Cryptocurrencies in the early stage of a bubble?

PETALING JAYA: With Bank Negara Malaysia (BNM) taking steps to accommodate the rise of digital currencies, the outlook for cryptocurrencies appears to be more certain, but market observers opine that the market could be in the early stage of a bubble given the rising number of participants.
FXTM chief market strategist Hussein Sayed said there are more than 1,200 cryptocurrencies with a market cap of US$205 billion (RM845 billion), with Bitcoin, Ethereum and Ripple being the three big boys, accounting for over 80% of the total market cap in the cryptocurrency market.
“Others such as Litecoin, Dash, and Monero are also experiencing increasing popularity. New players may come in, but before investing in a cryptocurrency one should understand: what problem is it solving, the long-term vision, the team behind it, and its valuation compared to similar ones.”
As at 5pm last Friday, Bitcoin’s price stood at US$8,251, and Ethereum and Ripple were at US$411 and US$0.24 respectively. Year to date, these three most popular cryptocurrencies have risen 757%, 411% and 3592% each.
Singapore-based CoinHako’s head of market research Elvis Hee said in the emerging market of cryptocurrencies, there are many new projects and the spike in prices can be attributed mainly to new releases, including new exchange listings – Bittrex, Binanace, Bitfinex – which increase the liquidity of the tokens.
Nonetheless, he said, the current spike in cryptocurrencies’ prices will not be sustainable in the long run as more participants enter the market.
While the cryptocurrency market may be in the early stages of a bubble, Hee sees room for growth within the space as main market adoption by the masses has yet to take place, which will come in the form of increased regulation and supervision by the government.
“Once these rules are in place, it will allow for mass adoption and we believe we would see an increased growth in the space then.”
CoinHako is a service for consumers to buy, sell and secure their Bitcoins. 
Last Wednesday, BNM governor Tan Sri Muhammad Ibrahim said the central bank will designate persons converting cryptocurrencies into fiat money currencies as “reporting institutions” under the Anti-Money Laundering, Anti-Terrorism Financing and Proceeds of Unlawful Activities Act 2001 from next year. Following that, due diligence is required with proper records on customers and transactions.
Earlier, the Securities Commission Malaysia said it is in consultation with global regulators, looking at recent developments and different approaches taken by its counterparts, to establish a framework for the registration of cryptocurrency exchanges by year-end.
At the Counter-Terrorism Financing Summit 2017 last week, BNM Financial Intelligence and Enforcement Department director Abd Rahman said Bitcoin is not the main source of funding for terrorism, but is more for investment.
On risks in investing in digital currencies, Hee said the risk is security at the fundamental level.
“This is in terms of securing of assets and tokens and ensuring sending to the right address. There is also volatility risk as prices can swing 10% to 50% either way at any given time. The general advice is to invest in fundamentally strong coins over the long-term horizon and not panic sell during volatility,” he said.
Hussein sees more upside bias to cryptocurrency prices as there is a clear correlation between them and the number of users, a trend that is likely to continue.
“Whether the longer term remains positive depends on adoption and application. Will more companies accept payments in cryptocurrencies? How will governments and regulators respond? And how will banks act on what seems to be a threat to their traditional businesses? Until now it’s not very clear.”
However, he said soaring demand is the key driver for any asset class and speculation for short-term profit is another source, pushing prices and leading to extreme volatility.
“Acceptance of cryptocurrencies by some countries, particularly Japan, also helped and just recently CME Group announced that it will include a Bitcoin derivative to its platform. This indicates that new investors are likely to become a part of the new asset class, but a projection for prices is very difficult given that there’s no economic metrics to valuate Bitcoin or other cryptocurrencies.”