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?
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