Four lessons we can learn from the Bitcoin crash

Cryptocurrency isn’t dead yet, but its core credo now is to sustain life. The illusion that Bitcoin is an inflation fighter has disappeared. The first severe inflation since the 70s of the 20th century coincided with the fall of the bitcoin price by 60% over the past year. There is also no longer talk of bitcoin as “digital gold,” a precious metal that has far outperformed bitcoin, stocks and bonds this year, falling just 6%.

However, it would be a big mistake to interpret Bitcoin’s woes as a false argument for the entire cryptocurrency industry. Ethereum, the second-largest blockchain, has just undergone a major upgrade that could drive a renaissance in crypto activity. Companies supporting other blockchains remain committed to building new systems for financial products, payments, and digital assets.

Just as the internet survived the demise of Pets.com, the cryptocurrency collapse is not an epitaph for blockchain technology. In fact, scrape off the trash and what’s left is an industry worth revisiting. “In previous cryptocurrency cycles, your engagement was lower. In the new cycle, more people will use digital assets and build on top of blockchain,” said Alkesh Shah, cryptocurrency strategist at Bank of America.

Investors still need to remain vigilant. Dogecoin, an “influencer” token that started as a joke, still retains a market value of $8 billion, close to the market capitalization of companies such as American Airlines Group (AAL). Although the token market has lost $2 trillion in value, a large bubble still exists. “The durability of crypto assets is questionable,” said Eswar Prasad, a renowned digital asset expert and professor at Cornell University, “but the technology does seem to have some durability.” ”

If you’re considering investing in cryptocurrency, here are four lessons for you.

Four lessons we can learn from the Bitcoin crash

Bitcoin is still looking for a raison d’être

Bitcoin proponents have spent 10 years promoting Bitcoin as a currency not controlled by governments, digital gold, and an inflation hedge, and that its limited supply will protect its price. But Bitcoin has failed to deliver on those promises.

Moreover, there is little agreement on what Bitcoin really is: it is just another set of software rules, a truly revolutionary technology like the Internet, or a quasi-currency that could one day be worth $500,000 per coin (as some bulls believe), well above the current $20,000.

Madeline Hume, senior analyst at Morningstar, said: “It reminds me of the fable of a blind man touching an elephant.” No one can figure out what an elephant really is, because everyone can only feel a single attribute like ivory or hide. “We are slowly understanding what Bitcoin is,” she said.

Bitcoin’s role as an alternative asset remains questionable. The price crash shattered the belief that the cryptocurrency market could withstand macroeconomic pressures that have pushed the Nasdaq Composite Index down 29% this year. Bitcoin’s correlation with Nasdaq hit an all-time high in September, with an average of 0.66 over the past 6 months, suggesting that Bitcoin and tech stocks tend to move in unison.

Despite these drawbacks, proponents like Shah argue that Bitcoin and other cryptocurrencies are still viable long-term investments. “People are realizing that digital assets are becoming an internet operating system, much like a high-growth sector in the economy,” he said.

Just a big influx of money is not a recognition

Before the crisis, one of the big selling points of cryptocurrencies was that it attracted institutional capital from pension funds and venture capital firms. Why are these established foundations investing their savings and investments in cryptocurrency companies built on fragile revenue and profit promises? The mainstream thinking at the time was that they wouldn’t do it. So this creates a selling point for attracting more money from retail investors.

But, like many small investors, big money was burned as the market collapsed. Take crypto lending firm Celsius Network, which has attracted more than $20 billion in customer deposits, in part because it pays yields as high as 18%. Celsius Networks is currently operating under bankruptcy protection, its CEO has resigned, and thousands of investors are trying to get their savings back.

However, eight months before Celsius Networks stopped customer withdrawals in June, the company raised $400 million in a funding round that included Canada’s second-largest pension fund, Quebec Savings and Investment Group. Former CEO of Celsius Alex Alex Mashinsky said in a live video just days after the funding announcement: “If someone is very concerned that what we are doing is not legal and does not comply with all the rules, then no one is going to put so much money into Celsius”.

Since then, the pension fund has reduced its investment in Celsius. Charles Charles Emond, head of the C$392 billion ($288 billion) fund, said at an August news conference that the losses “don’t even count the rounding error of our returns,” despite his remarks, but he was considering recourse to legal measures after writing off $150 million in the fund’s investment, according to the Montreal Gazette. Celsius did not respond to a request for comment.

Venture capital firm Andreessen Horowitz could also be affected. Horowitz is the biggest supporter of crypto startups in Silicon Valley. The company has invested more than $7 billion in crypto startups, including $314 million in tokens issued by Solana Labs. Solana’s token price spiked to $259 in November, but is currently trading at just $33 due to concerns about network security and the ability to scale. Both Anderson and the Solana Foundation declined to comment.

VC funds expect most of their bets to fail, while hoping that one of them will be the next Facebook (META). David Nage, a portfolio manager at cryptocurrency investment firm Arca, said retail investors shouldn’t take comfort in VCs investing with them. “If the fund is larger and the cheque amount is small, the bandwidth and support provided to the project is quite low,” he said.

Separate the blockchain infrastructure from the token

Many large companies are betting that blockchain technology will be around for a long time after pure token speculation disappears. The idea is that blockchain and associated digital assets provide access to new markets—whether video games, financial products, or new iterations of art, music, and video repackaged as non-fungible tokens, or NFTs.

These plans range from trivial to extremely significant. On the one hand, Starbucks (SBUX) said last month that it would launch “digital collectible stamps” to allow the most loyal customers to “get an immersive coffee experience,” but that is unlikely to put a company in sales of $33 billion this year.

On the other hand, Swift, an interbank information system that handles trillions of dollars of global transactions, is testing a system that allows information to be transferred directly to tokens. If this approach works, banks could start transferring money through blockchain to methods already used to transfer traditional funds.

“We’re in the crypto winter, but we’re certainly not in the infrastructure winter,” said Will Peck, head of digital assets at ETF provider WisdomTree Investments (WETF). Wisdomtree itself is launching a short-term U.S. Treasury fund that uses blockchain — the short-term U.S. Treasury digital fund — to trade. Wisdom Tree says the fund can provide faster clearing and settlement.

Investing in companies that serve the crypto industry is less risky than buying tokens. A prominent example is Silvergate Capital (SI), a bank that is developing services for cryptocurrency brokers, financial firms, and others in the industry. Silvergate managed to expand its crypto customer base through Bitcoin’s price crash. The company’s net profit is expected to grow 72% to $277 million in 2023.

The stock currently has a price-to-book ratio of twice as high, well above the banking average. But Wall Street still likes it: The average price target is $129, which means it will rise 63% from the current price of around $79.

Other crypto-related stocks include Signature Bank (SBNY), PayPal Holdings (PYPL), Block (SQ), and Coinbase Global (COIN). In addition to the large digital asset exchange Coinbase, these companies are developing crypto services outside of their core business.

Admittedly, crypto concept stocks have been doing poorly. The largest crypto-related ETF, the Amplify Transformational Data Share ETF (BLOK), fell 50% in shares. This is a victory over competitors such as the Global X-Blockchain Exchange Traded Fund (BKCH), which has lost 70% of its share price.

Shah said investors should see cryptocurrencies as a way for large corporations to prove that their earnings can retain their value. “Existing players who embrace this technology, engage in facilitation or market education are likely to do well in the next 5 to 10 years,” he said.

Regulation is really helpful

While other banks are experimenting with cryptocurrencies, most have been on the sidelines. A recent report by the Basel Committee found that large banks hold only €9.4 billion ($9.2 billion) worth of cryptocurrency exposure on their books, a fraction of total assets.

A very important reason behind this is that without clear regulations, large institutions will not invest, but this can happen. Regulators are currently working on rules to allow financial institutions to own cryptocurrencies and provide cryptocurrency-related services to customers. For example, Senate legislation would direct federal agencies to place most of the cryptocurrency market under the jurisdiction of the U.S. Commodity Futures Trading Commission (CFTC). Other bills deal with whether the U.S. Securities and Exchange Commission (SEC) should regulate exchanges, or whether cryptocurrency banks should receive the Fed’s core services.

Without more regulatory certainty, most companies will not have access to cryptocurrencies. Charley Cooper, managing director of blockchain software company R3, said that today, if an executive tries to get permission to launch a legally ambiguous crypto product, the company’s in-house lawyers “will choke to death over breakfast.”

Regulatory rules, which have bipartisan support in the Senate, have a good chance of passing next year. The proposals also appear to be in line with the industry regulatory framework recently announced by the Biden administration.

For Wall Street, creating a level playing field between cryptocurrency upstarts and banking firms would be a win. As institutions and consumers adapt to legal protections, it could trigger a wave of investment.

“If there is a CFTC-regulated market, the price of bitcoin could double,” CFTC Chairman Rostin Behnam said in September. Sounds good, right? But even if it doubles, the price of Bitcoin is still 40% below its maximum price.

Posted by:CoinYuppie,Reprinted with attribution to:https://coinyuppie.com/four-lessons-we-can-learn-from-the-bitcoin-crash/
Coinyuppie is an open information publishing platform, all information provided is not related to the views and positions of coinyuppie, and does not constitute any investment and financial advice. Users are expected to carefully screen and prevent risks.

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