About this time last year, cryptocurrencies were all the rage. Stories about teenaged crypto millionaires flooded cocktail party and tailgate conversations. You were decidedly behind the times, let alone extremely uncool, if you weren’t in on the action.
What a difference a year makes.
On November 9, 2021, Bitcoin closed at $67,734. Let’s just say it has been downhill since. This morning (11/18/2022), it goes for roughly $16,640. That is right at a 75% decline in value. Obviously, this begs the question: how can Bitcoin be a store of value when it is so volatile? While I am supposed to say “past performance is not indicative of future results,” historical and present performance suggest it isn’t a good store.
Unless you really don’t follow the news, you have probably recently read about the collapse of something called FTX. At one point, this was the world’s third largest cryptocurrency exchange. Its CEO, Sam Bankman-Fried, hobnobbed with global politicians and celebrities. At one point, analysts estimated he was worth something like $26 billion.
Life was good for Bankman-Fried until it wasn’t. Last Friday, November 11, FTX and its affiliates filed for bankruptcy. The next day, CNBC reported “between $1 billion and $2 billion of FTX customer funds have disappeared.” What’s more, it seems FTX had loaned more than half of its customer assets to an affiliated trading firm. Completely unauthorized, of course.
I won’t go into all the gruesome details. Let’s just say the capriciousness is/was jaw-dropping. The red flags were everywhere. Finally, it was a powerful lesson re-learned: if it seems too good to be true, it probably is.
What’s more, if cryptocurrencies seem difficult to understand to you, they are for most people. According to the State University of New York at Oswego, the following is a definition of a cryptocurrency:
“A cryptocurrency is a digital currency, which is an alternative form of payment created using encryption algorithms. The use of encryption technologies means that cryptocurrencies function both as a currency and as a virtual accounting system. To use cryptocurrencies, you need a cryptocurrency wallet. These wallets can be software that is a cloud-based service or is stored on your computer or on your mobile device. The wallets are the tool through which you store your encryption keys that confirm your identity and link to your cryptocurrency.”
Now, go explain that to your grandmother. If my Memaw were still alive, she would say: “Boy…after listening to that…April Fool’s Days gone and past, you are the biggest fool at last.” Of course, she wasn’t an expert on 21st Century technological advancements. To say the least, considering she passed away in 1991.
Regardless, all of this turmoil has caused a reexamination of the asset class. Are cryptocurrencies here to stay? Will investor confidence ever return? Will Bitcoin ever get back to the 2021 highs? What does this all mean for the average investor?
The probable answers are: yes, probably, at some point, and it all depends. After all, tulips were a bubble asset in the Netherlands in the 17th Century, and we still grow them. Pineapples were bubblicious in the American Colonies during the 17th Century, and we still eat them. Japanese real estate reached a fever pitch in the 1980s, and it is still around. The US housing market fell apart in 2008, and we still live in houses. Final, the dot.com bubble caused a lot of pain back at the start of the century. However, we still use the internet, don’t we?
If you are ‘long’ cryptocurrencies, that paragraph probably doesn’t provide much solace. However, if you were an ‘early adopter’ of the asset class, you have still made a lot of money. Finally, if you haven’t participated, the most recent swoon probably hasn’t impacted you very much. Well, other than to say “I told you so” to all those whippersnappers who thought themselves so much smarter than you.
To that end, there seems to be a sort of schadenfreude regarding Bankman-Fried’s downfall. Who knows, maybe it is just me, but I doubt it. After all, at the end of the day, the man committed fraud. This was either through gross incompetence or hubris. I suspect it was a potent mixture of both. As a result, literally billions of dollars are gone. Poof. People have lost their jobs, and lawyers are gearing up to make a mint.
That is if they can find the purloined or otherwise missing assets.
Ay, there’s the rub. Unsavory characters dealing in assets which aren’t exactly intuitive, and getting stinking rich? Americans have traditionally had a sense of fair play. What’s the old adage? An honest day’s work for an honest day’s pay? That pretty accurately sums up the historical zeitgeist. In this country.
So, when someone doesn’t follow the rules, smashes them to pieces really, it is satisfying to see them fall off their stool. But what about the people, the investors, left holding the empty bag? What about them?
While I believe cryptocurrencies are here to stay, I don’t think all of them are. In fact, I fully expect the cryptocurrency markets to consolidate, significantly, moving forward. The days of creating the things out of thin air and making a bushel of money are over. In short, the easy money in the asset class is long over. It is dead, pushing up daisies, taking a dirt nap; you name it. At least for now.
The reason isn’t just Sam Bankman-Fried, although he helped. It also isn’t due to the somewhat confusing characteristics of the asset class. Although those didn’t help either. Nope. The primary reason is decidedly less interesting. Simply put, tighter monetary policies have taken ‘risk off the table.’ Shoot, if blue-chip stocks are having a problem with higher rates, how can something as arcane as individual points on an intangible blockchain stand a chance?
The answer is obvious. They don’t. Cryptocurrencies became popular because central banks went out of their way to make their currencies cheap after 2008. You could argue almost to the point of worthlessness> For some reason, the Jimmy Buffett song “Gypsies in the Palace” comes to mind when thinking about the loose money and Bankman-Frieds of the world over the last 14 years.
So crypto investors? They will lick their wounds and reminisce about the good times for a while. At some point, maybe in the not so distant future, there will be another panic of some sort. Central banks will flood the markets with liquidity, again. And cryptocurrencies, as though Phoenix-like, will rise from the ashes. Teenagers will become millionaires, and you will be behind the times if you aren’t in on the action.
After all, while past performance is not necessarily indicative of future results, it is amazing how frequently the past tends to repeat itself.
Thank you for your continued support. As always, I hope this newsletter finds you and your family well. May your blessings outweigh your sorrows on this any every day. Also, please be sure to tune into our podcast, Trading Perspectives, which is available on every platform.
Chief Economist
Please note, nothing in this newsletter should be considered or otherwise construed as an offer to buy or sell investment services or securities of any type. Any individual action you might take from reading this newsletter is at your own risk. My opinion, as those of our investment committee Investment Committee, is subject to change without notice. Finally, the opinions expressed herein are not necessarily those of the rest of the associates and/or shareholders of Oakworth Capital Bank or the official position of the company itself.