ALEX BRUMMER: Cryptocurrencies fall to the ground
ALEX BRUMMER: Investors have been attracted to cryptocurrencies because they’re super safe: they’re learning that it doesn’t shine like gold anymore.
- Even the ‘respectable’ end of the crypto market – dollar-pegged stablecoin – in trouble
- Withdrawal of monetary largesse by central banks with consequences
- Bitcoin is down 35% since the start of the year; Coinbase shares plummet 80%
Around the world, central banks did a great job of shielding Western economies from the worst shocks of the ‘Great Financial Crisis’ and, a decade later, of Covid.
As banks looked over the edge in 2008 and the financial system descended into chaos in March 2020, the US Federal Reserve, the Bank of England, and eventually the European Central Bank were taking economic history into account.
Interest rates were slashed to the bone and money wizards devised the Quantitative Easing (QE) tool.
All that glitters: The bubble has now burst and even the most respectable end of the crypto market, the dollar-pegged stablecoin, is in deep trouble.
Avoiding recession and an Argentine-style loss of life savings became the goal.
The rescue did its job. Important banks were saved and have come out stronger on the other side.
Greece and Italy did not go into insolvency during the 2010 euro imbroglio and, as the Covid shock was absorbed, the US bond market, the world’s largest, did not collapse. The 1930s Great Depression anthem ‘Brother, can you give a dime?’ it was not repeated.
So convinced were the central banks that they were the world’s ultimate saviors that super-low interest rates and money taps were maintained long after it was prudent. The Bank of England went on a £895bn bond-buying spree (nearly half the national debt).
And the Fed’s balance sheet grew nearly nine-fold, from $1 trillion in 2008 to $9.9 trillion (£8.1 trillion) in April this year.
The lifeboat launched by President Ben Bernanke, buoyed by Janet Yellen, and then reinflated by Jay Powell did what it was supposed to do. But when such large sums are injected into the monetary system, some of it will end up in the wrong places.
Share prices on the Nasdaq-dominated exchange soared.
It has plummeted 25 percent this year. Shares of recommended memes on sites like Reddit skyrocketed and they could apparently be purchased commission-free on Robin Hood.
Celebrities put their names on Special Purpose Acquisition Vehicles (Spacs) with no idea what they were signing up for.
And most toxic of all, ordinary investors (and a growing number of professionals) bought into the idea that cryptocurrencies (money minted in the metaverse) were as good, if not better, than gold.
To be sure, when Bitcoin skyrocketed to its peak price of $68,000 in November 2021, there were professional investors, savvy amateurs, and novices who became very rich by buying the dips, selling the highs, or trading derivatives.
From time to time, I remember my cabbie from several years ago, after dropping me off in the City, on his way to visit a tobacconist in the East End that sold the virtual currency.
It would be great if, despite my Luddite advice to stay away, he had his own fleet of rental cars. The bubble has now burst and even the most respectable end of the crypto market, the dollar-pegged stablecoin, is in deep trouble.
Bloomberg reports that backers of Terra USD, an algorithm-driven stablecoin creator, are seeking a $1.5bn (£1.2bn) bailout to prop up their Luna coin after it plunged 50 per cent from its peg. with the dollar.
it’s not alone
When cryptocurrency exchange Coinbase floated in New York just over a year ago, shares soared 25 per cent above the offer price within minutes, being valued at $86 billion (£70 billion).
This made it worth more than the $56 billion Intercontinental Exchange, the owner of the New York Stock Exchange, and more.
As Bitcoin has fallen in value, dropping 35 percent since the start of the year, shares of Coinbase have plunged 80 percent.
The withdrawal of monetary largesse by the world’s central banks is having dramatic consequences.
Sounding like a Premier League football manager on the eve of being sacked, Coinbase CEO Brian Armstrong tweeted “your funds are safe with us.”
There may very well be some useful consequences of the crypto craze, including the widespread use of the blockchain digital ledger.
Central banks also acknowledge that officially backed cryptocurrencies may be a better way to conduct monetary transactions as cash falls out of fashion.
Investors have been attracted to bitcoin and other cryptocurrencies because they are super safe due to limited computer mining opportunities. What they are learning is that it no longer shines like gold.