Is the Crypto Party Over?

Bitcoin, along with other cryptocurrencies have been on an upward tear since the COVID pandemic began. On January 1, 2020, bitcoin traded at $7174.74. By April 15, 2021, its price had soared 783% to a (so far) all time high of $63,346.79. Other leading cryptos such as ether enjoyed similar gains.

That’s some serious dough. But sadly for crypto investors, the party didn’t last. Bitcoin’s price began faltering in late April. Losses mounted after Tesla founder and crypto enthusiast Elon Musk announced the company would no longer accept payment in bitcoin for its vehicles.

Then on May 19, crypto prices dove off a cliff after the Chinese government announced it would prohibit financial institutions and payments platforms from providing any crypto-related services. While Chinese citizens can still legally own cryptos, the ban makes them much harder to use.

When news of China’s announcement reached investors, bitcoin’s price plummeted to 53% below its April 15 peak. At one point during trading hours on May 19, nearly $1 trillion was wiped off the market capitalization of the entire crypto sector. While bitcoin recovered about half that loss after some encouraging tweets from Tesla, share price volatility is making crypto investors nervous.

The Financial Times reported “new doubts among institutional fund managers over the future of cryptocurrencies as an asset class,” A report from JPMorgan said that institutional investors which only a few months ago appeared to be abandoning gold as a safe haven in favor of bitcoins, were now moving back to gold.

But not all crypto investors are nervous. In the midst of the market carnage, Cathie Wood, Chief Executive of Ark Investment Management, reiterated her $500,000 price forecast for bitcoin.

Of course, this isn’t the first example of extreme price volatility for bitcoin and other cryptos. Every time Elon Musk or another influencer announces they’re bullish on cryptos, prices soar and talking heads again parrot that crypto is winning mainstream acceptance. But when upward momentum stalls, the talking heads turn bearish.

As is the case with many things, the truth is probably somewhere in the middle. Even as price volatility lingers, mainstream acceptance of cryptos continues to grow. Indeed, on May 19 – the day cryptos had its most recent sharp price drop-off – banking giant Wells Fargo announced it would offer a crypto fund to its largest wealth management clients. Morgan Stanley and JPMorgan Chase have already announced plans to launch actively managed -crypto funds for their managed portfolios.

As well, in April, Coinbase, America’s largest crypto exchange, began trading on the Nasdaq stock exchange. Its share price soared past its initial reference price of $380, rocketing to $429.54 before falling back.

It’s also important to view cryptos in the context of the broader market. There appears to be a broad rotation out of big tech and growth stocks in favor of shares better positioned to benefit from a recovering economy and (especially) inflation. It’s hardly a stretch to suggest that many of these investors are similarly taking profits in cryptos.

Still, there’s more than a whiff of snake oil in the air when a single tweet by an influencer like Elon Musk can spook – or spike – the markets. Nor are we reassured by the spectacular price increases experienced by cryptos launched as a joke, such as Dogecoin. Then there’s a crypto called Simple Cool Automatic Money (SCAM), which earlier this month briefly reached a market cap of $70 million, before falling back to $800,000.

And don’t forget that Big Brother doesn’t approve of bitcoin and other cryptos with “distributed ledgers” that trade peer-to-peer, without a middleman. Our government minders don’t want us to have financial privacy. Nor do they want a distributed ledger ecosystem to exist that could potentially compete with fiat currencies. These are two of the reasons why China cracked down on cryptos, and why we’ll likely see similar measures taken in other countries, including the United States.

We’ve previously suggested that governments are much more interested in supporting cryptos linked to a fiat currency or a basket of fiat currencies – so-called “stablecoins.” As we’ve pointed out, the advantage of stablecoins from the standpoint of central banks and governments is that cryptos tied to a fiat currency can inflate at will. They can also be micro-managed. In April 2020, the Chinese Central Bank formally launched a digital renminbi. Similar initiatives are underway in many other countries.

With these developments in mind, we think it’s a bit early to classify bitcoin or other cryptos with distributed ledgers as its own asset class. Buy if you choose, but don’t be surprised if a combination of price volatility, stifling compliance rules, and government-backed stablecoins erode their popularity.