Anyone passionate about the world of cryptocurrency will find themselves freezing in the so-called crypto winter after the recent and dramatic drop in the value of the misnamed digital currencies, writes Manuel Romera Robles in his essay for finews.first.
This article is published on finews.first, a forum for writers specializing in economic and financial topics.
Bitcoin — which began trading in 2008 and is the best-known cryptocurrency with the largest trading volume — has fallen more than 70 percent from its peak in November 2021, when just one unit cost nearly $70,000. This is actually the third major correction in Bitcoin’s history, along with those of November 2018 and March 2020.
One of the factors that may have influenced this latest correction is the higher cost of mining bitcoins with blockchain technology, which involves high energy consumption that may be the cause of the “big whales” (the major bitcoin holders) to sell their digital assets since it is not as profitable to produce them. With bitcoin trading at around $20,000, experts point out that the profits from producing them fall significantly because this is the average amount bitcoin costs to produce. In addition, some of these “whales” have had to raise cash to enforce guarantees or repay the debt required to produce bitcoins at a higher financial cost due to the increase in interest rates in the financial markets.
“In fact, 27 percent of Brazilians, 20 percent of Argentines and 18 percent of Mexicans already own crypto assets”
However, and perhaps more importantly in this correction, some stakeholders in the ecosystem are beginning to question whether bitcoin and other similar denominations are truly cryptoassets or cryptocurrencies. In other words, whether they have a store of value due to the technology behind them and whether they can function as a currency that can be used as legal tender at some point.
Indeed, this is one of the key aspects that must be taken into account, because most holders consider cryptocurrencies as a store of value rather than usable money, and to that point, cryptocurrencies are more successful in countries with central banks that inspire less public trust, such as in Latin America. In fact, 27 percent of Brazilians, 20 percent of Argentines, and 18 percent of Mexicans already own crypto assets.
“In my opinion, this is frankly not enough”
What is undeniable is that those of us who believed that these decentralized finances would be resistant to the inflation inflicted by currencies issued by central banks have been proven wrong, at least so far. These assets represented by the likes of bitcoin are not only difficult to use in daily life, but have also recently devalued against the world’s most widely used currencies, such as the euro and the dollar. We must remember that the monetary policies and currencies of the world’s leading economies such as China, the United States and Europe are much more robust than the lack of a virtual currency.
The fiat currencies of the major economies are the cornerstones of our public debt, which (although very high) is supported by our gross domestic product (GDP). Conversely, bitcoin is only backed by a few hours of data mining and a maximum limit on the amount of bitcoin in existence. In my opinion, this is frankly not enough.
It is certainly fair to say that the global banking sector is not at its best when it comes to guaranteeing value and balance to depositors. Nevertheless, it is no less true that it is the basis of our market and currency economy, and I would go so far as to say that it is even the basis for the smooth functioning of our capital markets. That there are fears about the soundness and liquidity of the banks does not justify attaching value to bitcoin scarcity, as if it were valuable in itself, just because it is also decentralized.
Finally, to add to the salad bowl of problems with these assets, central banks are starting to bet on this virtual world by issuing their own digital currencies, or CBDCs. The Central Bank of China with its “digital yuan” already offers a digital currency, and the ECB and the US central bank are likely to do the same next year, launching “digital euros” and “digital dollars”.
“I always say I don’t know how to value them since they don’t produce anything”
I am often asked about the right or wrong time to invest or disinvest in these types of assets and I always say that I don’t know how to value them as they produce nothing but confidence among those who believe in them. Conversely, if we examine stocks or bonds, the value depends on cash flows discounted at a risk rate, and therefore they depend on the wealth that the asset produces in currency, discounted by the risk of achieving that wealth.
Perhaps this is why we need to ask ourselves – once again – whether cryptoassets are assets or currencies. If they are assets, they should produce money in the discounted future to value them, and if they are currencies, they should be usable as liquidity. Both parts are difficult to explain.
Regulation of crypto assets is another hot topic. The US Securities and Exchange Commission is trying to reach agreements with other international agencies to prevent their operators from taking advantage of the lack of existing regulations governing them. Recently, the SEC chairman, Gary Gensler, declared its intention to enter into agreements with the Commodity Futures Commission to ensure that trading in digital tokens is legal and sufficiently transparent, as there are recognized voices within the commission itself that believe that most digital assets and tokens are more akin to commodities than securities. . Gensler has also called for a debate on whether the platforms should be registered as an agency.
“Freedom is the best thing about markets”
The truth is that this world of digital assets and their wild volatilities generate a lot of media hype and they have become the dream of many investors eager to get rich quick through the purest game of Russian Roulette. They also have a pull effect on all kinds of famous personalities, like the footballer Cristiano Ronaldo which has signed an agreement with the cryptocurrency platform Binance.
However, it is important to keep in mind that major platforms such as Coinbase, Gemini and crypto.com have announced layoffs recently due to the slowdown in business. Personally, I agree with Warren Buffett who commented that even if he were offered all the bitcoins in the world for $25, he wouldn’t buy them. In fact, the collapse of the luna and terra tokens proves Buffet right, as does the decline in the total value of the crypto market from $3.2 trillion to less than $1 trillion in just a few months.
Of course, freedom is the greatest thing about the markets, and everyone is free to invest in what they find most appealing – but a thorough analysis should be the bottom line for everyone.
Manuel Romera Robles is professor of finance at IE Business School – IE University in Madrid, Spain.
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