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JUST a few days ago, the total cryptocurrency market capitalization fell below $1 trillion for the first time since February 2021, according to data from CoinMarketCap.com. This happened against the backdrop of a bull run of Bitcoin in 2021, which ended 70% up at the end of the year. During the lockdown-stricken year of 2020, Bitcoin gained more than 300%!
But in 2022, crypto investors are embracing “a general flight to safety across the board in most asset classes,” said Alex Reffett, co-founder of wealth management firm East Paces Group, as reported in Forbes. “Collectively, investors have shown more interest in value-based investments and less in speculative stocks and alternative ‘store of value’ investments.”
One major source of the negative Bitcoin sentiment is the meltdown of Celsius, a decentralized finance (DeFi) platform and one of the largest crypto lenders. The company gathers crypto deposits from retail customers and loans them out to other investors and financial institutions, much like what a conventional bank does. Investors earn yield from the revenue Celsius generates from crypto borrowers.
In recent days, we have seen the consequence to consumers when unregulated crypto firms play in the highly regulated financial markets. Within the last few days, Celsius experienced an old-fashioned run on the bank and halted customer withdrawals last Sunday. For a variety of reasons, customers lost confidence in the Crypto firm.
One reason is the Federal Reserve’s raising of interest rates twice this year and is planning to raise them again soon. The demand for cryptocurrencies and Bitcoin apparently dwindles when the Fed raises interest rates, just like its impact on tech stocks.
The sustained jacking up of interest rates to fight the historic surge in inflation is uncharted territory for cryptocurrency. In fact, Interactive Brokers’ Chief Strategist Steve Sosnick said, “We have no historical precedent for how Bitcoin and other cryptos might act if we enter a sustained period when central banks actively drain liquidity; Those tend to be tough times for investors, and riskier assets tend to underperform safer ones,” as quoted in Forbes.
These highlight the fact that Bitcoin and cryptocurrencies are risk assets — investments that experience a substantial amount of volatility when subjected through the usual market forces. Other risk assets are stocks, commodities, currencies, and high-yield bonds, which frequently experience difficulties in prices under almost any market conditions.
That’s why Microsoft co-founder Bill Gates described cryptocurrencies and non-fungible tokens (NFTs) as something that’s “100% based on greater fool theory.” He was “referring to the idea that overvalued assets will go up in price when there are enough investors willing to pay more for them” as reported by CNBC. “I’m used to asset classes… like a farm where they have output, or like a company where they make products,” Gates said in a CNBC report.
Gates’ pronouncements resonate well with astute investors. In 2017, I have written and spoken advisories about cryptocurrencies and Bitcoin. I likened investing in Bitcoin to gambling — deciding to put one’s money into something with low to moderate knowledge of the investment and extremely substantial risk.
Warren Buffett said that gamblers are “encouraged when they see some successes around.” But it “has terrible odds attached.” Gamblers lose more when they erroneously assume that the more they lose now, the better the chances of winning in the future; hence they make more bets. This is what has been happening with Bitcoin and other cryptocurrencies over the last years. Only a few make money relative to those ignorant masses that blindly speculate on the risky asset.
Is it wise to invest in Bitcoin? The answer is no. It’s never an investment in the first place. Just like rare baseball cards, Bitcoin is being driven to absurd prices by speculators, misinformed investors, and even gamblers who think they could sell them to someone else for more money in the future.
Reynaldo C. Lugtu, Jr. is CEO of Hungry Workhorse, a digital and culture transformation consulting firm. He is the country representative of the Institute of Change and Transformation Professionals Asia (ICTPA) and fellow at the US-based Institute for Digital Transformation. He teaches strategic management in the MBA Program of De La Salle University. The author may be e-mailed at rey.lugtu@hungryworkhorse.com
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