Markets have been difficult to watch over the last few weeks across most liquid asset classes, but none so painful as cryptocurrencies.
The price of bitcoin (BTC) has plummeted in the past week, dropping below $27,000, less than half of its November 2021 high. That’s a long way down in a short amount of time. Most of the major alterfnative cryptocurrencies (altcoins) have posted similar performances.
Amid this volatility, the chorus of voices critical of cryptocurrency has become amplified. Most are rehashing arguments that view cryptos as akin to pyramid or Ponzi-like schemes that funnel most value towards a few founders and early investors.
As of this writing, the crescendo has culminated in a sense that crypto might be “dead.”
That’s the case made by The Spectator’s Ross Clark, who argues that despite the lower prices for bitcoin and other tokens, there are few signs that investors are buying the dip en masse. Clark argues that this is the end stage of a pyramid scheme, when there are not enough new investors to create the next layer of the pyramid and the scheme collapses in on itself.
Writers like Clark are pointing out that bitcoin is not really serving as a hedge to inflation or equities, as some expected, and are calling into question cryptocurrencies’ value as investments themselves.
Oh yeah, it doesn’t help that over last weekend, the Justice Department indicted the CEO of Mining Capital Coin, a crypto mining and investment platform, for allegedly running a $62 million pyramid scheme.
Volatility is a feature, not a bug
We talk a lot about the virtues and potential of cryptocurrencies in the crypto press, but clients are going to hear and read about these things, and they’re going to look to advisors to help them stay on track. If advisors believe in cryptocurrency, then they have to be prepared to make the case to clients for staying invested in them for the long term.
Ultimately, volatility is a feature, not a bug of cryptocurrencies. Bitcoin, the crypto with the longest track record and the most investor participation, has seen this type of precipitous drop several times over its history.
Cryptocurrencies may closely correlate with technology sector stocks at times, but the asset classes have historically converged and decoupled, said David Gamble, portfolio manager at Sarson Funds, a crypto education and investment platform for financial advisors.
Gamble believes that crypto will ultimately decouple from equities as a new wave of adoption emerges, driven by state actors. Two countries, El Salvador and the Central African Republic, have already adopted bitcoin as legal tender, and Gamble expects more to follow.
“That being said, good things take time, and we’ll need to see more of this adoption curve,” he said. “Fundamentally, we are seeing the right things happen.”
Another bright spot is regulation, where there appears to be some movement towards clarity and consensus building in the U.S. towards how crypto will be treated – the president’s executive order kicked off coordinated review of cryptocurrencies and the digital asset ecosystem by federal agencies.
What happens next?
For the time being, regulators appear to be taking a more benign approach in the U.S.
“People were very cautious around what might be to come, especially around the debate of people being able to self-custody,” said Stan Miroshnik, partner and co-founder of 10T holdings, a growth-stage private equity firm focused on the digital assets space. “The recent executive order wasn’t just benign, it was forward-thinking by pushing for a thoughtful framework for regulation.”
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Progress is being made towards more efficient cryptocurrency products, like a spot bitcoin exchange-traded fund (ETF), to be made available in more marketplaces.
Ultimately, those products will be key in bringing in new crypto investors, said Andrew Puschel, global head of strategy at HashDex, which has created a suite of exchange-traded crypto products, including spot-price ETFs domiciled in Brazil.
“I wouldn’t say the SEC is ready, but they are getting there incrementally,” said Puschel. “There’s been a lot of demand serviced through private placement products, direct ownership and other things, but ultimately from a compliance standpoint advisors and investors want to own an entire portfolio on one platform – all of the assets should be in the same place, and that’s one thing that ETFs can offer.”
And overall, investment in crypto and digital assets is still increasing as businesses develop and offer more ways of accessing the space.
Coinbase (COIN), which recently announced it has reached 89 million verified users, now predicts that there will be 1 billion active cryptocurrency users by 2032. As of 2021, there were estimated to be 295 million users – so there’s still plenty of growth to look forward to within the networks that power crypto.
“It’s clear that crypto has arrived and we can’t afford to ignore crypto any longer,” said Ben Cruikshank, founder of Flourish, a crypto platform for advisors. “Twenty-five percent of American investors are investing in crypto now – that’s the same number that are investing in CDs. It can’t be avoided.”
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