Is there a crypto bubble? Is it about to burst? Yes, and yes.
Well, don’t take my word for it. Just look around and see what’s brewing in the crypto investment world in the last weeks. There seems to be massive irregularity with some exchanges and outright fraud in others. Cryptocurrencies have sustained considerable declines in the previous week, with only 29 of the 5,173 coins tracked on Coinbase making positive gains. Thirteen of those coins have sub-one-cent prices.
The crypto market reminds me of penny stocks, which have been around for over 150 years and have consistently bankrupted millions of quick-win-seeking investors, who tap their savings and pensions, or worse, buy on margin, trying to hit that stock market lottery. Sure, people can make money in crypto, but investment gains are made from others’ losses, just like any market. Watch the film Boiler Room for a primer.
Who is benefitting from Bitcoin and the other 4000 cryptocurrencies? Mainly the exchanges that charge for trades and redemptions. Also, whales that move large volumes to make relatively little percent increases but realize big profits on considerably large trades. The early entrants with ‘diamond hands‘ will be the winners. Then there is buying on the dip. When is that, exactly?
Bitcoin was touted as the ultimate decentralized payment system, empowering the individual to escape the banking system and conduct trade directly with others, knowing that those transactions were safe because the Bitcoin ledger is available to everyone to see. But, nobody buys hardly anything but more Bitcoin with Bitcoin. There is no scale in retail transactions that would ever make it a good idea to pay for McDonald’s or Dominoes Pizza with crypto. Plus, it’s a complete joke that Tesla made a big deal out of stopping purchases with Bitcoin. Nobody should sell a capital-gains taxable investment to buy a depreciating asset like a car. The Bitcoin wallet is much more a portfolio than a roll of cash.
The vision of millions of under-represented workers able to make things and sell them using a cryptocurrency while cutting out the banks is dreamy. Some firms are making payments to underserved communities, such as BitPesa in Africa, but their total customer transactions were 26,000 for a year. In contrast, about 250M people physically enter a Walmart every week, and none of those people pay with crypto. That Walmart-like scale is needed to shift crypto from a risky investment vehicle to a standard form of payment. Plus, Walmart issues their own credit card, and they have relationships with banks and other credit card issuers and processors, and you can be sure those relationships aren’t going to be upended by Dogecoin or some other meme crypto wallet. There is interest in expanding crypto to mainstream payments, but it’s at the infancy scale today and everyday we hear more Dogecoin jokes and see more Elon tweets, payment normalcy stays in the future.
Tether, the cryptocurrency that is pegged to the US Dollar (but in reality isn’t), is likely to be the largest financial fraud in history. It became clear that there are some incredible irregularities with Tether and their operations in the last few days. Their debt of some $40-60B dollars is to the major crypto exchanges Binance, FTX, and Bitfinex. This is all reminiscent of 2008 and the Big Short situation (and the upcoming Big Short 2: Commerical Mortgages). Tiers and tiers of leverage will implode and pancake down on investors. There’s no bailout from the US Treasury for crypto.
China has banned the use of cryptocurrencies in just the last few days. It is now illegal in the 2nd largest economy to use crypto to settle transactions. That’s not a good look for the democratized, decentralized, transparent crypto dream. And this will continue to happen as other nations and the EU roll out more restrictions, greater scrutiny, and eventual outright bans.
I find it amusing all this talk about crypto being the future of money and how holding cash or stocks is a thing of the past. That sounds a lot like magical thinking — just wish it, and it will be. There is no practical reason for any cryptocurrencies to overtake or replace any banking system. You can be sure those established systems might play along for a while, seeing what this upstart is all about, siphon off some profits along the way, and offer some well-paid-for advice on your crypto portfolio. Global banks don’t need crypto; they already get (almost) free money to use from national central banks. They’ll take some Bitcoin profits but will never endanger their position in the established financial system.
For me, crypto has been spin from the start, and it continues. It will rise and fall and have winners and losers, and people will continue to ignore the valuation is based on nothing. Celebrities and pundits will continue to affect exchange prices up and down with exciting results. We all will think Dogecoin is funny and chuckle as its value rises for no reason beside it’s funny that it even exists.
All of the attention and hype for cryptocurrencies will continue ad nauseam. Until it doesn’t.