Crypto – Coin crunch pt. II

Crypto heads for a deep freeze.

• The rhetoric around the safe haven and inflation hedging properties of crypto has gone eerily quiet as it transpires that cryptocurrencies are nothing more than speculative assets whose value is impossible to determine.
• The news gets worse and worse as Bitcoin is now around $21,000 and many of the crypto-related companies are cutting staff as they grit their teeth and get ready for deep winter in their sector.
• The latest bout of volatility was triggered by Celsius Network which froze its users’ assets citing “extraordinary market conditions” but which to me looks like a run-of-the-mill run on a bank.
• Celsius Network is a crypto lender where holders of cryptocurrencies can deposit their tokens and earn high yields by allowing Celsius to lend them out.
• In the era of negative real interest rates, this has been an attractive proposition as the bond market to any rational investor has been unattractive for quite some time.
• However, it is also a very risky one as the underlying value of cryptocurrencies is impossible to determine.
• As investors (speculators) get nervous and want to withdraw their tokens and sell them, Celsius is unable to meet the demand as it has lent the tokens out to earn yield in a replay of an ages-old banking problem.
• This has triggered a deepening loss of confidence in cryptocurrencies resulting in the sector now being worth less than $1tn compared to $3tn a few months ago.
• Bitcoin’s proponents point to its finite supply as a reason for its value, but there is no limit to the number of cryptocurrencies that can be created which has recently ballooned to around 20,000.
• This means that the supply of cryptocurrencies is infinite just like fiat currency and one only has to look at what has happened to Luna for evidence of what that means.
• I have little doubt that soon there will be far fewer cryptocurrencies around and that Bitcoin will be one of the survivors but the big question is: at what price?
• Furthermore, any notion of the safe-haven or inflation hedge has been blown out of the water with the evaporation of 2/3rds of the value of the sector coinciding with a 40-year high in inflation that is destroying people’s savings by around 8.5% per year.
• Of all of the crypto companies, I think that Coinbase is one of the most interesting because, at its heart, it is an unregulated bank that can easily withstand withdrawals by panicked users.
• However, this company is still trading at over 2x PBV compared to the best banks in the industry which typically trade at 1.0x to 1.5x.
• Hence, there is no valuation support for Coinbase and the fact that it is cutting staff clearly points to the fact that it is also not very optimistic with regard to its outlook.
• As yields rise elsewhere and liquidity evaporates, the crypto sector is going to look less and less attractive, meaning that this is not a blip but a full-on resumption of reality.
• Cryptocurrencies remain unable to function properly as mediums of exchange and, as such, are wholly unsuited to running any economies be they in The Metaverse or in El Salvador.
• When these issues are fixed, then cryptocurrencies will find their place in the world of finance, but this could take a while as this will require a lot of changes to be made to the blockchain protocol.
• Until then, cryptocurrencies will remain purely speculative that I think will prove to be even riskier than dabbling in junior mining exploration companies.
• It was Mark Twain who coined the phrase that a mine is a hole in the ground with a liar standing next to it.
• It is strangely ironic that the cryptocurrency currency creation process is referred to as mining.