The flowery universe of virtual currencies is experiencing an anthological spring pruning. Bitcoin has plummeted 35% in 2022, Ethereum 44%, Cardano 58%… And these are the strongest currencies. Other smaller ones, such as Fantom or Terra USD, have lost more than 80% of their value. The (irrational) exuberance with which this garden grew invited the purge. Now, how many of these cryptocurrencies will survive? Has there been excessive growth?
The governor of the Bank of Spain, Pablo Hernández de Cos, put on Thursday during a financial conference exorbitant numbers in the world of digital assets. “Five years ago, the total value of this market was 16,000 million dollars, to be worth nearly three trillion dollars by the end of 2021”. In other words, it has multiplied almost by 200. Cos insisted again that financial history indicates that in the face of such a meteoric growth of a type of non-regulated asset, it is necessary for the authorities to take measures.
The great boom in virtual money is relatively recent. Although the first cryptocurrency, bitcoin, has been around since 2010, it was not until the pandemic hit that millions of people joined this trend. From March 2020 (with half of humanity confined) until August of that same year, the price of bitcoin multiplied by 8.
This galloping revaluation invited a legion of new investors, especially young ones, to dare to surf this new wave of crypto assets. But the virtual money craze didn’t stay with the legion of computer and tech-savvy millennials who got there first. The launches of new virtual currencies and tokens were accompanied by the development of a whole new industry: computer farms in Canada designed to be rented by bitcoin “miners” eager to decrypt new currencies; intermediation platforms, such as Coinbase, which went public with the guarantee of the hundreds of millions of dollars entered in commissions; venture capital funds domiciled in Luxembourg, Gibraltar or Malta, which sought to be able to institutionalize investment to reach a greater public…
What happened to the ‘stablecoins’?
- Concept. The so-called “stable currencies” are cryptocurrencies designed to minimize their price volatility, in relation to a “stable” asset or basket of assets. They are usually linked to conventional currencies, such as the dollar. Ensuring that parity allowed them to convey trust between users, so that they could be used for various functions. One of them, to serve as collateral for investors interested in speculating with other cryptocurrencies.
- land. The big problem with stablecoins is that this parity guarantee is only backed by an algorithm, not by the actual purchase of assets. So, when there is a moment of mistrust and everyone starts selling, there is no way to meet the promised conversion rate. This is what happened to the Terra USD coin on Thursday, whose value went from $0.995 last Monday (almost perfect parity) to $0.16 on Friday.
- Tether. Terra USD was not a widely used stablecoin, but its problems have spread to other more established stablecoins, such as Tether. In the session on Thursday, there was a moment when its value fell by 5%.
money in buckets
As more and more investors arrived, the main companies in the sector increased their advertising budgets. the spanish firm Bit2Me unleashed a powerful billboard campaign, in March 2021, in the main Spanish cities… while the Bank of Spain and the Government issued notices of concern, reminding the population that cryptocurrencies are an unregulated and risky asset.
European and North American regulators have been looking for a way to regulate this stormy universe for two years. The European Commission wants the new directive on crypto assets to come into force in 2024, and in the United States several senators are promoting a specific regulation for stablecoins.
The giants of Wall Street have also been dazzled by the glare of virtual money. Bank of America fell in love with digital assets. “We believe that they will become another new class of financial asset,” like the stock market or bonds. The fund manager Fidelity created a working group to advance the regulation of crypto assets and the Goldman Sachs bank is negotiating a loan with Coinbase in which the guarantee is bitcoins.
Has there been a bubble?
The collapse of electronic currencies in recent months has been precipitated by the United States central bank. The Federal Reserve has been forced to raise interest rates to contain a runaway rise in prices. The end of easy money has caused massive falls in the Stock Market, and also in crypto assets.
Joaquín Casasús is a partner and CEO of Abante Asesore. The financier explains that in recent months it has been possible to verify that bitcoin has not fulfilled some of the promises brandished by its defenders. “It is neither a refuge asset, nor does it allow you to be decorrelated from the Stock Market, nor does it protect you when there is very high inflation.”
Now, his view on whether there has been a bubble in crypto assets is more nuanced. “There has been something of a bubble, but it cannot be compared with the historical bubbles such as the tulips or the dotcom companies. Here is behind a decentralized processing technology, the ‘blockchain’, which can add value. What remains to be seen is which virtual currencies and projects end up surviving.”
Víctor Alvargonzález, founding partner of the firm Nexstepshows himself to be a great defender of the technology that underlies cryptoactives, the blockchain. “I think these corrections are going to be good for this industry, separating the wheat from the chaff. The concept behind it seems brilliant to me, and that it can be useful, but there have been too many inexperienced users and too much speculation”.
One of the greatest experts in Spain on fiduciary money and cryptocurrencies is Emeritus Quintana, advisor to the investment fund Numantia Patrimonio. In his opinion, the corrections that have occurred are perfectly normal for a relatively new asset. “You have to take into account that more than 65% of bitcoins have not changed hands in the last year, an all-time high. Which indicates that most of the volatility is generated by new players, who have entered here with a purely short-term and speculative vision”.
His fund cannot invest directly in bitcoins, as it is not regulated, but it does so indirectly through the US company Microstrategy, which invests almost all of its cash in buying bitcoins. The firm has spent nearly $4 billion, at an average price of $30,000 per bitcoin (the current trading price).
Buying Microstrategy shares has become a roundabout way to get into cryptocurrencies. Of course, its future has been totally linked to bitcoin and its price has fallen by 70% in the year.
Another formula is the purchase of exchange-traded funds (ETFs), linked to cryptocurrencies. This figure is accepted in countries such as Germany, Sweden and Switzerland. Instead, the United States has been debating for months whether to accept this type of solution. “I think in the end they will have to do it,” says Quintana.
In addition to companies and exchange-traded funds, there are even countries betting heavily on bitcoin. It is the case of The Savior, which since 2021 accepts this asset with legal tender money and allocates part of the budget to buy bitcoins. The recent collapse has put its public accounts on the ropes. Too much volatility for what has so far proven to be little more than a speculative asset, with little use in the real economy.
digital dollar
Faced with the push of blockchain technology and crypto assets, several countries are studying ways to launch their own digital currencies. Ignacio Cantos, director of investments at the firm atl Capital, understands that these developments also explain part of the collapse of recent months. “A currency that does not have the backing of a central bank is more difficult to succeed. When you invest in crypto assets, many times you are not clear about what is behind it. I think a lot of the projects will end up disappearing,” he reasons.
Ignacio de la Torre, chief economist at Arcano Partners, is of the same opinion. “Cryptocurrencies have been sold as an alternative currency, but have ended up behaving as a highly speculative asset. There have been many players who have ended up taking advantage of the legal vacuum that reigns in this area to seek regulatory arbitration”.
Although there was already a certain rebound on Friday, no expert dares to venture how long the deep cleanup of crypto assets will come. However, everyone agrees that the strongest projects that add the most value will prevail.
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