Why crypto prices will probably never recover.
I read today that the crypto market cap has crashed back below $1 trillion for the first time since January 2021.
We have witnessed (and a minority have suffered from) a drop of 67% from an all-time high of $3 trillion reached back in November 2021. If you have been following my crypto analysis & forecasts on social media,
particularly twitter, you will know that I predicted the markets would begin to fall on December 16th 2021. I have maintained my negative outlook throughout the first half of 2022, even when we have seen the odd bear market bounce.
Selling at most of my resistance levels would have paid off handsomely. So obviously I am now being asked regularly if I am seeing any technical reasons or any signals that crypto markets can start to recover.
However, from what I read, the prices of crypto currencies could continue lower. Singapore-based hedge fund Three Arrows Capital, one of the largest crypto players, failed to meet margin calls last week.
Some positions were liquidated, the Financial Times and others report. Surely more will follow?
When commodity prices peak, there is a forced cut back in production as some producers find conditions uneconomic. Actually I read that many crypto miners have shut down their machines
because this activity is no longer profitable.
But with commodities, there is always natural demand, whether it be for energy, metals or food. So eventually demand picks up when prices over shoot to the downside, prices recover,
partly because there is a squeeze on production & finally more producers come back in to the market when prices rise significant. It’s a well rehearsed cycle. Same kind of thing for stock markets.
Euphoria creates severely overbought conditions. Reality starts to bite, perhaps as central banks increase interest rates to slow an over heating economy.
Prices decline, some on forced selling from over leveraged positions and then prices over shoot on the downside. Finally stocks are so cheap & PE ratios so attractive that investors begin buying again
& a new bull market commences.
So could a similar cycle apply to crypto? Well crypto has some useful functions, could be seen as a store of value, certainly is an efficient method of moving funds. But higher prices in crypto rely on
‘The Greater Fool Theory”. The greater fool theory argues that prices go up because people are able to sell overpriced securities to a “greater fool,” whether or not they are overvalued.
That is, of course, until there are no greater fools left.
I believe most so called investors in crypto in recent years have seen the hype and read about fortunes being made by early investors, triggering FOMO – fear of missing out.
So they buy, not even really understanding what they are buying, in the expectation that ‘Greater Fools’
come along who are prepared to pay higher & higher prices as they chase they get-rich-quick dreams.
Some call this a Ponzi scheme. So a bubble occurs, as a media feeding frenzy develops. So called experts advise viewers to mortgage their homes to buy crypto.
Eventually of course all the fools have bought and there is nobody left to sell to.
Prices start to decline, until panic sets in, margin calls force more selling and prices crash. History of course is littered with examples.
The tulip craze!
In 1593, tulips were introduced in the Netherlands and after contracting a virus that gave their petals a multicolour effect, tulips became widely sought after in the country.
The price of tulips skyrocketed as the craze swept the country. The price of tulips was so inflated that it reached a point where no one could really afford it, which triggered a sell off.
Then, a domino effect took place and bulbs were worth nothing, meaning people would make a loss when selling their tulips.
Some crashes are followed by a slow recovery, which is certainly the case with stock markets.
The famous 1929 crash collapsed the global economy. The Great Depression hit almost everybody in western societies leading President Roosevelt to launch the New Deal to stimulate the economy.
However it took 25 years for the Dow Jones Industrial Average to recoup its losses.
The Dotcom Bubble Burst saw the Nasdaq crash for almost 3 years, up to the end of 2002 but it took 13 years for the market to recoup its losses.
In December 1989, the Nikkei 225, reached its all-time high at nearly 39,000. By December 1990, the Nikkei 225 had lost more than $2 trillion.
The Nikkei 225 has never fully recovered to the level seen in 1989 as I write in June 2022 is only trading at 26000 after a long bull run.
Stock markets recover eventually because the indices are made up of companies which make a profit & pay dividends to share holders (even though the companies that constitute the indices regularly change).
Gold like crypto, is a commodity which pays no dividend but has many uses and has been accepted as a store of value for centuries due to it’s unique properties.
- Crypto has been described as digital Gold but this argument is a lot weaker than it was before the 2022 crash.
- Crypto has proved to be no hedge against falling stock markets (& in fact has crashed in line with stock markets over the last decade).
- It has proved to be no hedge against inflation. (Gold holding up well as crypto crashes).
- A poor store of value. (Who wants their savings to be changing in value by 10% a week?).
- Has no rarity value, with over 18,000 currently available to own. We cannot make more land or Gold. If I was smart enough I could create as many coins as I like. (Unfortunately I am not!!)
Regulation.
Finally, the Biden administration also wants to explore a digital version of the dollar just as China aims to introduce a central bank digital currency,
with more and more people using smartphones to make payments and handle their finances. Virtually all banks everywhere now ask for proof of the source of funds for large transfers and increasingly even for small ones.
If you’re buying or selling real estate, a copy of the sales contract generally satisfies the inquiry.
Additional hoops must be jumped through in countries that impose capital and/or exchange restrictions to control the flow of money coming and going.
The Patriot Act, passed by Congress about a month and a half after 9/11, added provisions to the 1970 Bank Secrecy Act that set standards for banks to identify customers,
maintain records required them to report cash transactions over $10,000.
US federal law requires banks to have customer-identification programs approved by their boards. When opening accounts for customers, banks must collect and verify customer-provided information, such as birth dates,
addresses and copies of drivers’ licenses or passports.
Civil and criminal penalties for money laundering were increased, and banks can face enforcement actions for shoddy anti-money laundering practices, whether or not actual money-laundering crimes by their customers are alleged.
Most banks have faced increased regulatory compliance costs, in part because they must do more to verify who their customers are, and try to get a sense of what they do, and with whom they may be doing it.
Bankers have had to hire more consultants, more compliance staff and buy more anti-money laundering software to meet the demands of not only the Patriot Act but also the Dodd-Frank law, which aims to curtail risky behaviors by financial companies
that played a major role in the 2008 financial crisis.
How can governments & regulators allow crypto to remain unchecked? The SEC just announced it would increase the staff of its Cyber Unit from 30 to 50 and rename it the Crypto Assets and Cyber Unit to bolster the enforcement of regulations in cryptocurrencies.
The will fundamentally change how cryptocurrency markets work.
The crypto bubble has burst, the speculators got burned & I think history will judge the crypto craze as one of the classic bubbles of all time, along the with the tulip craze of 1637 & The South Sea Bubble of 1720.
Crypto has much to offer & will always exist, but I have never seen it as an investment and I never will. Please leave your comments below.
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