Cryptocurrency seems more of a risky fad than a store of value
Cryptocurrency has gotten a bad name for good reasons lately.
The value of Bitcoin, the public market face of the largely unregulated cryptocurrency industry, lost two-thirds of its value over the past year, compared to 25% for the S&P 500. That said, hot-to-not Bitcoin was a much better investment over five years.
The Federal Trade Commission just reported that cryptocurrency, while still a common payment method, is “an alarmingly common method for fraudsters to get people’s money. Since the start of 2021, more than 46,000 people have reported losing over $1 billion in crypto to fraud About one in four dollars reported lost, more than anyone other payment method.”
There is no central regulator to flag suspicious transactions and no way to reverse a transaction. Most people don’t understand crypto and are easy prey for online scammers.
We are inundated with pitches from Super Bowl ads to Hollywood celebrities. Kim Kardashian recently paid $1.26 million in fines and deportation for naming a crypto-asset security without disclosing that she was paid $250,000 for an Instagram post about EMAX tokens, a cryptocurrency.
SEC Commission Chairman Gary Gensler has called the crypto market “the Wild West.”
The Financial Stability Oversight Council concluded in a report this month commissioned by Treasury Secretary Janet Yellen that “crypto-asset activities could pose a risk to the stability of the US financial system” if their interconnections with the traditional financial system and size continue to grow “without following … appropriate regulation, “
“Many crypto-asset activities lack basic risk controls to protect against risk or to ensure leverage is not excessive,” the council found. “Crypto-asset prices appear to be driven primarily by speculation.”
Yellen and Warren Buffett, considered America’s top long-term investor, as well as JP Morgan Chase CEO Jamie Dimon and others, have raised concerns.
“Who am I to argue with Warren Buffett?” said Marc McIntosh, a professor of finance at Augsburg University and a former Wall Street investment banker. “It’s obvious that cryptocurrency is a very risky investment, and there is enormous uncertainty about its viability as a dollar substitute.”
But it could have potential when investors need a “potential store of value” like gold to withstand extreme economic events, he said.
“Can crypto act as a hedge against negative stock market movements? Possibly, but we need a lot more historical data on how crypto moves relative to the overall stock market,” McIntosh said.
The council recommended regulatory authority for federal financial regulators, legislation regarding risks from “stable coins,” whose value is tied to currencies, commodities or other financial instruments, and further study of the industry.
“Crypto hasn’t changed since the Great Recession of 2008 and the cyberpunks who started it because they didn’t trust traditional financial institutions,” said Vivian Fang, a professor at the University of Minnesota Carlson School of Management. “Bitcoin is high risk. It is volatile and does not generate cash flow. But there has been a growing use, including Google, which intends to use Coinbase to process crypto payments, as well as investors.”
Bitcoin rallied around 240% to 40% for the S&P 500 over five years.
“The Correlation in the Price Movement of Cryptocurrencies [and stocks] has increased since March 2020,” Fang said. “It was a jump. Before 2020, it was close to zero. We injected so much liquidity into the economy. It told investors that it’s OK to trade risky assets, including high-growth stocks. They all shot. They now come down in parallel strokes. If the stock market goes down, crypto goes down.”
There are other fallout, including significant environmental disadvantages.
The cryptocurrency recently fainted after the bankruptcy of Compute North, an Eden Prairie-based cryptocurrency “miner.” Compute North had raised $385 million in capital this year, has $500 million in assets and owns data centers in Nebraska, Texas and South Dakota.
Crypto miners are controversial because they use enormous amounts of energy to produce cryptocurrency, an electronic resource based on mathematical calculations whose primary purpose so far appears to be speculation.
A new crypto mining operation in Jamestown, ND will use twice the energy of the entire town of 16,000. The Jamestown operation immediately ranked as the second largest customer of Minnesota-based Otter Tail Power Co.
And there is related fallout among neighbors of the noisy, energy-sucking mines.
“I think it’s risky, but there’s value,” Fang added. “Most crypto stocks don’t generate cash flow and it’s hard to calculate value. That attracts speculators. [regulators] fighting over what to do and President Biden [ordered] regulators to come up with a framework to regulate digital assets. It’s not a sign of a dying industry.”
