What’s behind the crypto headlines?
Please note: Reference to specific companies in this article is not an opinion as to their present or future value and should not be considered an investment recommendation, investment advice or a personal recommendation.
Recent weeks have seen a number of dramatic headlines being written about cryptocurrencies, driven by plunging valuations which have hurt both crypto investors, as well as crypto employees.
While we don’t invest in cryptocurrencies for our International Bank clients – please see below for context behind that decision – we recognise that current events are nonetheless attracting a lot interest.
With that in mind, we hope that this short article by Nikola Vasiljevic from our Investment Strategy team, offers some useful context and clarity.
What’s been happening?
The shuddering fall in cryptocurrency valuations has left many people wondering if it’s a short-term blip, or signs that the crypto bubble may finally have popped.
Bitcoin’s rapid change in fortunes has unsurprisingly generated a lot of attention, given its status as the biggest player in the market. On Saturday 18 June, it started trading below the $20,000 threshold. Why is that significant? First, $20,000 is symbolic as it’s the previous cycle’s highest valuation. Second, you have to go back to late 2020 to find the last time the valuation dipped below that level.
A wider significance emerges
Crucially, what happens in crypto land doesn’t stay in crypto land. The impact of recent large-and-fast drawdowns has been felt far and wide, spreading across the blockchain universe.
After a period of sustained hype, we’re now seeing real pain hitting crypto market participants. One lending platform was forced to halt withdrawals last week when customers tried to stem losses by getting out quickly. Meanwhile, there were reports of a high-profile crypto hedge fund being on the cusp of insolvency.
Looking at the bigger picture, there are two reasons why these developments aren’t isolated and contained:
- The collective value of cryptos peaked in November 2021 at $2.9 trillion1. While that’s relatively small in comparison to more traditional asset class valuations, the wider issue comes from unrealised gains. It is thought that the current fallout leaves hundreds of billions of dollars in unrealised gains vanishing into thin air. That’s bad enough on its own, but made worse if you consider it against the challenging backdrop we see with traditional bonds and equities. All-in-all, it creates a significant, negative wealth effect.
- The crypto crash has also damaged the industry as a whole, with reports of wide-ranging job losses. If the current momentum is maintained, then it’s not unrealistic to expect tens of thousands of jobs being cut in the short-to-medium term. Two weeks ago, Coinbase – a crypto exchange – declared it was laying off 1,100 staff, which is just under a fifth of its total workforce2. A knock-on effect could be that consumer spending slows, adding more pressure on an already-strained global economy.
As mentioned at the beginning of this article, we don’t invest in cryptocurrencies for our International Bank clients. Amongst other things, we think they’re under-regulated and uncomfortably volatile. Even professional investors who invest in crypto know that the territory comes with a significant risk of loss, and big price swings.
While today’s environment reinforces our crypto viewpoint, it doesn’t mean we’ll always think this way. We do see longer-term potential in blockchain and the technology underpinning digital currencies, albeit with many issues needing to be addressed.