During an economic downturn one would expect cryptocurrencies to soar in value, given that they seek to exist outside of the normal, fiat, monetary system – but instead they have tanked. Why is this?
Coinmarketcap data shows that in the last few weeks the total market capitalisation of their list of over 1,000 cryptocurrencies – which remains dominated by Bitcoin – has fallen from a recent peak of almost $300 billion on February 14, to around $150 billion this morning (19 March 8.30am GMT). That’s a 50% loss over what is a short time period. Although, to be fair, the $150 billion remaining is still an epic amount of money.
Prices now seem to have stabilised and found a new ground floor, but still, when the world’s economies go haywire because of a global pandemic and people are told to stay in their homes like we’re in some kind of Hollywood apocalypse movie, you’d expect the parallel digital economy of crypto to at least hold its value, if not see an explosion in value as a type of safe haven.
But, the movement in March has been downward after a short upward trend starting in late December. Why is this? One argument going around is that crypto futures contracts now in the red had triggered a run that had then escalated, and also perhaps had triggered automated trading systems to cash out. But, that doesn’t really explain why people are selling in the first place to trigger such domino effects.
Another reason doing the rounds is that some exchanges have been attacked with denial of service hacks, but again, while this would disrupt trading and make people nervous, a lot of people would have to sell their crypto assets to make prices drop by 50% since Feb 14, 2020. Exchange issues are not enough to do that.
Perhaps the real answer is a simple one: speculators who have lost a lot of money on the real world financial markets such as the NYSE and FTSE, are reaching for whatever liquid assets they still have, and so Bitcoin et al are being sold off to realise some hard cash – which of course is a bit ironic. But, it’s totally understandable in the circumstances, if that is what is happening.
It perhaps also shows that while the utopians among us want to see the blockchain-based crypto economy as separate in examples such as a Bitcoin casino or a blockchain-based realty business and operating in a ‘air-gapped’ world away from the bricks and mortar world of US$ and GBP£, the reality is they are not that disconnected after all.
Also, cryptocurrencies have, in most cases, no underlying value, are not linked to any physical asset such as gold, nor have a central bank that can try to improve their value via macro-economic levers. They are very often pure momentum plays, and when real world events drive cash-outs, there’s not much anyone can do, no more than an airline can convince shareholders to keep their FTSE-listed shares during a pandemic that bans international travel.
Artificial Lawyer asked blockchain expert, Stevie Ghiassi – founder of Legaler – what he thought.
‘I’d say [cryptocurrencies are] one financial crisis (this one) away from moving into a position of true ‘digital gold’. To give you some perspective, gold is a very old ‘technology’ that’s worth $8 trillion, so BitCoin alone still has a lot of room to grow to capture that market as it’s only worth $100bn.’
This crisis is going to have people resenting the financial system even more and off the back of it crypto should flourish. It’s still a very speculative market and coupled with low liquidity it can tank quickly, plus it doesn’t have the ‘circuit breakers’ that stock markets have. It’s very possible it’s going to go much lower.’
Ghiassi therefore sees this as a temporary phase, which in the end will lead to greater faith in crypto as we see traditional markets slide in value.
Of course, we cannot know yet how things will pan out – markets are always fickle. But, for now, it looks like investors are liquidating holdings in everything, including commodities (see Thomson Reuters data below) – as well as crypto.
Meanwhile, Aaron Wright, co-founder of smart contract pioneer, OpenLaw, told this site: ‘Just because it’s blockchain, doesn’t change normal market behaviour. And Bitcoin and Ethereum are liquid. If you need cash it becomes a viable option.’
I.e. don’t assume just because an asset lives in the often esoteric on-chain world that it’s not something people won’t liquidate when they want good old-fashioned paper money to keep in their very real world, off-chain, pockets.
Note: The Continuous Commodity Index is a major barometer of commodity prices. The index comprises 17 commodity futures that are continuously rebalanced: Cocoa, Coffee, Copper, Corn, Cotton, Crude Oil, Gold, Heating Oil, Live Cattle, Live Hogs, Natural Gas, Orange juice, Platinum, Silver, Soybeans, Sugar, and Wheat.
And, you may ask: what has this got to do with lawyers? One reason is that there are plenty of law firms that have developed cryptocurrency practices and are involved in legal work for asset holders, exchanges and crypto issuers.
Another reason is that lawyers around the world are increasingly interested in crypto as a new class of assets that may play a role in other types of legal work from bankruptcy to probate. So, when these assets dive, and do so against market expectations, it’s noteworthy.
Lastly, in some cases complex smart legal contracts may be designed with a crypto element. Wild swings in values of any token that is part of a transaction could cause issues.
I’d posit that they’re tanking because they are the digital equivalent of junk bonds – they are fiat currencies with no underlying backing from a governmental entity. Intelligent investors are moving to tangible assets that have actual underlying value – not perceived value.
The last few weeks have seen a liquidation across all assets in the rush to pay debts and meet margin calls. The crypto prices went down along with everything else as people sold anything they could to get cash i.e. dollars which explains why the dollar has gone up. But now I think we may see an uncoupling of the crypto’s from the stock exchanges in terms of trajectory. It looks like a financial crisis much worse than the last one is on its way with so many companies propped up by easy debt which will now not be available on rolling facilities etc. Repo market was in huge trouble even before the virus came along to push us over the edge. Huge quantitative easing for years, interest rates on the floor. It brings to mind that scene in the Wizard of Oz when we see behind the curtain and there’s this old guy frantically pulling levers. We kicked the can down the roand in 2008 and did not learn. A lot of people are talking about this being strike 3. If bitcoin is to be digital gold then this is the time we find out. BTC up 18% yesterday, biggest increase since October. Up 8% today – 12.00 GMT. Who knows – it’s so volatile. But I think it’s far too early to draw conclusions when the chaos is only just starting. Bubble of everything has just popped – this is clear.