Whatever you do, don’t let your customers get close to Bitcoin this year. While it appears to have stabilized in the past week, my view is that there is likely no respite in sight for the cryptocurrency pain. At best, bitcoin is dead money, at worst, there could be much deeper declines.
The problem is that bitcoin, which fell from a 52-week high in October of $62,201 to a recent range of around $20,309, isn’t just a bad performer recently. She and other cryptocurrencies have debunked old, old assumptions about their magical financial power.
The fundamental promise that was broken is the idea that bitcoin was a hedge against inflation. Early verbiage by Bitcoin predecessor Satoshi Nakamoto declared in 2010 that the currency would “be immune to instability.” [sic] Because of the partial reserve banking system and the bad policies of central banks”, and that “the limited inflation of the money supply of the Bitcoin system is evenly distributed (by CPU power) throughout the network, and is not a monopoly by banks.” “
These promises prompted interest in bitcoin as a safe haven. For nearly a decade, the Wall Street Journal has been reporting a sudden boom in bitcoin use in Argentina, for example. Argentines, who suffered from chronic inflation, were fascinated by the inseparable store of value of the Argentine peso. The country has become a hub for cryptocurrency activity.
I pity the true Argentine believers this year. The peso is down 17% against the US dollar, but bitcoin is down 56% in that time. And while the American consumer has experienced high inflation four decades ago, just holding the dollar would be smarter than buying bitcoin this year. At least the dollar has gained 8% against the euro since January.
Regardless of Bitcoin’s inflation failure, it is quite clear that the instrument suddenly dropping by 56% is not a hedge against anything. It does not provide stability.
Bitcoin has seen many ups and downs over the years. However, the most prominent company in the cryptocurrency space is a currency exchange and custodian
(stock ticker: COIN), he indicated that something different might happen this time.
Investment Conference on June 8,
CFO Alesia Haas notes that there have been four major declines in the life of Bitcoin since its introduction in 2009. Each of these declines has been significant, as high as 80%. In this latest retreat, Haas said, “The only major difference we haven’t seen before is the broader macro environment.”
“So this is the first broader macro change since the adoption of cryptocurrency, and we now have higher interest rates and higher inflation,” she said. “And we don’t know exactly how that will affect cryptocurrencies.”
That sounds ominous, as did Coinbase CEO Brian Armstrong’s comments last month. When asked his view based on previous cycles, Armstrong said, “I think there’s going to be a real kind of blood running down the streets…if it lasts for four quarters or something.”
Now, “blood in the streets” is not a technical term, but if previous cycles have seen an 80% drop, as was the case in the 2017-18 Bitcoin cycle, it is possible to imagine “blood” here meaning worse than 55%.
If the inflation-hedge magic of Bitcoin and other cryptocurrencies has already been broken, then it is best that advisors take into account the implications.
One implication is that demand will shift from Bitcoin as a store of value to other instruments as a store of value, including commodities, but also stocks.
While Bitcoin is down 56%, there are plenty of other securities trading at surprisingly low prices Investmentsmeaning that they are backed by real assets, unlike cryptocurrencies, which are not backed by anything.
Some of the best stocks on the planet are on sale at amazing discounts. If you can put a dollar in
(NVDA), one of the world’s largest chip makers, which is down 45% this year, and down 53% from a 12-month high, you’re likely to be better off with that than a dollar of Bitcoin.
This does not mean anything about increasing returns on fixed income products. As a zero-y tool, Bitcoin is suddenly on the wrong side of risk aversion trading. Two-year Treasury yields are currently around 3%.
Even if speculators do not flee Bitcoin to buy stocks or bonds, losing its status as an inflation hedge has the potential impact of damaging the currency’s price.
One of the most interesting characteristics of Bitcoin is the fact that most people keep it in digital wallets rather than deal with it. Crypto-watchers call the phenomenon of keeping bitcoin in a digital wallet and not spending it “manipulation,” a play on the term “keep.”
Any number of websites can show you the latest data on scammers from the global bitcoin ledger. The data reveals that the vast majority of Bitcoin is not used in transactions, and in most cases, it has not been used in years. It’s just sitting there. The scammer phenomenon is supposed to be a reflection of the belief that Bitcoin will be a store of value as its price increases.
If that assumption is broken now as Bitcoin collapses in the face of inflation, there could be fewer parties lined up – and more looking to sell.
Keep in mind that an increasing number of institutions are now accepting payments in Bitcoin and other cryptocurrencies. For example, last month gym chain Equinox told New Yorkers that they can pay their $4,044 annual membership fee up front in Bitcoin and Ether.
What happens when entities like Equinox receive payments in an instrument whose price drops? Perhaps they will keep it, hoping that its price will rise again. But it is also possible for these institutions to sell Bitcoin to limit their downsides.
Why is this important? Some academic research has hypothesized that the price of bitcoin falls when there are more bitcoins in circulation. If fewer bitcoins are held by parties like Equinox, which leads to an increase in the number in circulation, it could have an overall downward pressure on the bitcoin price.
Another factor that may affect the demand for bitcoin is the loss of the assumption of anonymity. An early promise, along with an inflation hedge, was that the use of bitcoin would be anonymous. However, a research study released two weeks ago by researchers at the Baylor College of Medicine in Texas and Rice University, and widely reported in the New York Times and elsewhere, breaks down the purported anonymity of the Bitcoin blockchain.
The authors write in the report that since there is at most “six degrees of separation” between any bitcoin transactions, typically four degrees or less, it is possible to use investigative work “to de-anonymize virtually any target bitcoin address by tracking on most 6 transactions.”
The implications are huge for cryptocurrencies in general, which appealed to criminals because they apparently had no paper trail. The study estimates that 46% of bitcoin transactions are linked to illegal activity. If transactions can eventually be tracked, as the authors suggest, there is every reason to believe that some of this activity will diminish.
It is certain that there will still be many true believers in Bitcoin among the scammers despite this latest crash. Bitcoin price just under $21,000 brings the instrument back to the level last seen in December of 2020. With so many bitcoins in wallets holding older types prior to that time, it is possible that traders who aren’t underwater are looking at decline. as a buying opportunity.
But as Coinbase CFO Haas points out, this is the first time Bitcoin has faced a risk-free environment. He was born at the end of the last recession. He’s a bubble kid, in a sense, the product of 13 years of risk-taking. Ultimately, it may have been little more than a product of its era, and as such, it may be irrelevant and unpopular with investors for years to come.
Ternan Ray Technical writer and editor in New York technology speecha free daily newsletter containing interviews with CEOs and CFOs of technology companies as well as tech stock news and analysis.