Crypto Capitulation - Australian Investment Education

Cryptocurrency has always been a point of contention in the investment space with crypto bulls and naysayers going toe to toe for years. Recently, major cryptocurrencies have capitulated with enormous losses. Join us in today’s podcast as we explore the reasons behind the fall:

Major Problems For Investors
When this episode was filmed, Bitcoin dropped as far as 73% from its highs following a colossal drop across the crypto market. Host Andrew Baxter explains his main qualm with the crypto space in that the marketing over the last few years in particular has been so effective in drawing people in who perhaps are not well-informed on the market. Adding to the issue is the fact that there is no real regulation surrounding crypto and when anything goes, it is hard to discern the truth from sales puff. The result, which we have seen now, is millions of people losing enormous sums of money because they did not understand the risks. Many of those wanting to take their money and run are unable to do so because some of the exchanges are experiencing liquidity and insolvency issues following the huge collapse. For example, Coinbase is a US listed company which has come off significantly following the cryptocurrency price drops and continues to tumble. 

The Main Reasons for Crypto’s Drop
Since its inception, crypto zealots have expressed the myriad of advantages and safe haven uses for crypto in your investment strategy. We have all heard that crypto is an inflation hedge because it isn’t tied to other assets but Host Andrew Baxter knows that this simply is not the case. We have touched on current levels of inflation in our podcast previously and inflation has been all over the news for the last few months. In that same period is where we have seen cryptocurrency drop more than most other assets and like gold, the results have shown that it simply is not a good hedge against inflation. Asset allocation is another argument regularly touted in favour of crypto currency but again, Andrew Baxter has his doubts. Managed funds had moved towards larger and larger allocations of crypto in their portfolios while the market was booming, but they have suffered the consequences of recent falls. The tough times in the market have revealed a clear correlation between the S&P and the crypto space, albeit a more amplified version. Though you might see larger gains when times are good in crypto, the losses you incur will be painful. Keep in mind, this has happened before. A few years ago we saw the Fed increase interest rates and we saw crypto sell off by about 75%. Once again, Fed rate hikes have hurt crypto and with more looming, one might suspect the pain to continue.

Crypto Mining – Supply and Demand
Co-host Mitch Olarenshaw points out that rising energy costs have meant crypto mining costs have also increased significantly. As a result, less of it is mined. So wouldn’t this mean supply drops so prices should increase. Host Andrew Baxter explains that there is greater context surrounding the drops regardless of less mining occurring. Although there is less supply, less demand cancels out investors’ appetite for crypto while they continue to lick their wounds.

Where to Now for Cryptocurrency?
Usually a news piece causes a ripple effect across the market. Host Andrew Baxter points out that there is bad news coming from everywhere sending multiple waves throughout the economy. The next 6 months are uncertain for crypto, but it is unlikely that the headwinds of higher costs of capital and increasing interest rates have eased just yet. It may seem cheap now relative to where it was, but the reality is that it was so overpriced it perhaps where it is now is actually fair value. Andrew’s opinion – we may or may not see crypto come back, what do you think?