The cryptocurrency comeuppance

The cryptocurrency comeuppance

Time to read: Minutes
Douglas Cote

Douglas Coté, CFA

Head of Global Perspectives Strategies

Bitcoin, which started the whole cryptocurrency phenomenon, is now in free fall, having dropped more than 50% year to date to $21,870 as of Tuesday’s close ― below my bearish forecast of $25,000. Why was I that bearish? Because the impetus for the speculation among cryptocurrencies has been the Federal Reserve’s extended period of easy monetary policy, which ended in February with a dramatic U-turn from quantitative easing to quantitative tightening. Certainly, there also was speculation in other asset classes such as growth stocks. The difference, however, is that stocks produce income in the form of earnings or dividends; many companies also possess underlying, tangible assets. By contrast, cryptocurrencies have no earnings, no yield and no tangible assets that might prop up their value. The crypto comeuppance has been fast and furious, to the detriment of retail investors.

Bitcoin is not and never was a currency. The term, “cryptocurrency” is and always was a misnomer. For example, recently the price of TerraUSD, a so-called “stablecoin,” collapsed nearly to zero along with its linked cryptocurrency, Luna. TerraUSD sought to maintain a steady value of U.S. $1 at all times, but instead of backing this value with underlying assets, it relied on a series of algorithmic adjustments; also, the linkage to Luna was supposed to absorb any price volatility in TerraUSD. Arrangements such as this lulled investors into believing that cryptocurrencies were stable, investable assets rather than speculative plays. Last month, however, when investors began selling TerraUSD, its linkage to Luna dissolved and both currencies collapsed, driving down most of the cryptocurrency market in the process.

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