Please register and get access to full articles.
Welcome to our blog – a place to discuss and exchange thoughts and ideas about iX-7 Asset Management SA, the stock markets and all matters relating to wealth management.
I was told that it was a +/- $2 trillion wipeout. The still-unfolding crypto winter, which leveled an entire blockchain’s ecosystem, a large hedge fund, a couple of crypto lenders, and an untold number of retail investors, sent crypto’s total market capitalization plummeting to less than $800 billion, from roughly $3 trillion at its peak in November. Given that the initial value of a token is always 0.00, does market cap really tell us anything about crypto’s economic value?
During the last nine months, a vast number of coins have simply disappeared and plenty of projects have not taken off. Since there is no underlying asset attached to a token, why all these worries?
So how much of that $3 trillion pile at the height of crypto last year was actually … a real investment? Could it be that the crypto boom was a mirage? The question of just how big the ecosystem became matters for a number of reasons, not least of which is that a ton of retail investors plunged into crypto thinking it must be safe, since so many others had made money doing so.
Central to the market-cap mystery is that some users sell crypto assets to themselves over and over—this is called “wash trading”—creating the illusion that money changes hands, that there are real trades, and that items are worth more than they actually are. For the now, things are much less clear. The popular crypto platform Coinbase Global Inc. is under investigation by the US Securities and Exchange Commission for offering tokens the regulator deems as unregistered securities. And this is just one case; others include money-laundering and other criminal offences. Other companies communicated layoffs and include: BlockFi, Crypto.com, and Gemini Trust, among others. Many unanswered questions remain in the bankruptcies of Celsius Network LLC, a crypto lending platform, and Voyager Digital Ltd., a crypto brokerage. And it’s all happening as Bitcoin, the largest cryptocurrency, hovers around 19,500, down from almost $69,000 in November. Where did all that money go? Can it be that is has not? That would assume that it was never there! Statistics and research suggest that between 12% to 16% of all Americans have had, or currently have, an exposure to the cryptosphere. In Europe, the figures are slightly less elevated, while in Asia, it is much higher. In absolute terms, that would mean about 200 million people have crypto currencies. This is substantial. How much hot air is there? Without a doubt, there was a wealth creation and a wealth transfer. The website CoinMarketCap shows that daily trading volume peaked at about $455 billion in February 2021 across different crypto exchanges, and it’s hovering at around $70 billion today. Yet, because the market is truly non-transparent, it does not give us any information about how many true trades took place. Because the system is working like a closed-end fund, an investor can elect the exit only if a new investor…joins the system. This has a certain resemblance to one particular NY-based hedge fund group which blew-up in the aftermath of the 2007/2008 financial crisis. In absolute terms, the number of active participants in a coin-system is most likely very small, probably less than half a dozen, which makes all possible manipulations very easy. Evidence suggests that the market is also actually very small, i.e., a number of bitcoin miners were unable unload newly minded tokens in recent months. According to Noelle Acheson, head of market insights at crypto lender Genesis Global Trading Inc., about 90% of the market cap is reflected by the top 20 coins. She also argues that there is speculation in there, and one can claim that speculation is one of crypto’s specific purposes. So what stands then for the market cap? We think the main lesson to retain here is the following. Crypto’s economic value, if any, is the system upon which was built, i.e., blockchain technology. The market value may have dropped from $3 trillion to something around $700 to $800 billion, or even less, who knows. Yet, the true value of crypto, once you take out all leverage, wash trades, manipulation, hype, dormant coins, lost coins, and stand-by coins, has been about stable. The market cap of crypto currencies can only go up provided there is more transparency (de facto more regulation), better liquidity, and less hype about a group’s favorite token for a given time.
Knowledge is power.