Cryptocurrencies in Distress

 

Yahoo Finance

This is the second time, and the second time this year, I am writing about cryptocurrencies.  The first was in January:  Digital and Cryptocurrencies Going Mainstream?

These currencies are in the news a lot these days and the news is not good.  Their value is going down as investors are exiting and abandoning the sector. Cryptocurrency companies and trading platforms are cutting jobs and there is real threat of some of them shutting down or seeking bankruptcy protection.  The Wall Street Journal has an article or two every day covering this implosion.

Before reading all the articles to fathom why this is happening, I had my own theory.  In good times, many people are willing to bet on investments that are hot and growing at an impressive rate.  In cryptocurrencies, there seems to be no end to the growth.  Even if we didn’t fully understand what we were investing in, we see others making money and want to be in on it.  It is kind of a herd mentality, a kind of fear of missing out, and, most certainly, the lure of what looked like easy money.  An investment might seem too good to be true, but because the returns were real, investors pouring money into it.

In bad times or times like now, where there is a real fear of recession, the savvier investors begin to bail out these seemingly too good to be true riskier investments.  They want to preserve their gains and look for more stable and secure investments to preserve their wealth.  Historically, precious metals, mostly gold, has tended to go up in hard times.  I suppose it goes back to a time when we could look at, hold, and feel good above having gold in our possession.  It was wealth that was tangible versus just being numbers on investment report.  Note that gold prices have not increased as crypto has dived.  But, I will stand by my theory of why crypto is tanking right now.

What do others say?

Record-high inflation, fear, rising interest rates and a loss of confidence in crypto investments are all contributing to the crypto crash. Analysts say most of the factors are “macro,” which means they relate to the economy as a whole rather than any flaws in the crypto market. ~ gobankingrates.com

For many, an investment in something as volatile and unpredictable as cryptocurrency feels like a risk too great in these times.

It's unregulated and unprotected by the financial authorities, so if you're using your savings to invest in it and it loses value, or you lose access to your crypto wallet, your money has gone. ~ bbc.com  

 What makes a currency?  It is something we all take for granted.  It is a measure of wealth and buying power.  It is a measure of the relative worth of a person’s labor and livelihood.  It is an agreed common medium for engaging in commerce.  Early in emergence of specialization of labor (hunter, farmer, tinker, tailor, and such), trade and barter was how goods and services were exchanged.  Beads, stones, and eventually metal coins replaced became the medium of exchange when trade and barter became too complicated with gold and silver being the most valued coins.

I suppose gold and silver in the early days were the cryptocurrencies of those days.  Perhaps an ancestor of mine was a baffled by being offered shiny silver or gold coins for ten sheep back then as I was when I first tried to fathom bitcoin.  How could a pile of shiny coins be equal to ten head of sheep?  How could $60,000 or a few bitcoin get me a new car?  The answer to both is the same.  We buy into the medium of exchange.  We agree to this medium of exchange we call money.  Over the years, we have learned to regulate money.  Rather than carry precious metal coins around, we replaced them with paper money backed by the gold and silver reserves of the government issuing the currency.  As international commerce grew, the relative worth of government backed currencies were established based on their reserves and then be the relative output, imports, and exports of the economy of the nation. 

Part of the confusion I have with cryptocurrency is that there is nothing to back it up.  The value is purely relative to what people are willing to buy and sell them for.  There is no regulation and hence the volatility that makes it rise quickly and everyone wanting in or, like now, everyone bailing out as they see the crypto-wealth evaporating.

Will cryptocurrencies survive this downturn?  This is a good question.  We have a lot of history and experience dealing with traditional currencies.  We use that history and develop models to predict what might happen.  We do not have the same experience with cryptocurrencies.  This is the first time we are seeing what is happening right now with cryptos.  It is anyone’s guess… and I emphasize the word guess.  I believe the cryptocurrency markets will survive but agree with almost every article I have read calling for more regulation.