If you’ve invested in cryptocurrency, checking your portfolio over the last few weeks won’t bring any seasonal joy. With few exceptions most currencies are down with bitcoin currently hovering around $46 500 USD and ethereum around $3 800 as I write this.
Many were predicting that bitcoin would reach $100 000 USD by year’s end.
Even for a very volatile currency (one bitcoin was worth just $19,783.06 USD just four years ago) that seems highly unlikely.
Bitcoin has declined more than 30% since peaking at near $69,000 USD in early November, causing one analyst at Coindesk to remark this week that – “Multiple failed attempts at an all-time price high near $69,000 suggests the broader uptrend is weakening. BTC is at a critical juncture and remains vulnerable to another 20% price drop, assuming buyers are unable to hold current support levels.”
Investment funds focused on crypto also hit the exit door – bitcoin had $89 USD million worth of outflows last week, a reversal from the $145 million of inflows the prior week.
While longtime hodlers (crypto-speak describing buyers who buy and hold their crypto) who bought bitcoin early will still be showing a very healthy profit, investors who have recently dipped their toe into crypto waters will be wondering if – as many crypto sceptics have always contended – it’s just a trillion dollar Ponzi scheme and they’re too late to the party.
Up until November crypto seemed unstoppable, and while the value fluctuated from a first quarter high, the hype around crypto continued to build.
I wrote here about the Hollywoodisation of crypto and crypto exchanges – with celebrities, sports stars and tech figures like Elon Musk and Jack Dorsey becoming vocal crypto champions.
Big financial players were getting in on the action too.
In October Mastercard announced the launch of its first cryptocurrency linked payment cards in the Asia Pacific region, PayPal now accepts bitcoin, the first bitcoin ETF was approved to start trading on US equity marketplaces and LA’s iconic Staples centre will be renamed Crypto.com Arena starting Christmas Day in a $700 m USD deal.
Use of crypto in countries like Cuba and Sub-Saharan Africa for international transactions continues to grow and you can now pay for your McDonald’s in El Salvador in bitcoin, where it is legal tender.
NFTs – which are bought using crypto – also hit the mainstream.
Crypto adherent Ryan Selkis, co-founder & CEO at Messari points out, in his recently released Messari Report, that – if you invested $100 in gold 10 years ago you would have yielded just $102 today, underperforming inflation. If you’d invested $100 in bitcoin over that time you would have yielded $1.7 million.
So, is this just the beginning of another “crypto winter” after which it will rebound and hit new highs or is something more serious going on?
Reasons to be fearful
The recent bear market has been driven by a number of factors.
Along with that mainstreaming of crypto comes increased interest from regulators who are concerned with tax, security and fraud implications of a decentralised payment system – and with a market cap of more than 2 trillion USD crypto has to be taken seriously.
Regulators’ main concern is that crypto poses a threat to financial stability and their own banking system. Furthermore, being seen to embrace crypto, which has a massive energy consumption due to mining, doesn’t sit well with many government’s environmental policies.
A number of whales – big crypto investors – have cashed in as the economic and regulatory outlook darkens, stimulus payments stop and inflation continues to rise (despite crypto adherents boasting of its deflationary properties cryptocurrencies have continued to plummet as inflation rises.)
Suddenly high risk, volatile investments like bitcoin aren’t looking that smart.
Additionally China has banned financial institutions and payment companies from most uses of cryptocurrencies despite creating its own digital yuan. The Indian government also seeks to ban all private cryptocurrencies which it sees as a threat to its banking system.
For once Elon Musk didn’t help the crypto community by announcing a u-turn on its policy of accepting bitcoin as payment at Tesla over environmental concerns.
And perhaps the biggest destabilising factor at the moment is Omnicron.
Hodlers wait it out
Crypto’s decline has mirrored that of Wall Street with investors uncertain as to how the new strain will impact on the economy going forward, but whereas the regular stock market might fall a few points, crypto can lose 20 percent in a week.
Hodlers are used to the swings – and wait till it plateaus and “buy the dip”.
Going hand-in-hand with crypto is Web3 – “the internet owned by the builders and users, orchestrated with tokens” – is how one proponent describes it.
It promises a decentralised internet – eschewing Big tech companies like Google and Facebook, and providing financial incentives for users for taking part in the new companies that live on the blockchain.
The thinking appeals especially to a younger generation, suspicious of legacy institutions.
For example by using a service you may earn a token and have a way of cashing in through your use in the future – rather than that profit ending up with a tech giant, users have ownership.
Web3 means cheaper transactions, better transparency and equity and is the current buzzword in tech circles.
That said most who buy crypto are in it for the money – the philosophy is a nice add on – and many retail investors who are making use of the many new crypto exchanges that are popping up have little interest in the blockchain, DAOs or NFTs.
While we’re still at the early stages of the Web3 some aren’t convinced it is all it purports to be.
“At its core Web3 is a vapid marketing campaign that attempts to reframe the public’s negative associations of crypto assets into a false narrative about disruption of legacy tech company hegemony,” believes UK tech blogger Stephen Diehl .
“It is a distraction in the pursuit of selling more coins and continuing the gravy train of evading securities regulation. We see this manifest in the circularity in which the crypto and web3 movement talks about itself. It’s not about solving real consumer problems. The only problem to be solved by web3 is how to post-hoc rationalize its own existence.”
Some believe the cult of crypto is running out of steam and that smart investors are taking their profits and not looking back.
Others see it as the future of money and great way to reap high returns in the long run and are busy “buying the dip”.
“I have 99% conviction that crypto will be an order of magnitude larger by 2030 because the user economics here are an order of magnitude more attractive,” writes Selkis in the Messari Report. “We’re at the brink of a total transformation of the global economy. One that’s bigger than mobile, and maybe even the internet itself.”
Or perhaps the truth lies somewhere in between.