The Crypto Drop: Two Opposing Perspectives — Hoxton Capital Management
The Crypto Drop: Two Opposing Perspectives
Last week crypto saw a large sell off triggered by the news that Tesla would stop accepting Bitcoin as a payment method due to its negative impact on the environment, and China discussing stricter measures against crypto currencies. Some cryptos dropped in value by almost 80%.
The Enthusiast’s Perspective — Paul
‘Bitcoin has been on a wild ride recently with the added media hype that surrounds times when people lose or make a lot of money. The difficulty with bitcoin is that there is not a fully diversified ownership holding within the asset class. This causes a problem when there are large holdings held by a few investors. In the bitcoin universe these individuals are called whales. Typically, when these whales are active in the market, they have the ability to move the market in large quantities and in particular when they make a market move during weekends when trading volumes are thin this is exacerbated.
This explains the rapid rise and fall, with rumors circulating about a pitched battle for control between some of these individuals in a coordinated way. In regulated markets such as the NYSE this is considered market manipulation and is highly illegal. Until such time as the market can be regulated or the holdings become more diversified this will be the normal and one needs to expect their holdings to fluctuate dramatically.
In making a case for investing in the asset class, the fundamentals remain unchanged. There is a limited supply, with ever increasing demand for this limited supply as it becomes more mainstream. Taking into consideration the market economics, it becomes clear that over the long term, the finite supply of bitcoin will inevitably rise. This position is held firm by the fact the all transactions are recorded on the blockchain in a public ledger, with the data indicating that the bitcoin miners are not selling the stock they are mining, taking a long-term view that selling an appreciating asset would be fool hardy.
With it continuing to be viewed as a long-term appreciating asset, the tag of it being a digital currency is misleading as there is no incentive to use it in a transactional capacity similar to fiat money. This lends itself to be considered a commodity/store of value instead.’
Paul’s prognosis: The same principles apply to normal investing… only invest in high volatility assets when you have a long-term view.
The Sceptic’s Perspective — Andrew
‘I don’t actively want people to lose money, and everyone I know is ‘invested’ in crypto. So, I am not hoping that they crash but frankly I see no other alternative. To date, not one single person has been able to clearly explain the value of crypto to me. Usually, it ends up being something about new world orders, hyperinflation on fiat currencies etc. But it seems to me that it in fact has no value other than a speculative one, except to those involved in criminal activities. Imagine you are a business that decided to accept payments in Bitcoin, and you sold a product worth $100,000 on the morning of the 19 thMay. By that afternoon you’d be in the grips of fear as the Bitcoin you accepted is only worth around $70,000 and unless your margins were huge, you just made a significant loss selling that product. I can’t see what type of business, other than a criminal one, would be willing to accept that level of risk on their balance sheet, and that in my opinion, makes crypto a fundamentally worthless asset. In fact, I would go so far as to say that you shouldn’t be allowed to use the word investing when talking about crypto, as it adds false legitimacy to what is actually gambling.
The more volatile it continues to be, the less useful it becomes. There are 180 currencies in the world, all of which can be exchanged for goods and services. For a new currency to appear, a significant change would need to happen somewhere in the world, with the likelihood being that it would be a consolidation of currencies rather than the addition of a new one (like we saw with the Euro). There are currently over 4000 crypto currencies, pretty much none of which can be exchanged for goods and services and the likelihood is that that will keep expanding. No one can possibly know which, if any, will be usable in the future.
Crypto is often described as an alternative to traditional safe haven assets such as gold. But gold has value as it actually has functional uses such as in technology for its conductivity and heat management properties. It is also a desirable physical item that will always remain desirable and can’t be man-made. Cryptos have none of these things and an unlimited amount of them can be made.
The red flags are endless. The crypto world is a haven for charlatans, hypists and people with very little experience who are suddenly profound experts. The hype train was started by smart people and is largely followed by people who jump on a trend, it’s an exceptional example of modern marketing. No billboards or TV ads but influencers and social media virality building momentum over time, sucking in more and more people as it goes. We have seen these kinds of hypes before, a fashion brand called Supreme built a hype so strong they managed to sell a brick with their logo on for $30. Most of us see that and wonder why anyone would buy something so useless. Apple is another company that has successfully built a cult like following, with people camping outside their stores for new products. Again, whilst more understandable than a brick given their products actually do something, we wonder how people can be so fanatic. In between these two examples lies the crypto enthusiasts.
For me, it’s outside my risk profile. I am happy to miss out on potential returns as I know the pain of rapid and aggressive drawdowns. I have taken my chances with highly volatile investment strategies and actually made money overall however, the price is too high. The stress and sleepless nights aren’t worth the possible upside. The sinking feeling you get when you are watching your portfolio plummet in value is something I never want to experience again and for that reason, I’m not getting involved in this one.
Andrew’s prognosis: If you want to make money from crypto, join the 4000 smart people and start your own. Get a top-level marketing team and build some hype.
Originally published at https://hoxtoncapital.com on May 25, 2021.