Crypto’s Comeuppance

Crypto’s Comeuppance

Commentary

NEW YORK–Bitcoin and associated cryptocurrencies have suffered a precipitous decline from their highs back in November when it was over $60,000. “Bitcoin To the Moon” is a popular refrain among internet bitcoin supporters less than one year ago. It now sounds almost like a rant by an End of Days prophet walking Madison Avenue with a sign.

Bitcoin came to be in the aftermath of the 2008 financial crisis when there was a yearning by some to avoid traditional fiat currencies tied to governments. The vision was that blockchain technology would allow a new, transnational, decentralized financial system–or “DeFi”–fiat currency to emerge and be adopted.

What emerged was a group of early adopters, a veritable community based on fear of missing out and followers who saw opportunities for huge, easy returns. Average people, particularly those with libertarian views and who are largely younger than the rest, embraced bitcoin as a brave, new way to increase their wealth. Jack Dorsey and Elon Musk, tech industry experts, proclaimed a brand of “bi-curious” world. A whole industry of crypto “news” sites, social media influencers, and journalists fed the fantasies with the opinions of “analysts.” Here, for example, one of them deigns Bitcoin as the most robust of the 20,000 plus cryptos that are in the market.

#Bitcoin will survive… I don’t have the same conviction about the rest. pic.twitter.com/REja53FJio

— Layah Heilpern (@LayahHeilpern) June 21, 2022

But, as the crypto value increased, it was actually that the Federal Reserve had been pumping money into an economy already in recovery. As I wrote last week, the Fed balance sheet has literally blown up since 2008, and was accelerated at an escalating rate. This chart shows how the Fed balance sheets went through a pandemic.

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All that money–$1.9 trillion as a consequence of The American Rescue Plan Act of 2021 (H.R. 1319)–was coming at a time when GDP was printing up over 6 percent–and when the Forward Price to Earnings Ratio (“PE Ratio”) on the S&P 500 was over 20 times.

Simply put, there was lots of money and nowhere for it to go in this economy. Real estate and Equities had been bought up to bubble level, and any new commodity markets entrants such as cryptos or NFTs (nonfungible tokens) enjoyed huge appreciation. These were especially the ones that bear the imprimatur billionaire tech geeks. They would absolutely join the “irrational excess” caused by the global asset boom.

Epoch Times Photo
An image of one of the “Bored Ape” NFTs, some which sold for seven figures. They now reportedly sell for less than $100,000.

The Federal Reserve began talking about increasing interest rates by half of a percentage. This bubble burst. Terra Coin, a “stablecoin,” meaning a crypto that purports to maintain a value tied to an actual currency, collapsed in May. (It has, reportedly, made some kind of “rebound,” but I am circumspect of crypto-oriented media. Caveat emptor. )

But this wasn’t all. As the Financial Times explains, people holding cryptos, so-called “hodlers” (sic), weren’t content to simply bet on the appreciation of their cryptos. In recent years hodlers have used cryptos to increase returns and sometimes use the same capital to make multiple loans. According to the Times: “This liberty to reuse capital without any restraint allowed investors to stack more yields into different DeFi projects, earning multiple rates .”

As the Fed normalization accelerated the price collapse, the deleveraging snowballed, driving prices on Bitcoin down to below $20,000. (As I write this today, Bitcoin is bouncing above and below the $20,000 benchmark. )

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In my view, Bitcoin and its lesser brethren have shown themselves a passing fad; a tech version of the Beanie Babies craze of the 1990s. Both are based on the “Greater Fool” theory of investing; the notion that if you foolishly invest in something you purport to have value, some “greater fool” will come along and pay you more for it than you paid.

Moreover, with cryptos falling, some countries might soon switch to digital currencies called “Central Bank Digital Currencies (CBDC)”. They will replace paper currency and be considered cash. Although the rules are still being determined, CBDC may be anonymized or pseudonymous currencies. You can transfer it to your payee using your smartphone. You will need to deposit your CBDC in a virtual account if you want to earn interest. While some in the crypto cult have expressed concern that governments will be able to track individuals’ spending, that is largely the case now, even with their beloved cryptos.

Bitcoin and its less famous progeny (now numbering over 20,000!!!) They have been the magic bullet to end poverty, the misery of living as a middle-income person or doing the tedious work of security analysis.

We now see that the clothes of the crypto-emperor–if ever they existed–are so worn and raggedy as to make them positively offensive.

Views expressed in this article are the opinions of the author and do not necessarily reflect the views of The Epoch Times.

J.G. Collins

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J.G. Collins is the managing director at the Stuyvesant Square Consultancy in New York City. This consultancy provides strategic advice, market surveys, and consulting services. Collins’ writings about politics, economics and public policy were published in Forbes, The New York Post and Crain’s New York Business.

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