A Wild Ride

A Wild Ride
by Pat Rooney

Here’s a question. What can lose $1.32 trillion in three months and nobody cares? Cryptocurrencies. These currencies are actually treated more like securities these days, or the commodities, with their wild fluctuations in price. A bigger question is why crypto went so high in the first place.

With a very devoted following, cryptoassets of all kinds continue to trade within this tight group of investors. Crypto clearinghouses such as Crypto.com and Coinbase now have unusually high public stock valuations due to high trading volumes, and the expectation of more to come.

Yet, the pressures are building on these assets as the various government regulators try to figure out how to deal with them. The unknowns and uncertainties are many. Who are the long-term survivors? What is the real value of Bitcoin, other cryptoassets? Does the lack of tangible value mean anything? Right now, there is a proposed bill in Congress to limit the issuance of stable coins, a less volatile type of crypto, to only regulated financial institutions. It may not end up that way but there will be some substantial limits.

Also recently, the International Monetary Fund (IMF) came out against Bitcoin as a legal currency of El Salvador, citing the large risks to the country’s financial stability. A recent article in The Wall Street Journal by two economic professors at Johns Hopkins panned crypto as “not much different than the U.S. digital dollars we have today.” They stated that the crypto ecosystem “merely mirrors electronically and anonymously the most rudimentary components of our regulated financial system.” Adding that “any putative gains are quickly dissipated by crypto’s many weaknesses.”

And there are other threats. As one of my tech-savvy friends put it recently, “since crypto is such a confidence game with no tangible value, a little bad news can really affect the price.” What is needed is more and more buyers enthusiastically plowing into the space, buying digital coins. Bitcoin, in particular, is facing a critical time, says The Wall Street Journal’s Anna Hirtenstein, who points out that “in today’s price of $33,000 per coin, the value is perilously close to the significant number of $30,000, which is roughly the low point of the April-July 2021 sell off, and where Bitcoin opened the year. This means that everyone who bought Bitcoin in the last 13 months (and the stock market doubled during this period) would be in the red,” or close to it, depending on today’s price.

All this makes cryptocurrencies a very speculative investment, and as such may not be the best use of the underlying blockchain technology, that by almost all accounts is very solid with many potential uses. There is so much more, but suffice it to say we have a very long way to go and a very wild ride before all of this gets figured out.