Feature Stories | Jun 10 2022
Recent volatility in bitcoin and other cryptocurrencies has led the mainstream investment community to question the value of crypto as an alternative investment.
-Bitcoin has endured wild volatility since covid hit
-Crypto stablecoins prove to be not so stable
-Inflation hedge and safe haven arguments shot down
-Central banks have their own plans
By Greg Peel
Last month the value of crypto “stablecoin” TerraUSD crashed to US30c. Being linked to the US dollar, terra was supposed to always be worth one US dollar. The value in such a stablecoin lies in providing to investors and traders an option to store their assets in a cryptocurrency without the risk and volatility associated with typical cryptos, which are effectively conjured up out of thin air.
But terra was not directly linked to the US dollar. The terra currency was not backed by US dollar-denominated assets, rather it was redeemable for one dollar’s worth of another cryptocurrency, luna. A computer algorithm creates and destroys both terra and luna to bring the price back into equilibrium. This worked reasonably well in practice from inception until the recent crypto market plunge, when the downward pressure on terra was too much for the algorithm to keep up.
In early November, 2021, the price of bitcoin – the benchmark cryptocurrency – hit US$65,000. By mid-January this year it was back at US$36,000. Bitcoin wasn’t the only crypto to crash in value.
In September 2020 bitcoin was trading at US$11,000, so it took a little over a year to hit US$65,000. It was a classic speculative bubble, fuelled, it is suggested, mostly by bored millennials in lockdown.
The same scenario played out in early 2021 when said millennials turned their attention to the stock market for the first time. Spurred on by social media chat rooms and new zero-brokerage online platforms, young retail investors poured into the likes of US companies GameStop and AMC Entertainment, which at the time were both heavily shorted by hedge funds.
GameStop sells new and used video games and equipment, and was struggling in the face of streaming. AMC owns cinemas, and was struggling in the face of lockdowns (and streaming). GameStop was trading at US$17.25 at the beginning of January. By the end of January it was trading at US$500. As February opened the stock plunged to US$101.
Aside from being in bubbles that simply had to burst, bitcoin and the so-called “meme” stocks turned around sharply as Wall Street plunged on Fed rate hike fears, leading ultimately to popular speculative growth stocks crashing by up to -80%. Recent data suggested some 60% of bitcoin holders are “underwater”, that is sitting on bitcoin they bought at a higher level.
It is unlikely young retail traders will tempt such a fate once more, at least in the short term. But bitcoin lives on. While cryptocurrencies still boast a loyal band of followers, the mainstream investment community – which also decided at one point that if you can’t beat ‘em, join ‘em – is once again having its doubts.
What is the value of crypto? The exit has been swift.
Get Me Out
ETFGI, a leading independent research and consultancy firm covering trends in the global exchange-traded fund (ETF) ecosystem, reported late last month that crypto ETFs listed globally saw net outflows of -US$556m during April, bringing year to date net inflows to US$303m, down from US$2.69bn one year ago.
Total assets invested in crypto ETFs decreased by -18.8% from US$16.28bn at the end of March 2022 to US$13.21bn.
Bitcoin, the crypto pioneer, was born of the GFC, which saw over-leveraged banks send the global financial system into chaos and forced central banks into a race to devalue their currencies. Bitcoin offered a seamless, unregulated and anonymous means of domestic and cross-border transaction, and was seen as a store of value – the “new gold”, if you will.
From September 2020, bitcoin has traded at [all US$] 11,000, 59,000, 35,000, 65,000, and currently 30,000. In the same period, gold has traded in a range from US$1700 to US$2000/oz.
Over time, gold has proven to be a reliable hedge against inflation and a safe haven in times of market turmoil. On the former, nevertheless, once might ask why the gold price is not through the roof amidst the highest global inflation numbers seen since the seventies.
The reason is that gold does not provide a return, such as a dividend or coupon. Thus the value of gold as an investment is undermined when bond yields rise. However, as the reasonably tight range gold has traded in over the past couple of years suggests, it is still a sufficient store of value.
The same is evident during the market turmoil of 2022, in which the gold price has remained relatively stable.
It’s a little different for cryptos.