Gold, for example, has risen about 3 percent from $1,792 an ounce on Nov. 1 to $1,849 an ounce on Friday to show its usefulness as a store of value in times of financial crisis or runaway inflation, while bitcoin it has plummeted 64 percent. cent during the same period.
Decentralized cryptocurrencies like bitcoin cannot exist as a unit of account or store of future purchasing power like fiat money because their value is too volatile. For example, an employee who agreed to be paid in bitcoin last November would have received a 64 percent pay cut for this week. For now, the only real use of cryptocurrencies has been asset price speculation.
DeFi under pressure
The decentralized finance (DeFi) corner of cryptocurrencies has also taken an especially big beating over the past week, with the collapse of industry players Celcius and Three Arrows Capital, following the implosion of digital currency Luna last month. .
DeFi promoters claim that it is the functionality of the projects by offering traditional financial services on a blockchain that supports the intrinsic value of cryptocurrencies.
However, Celcius is one of hundreds of DeFi companies offering double-digit interest rates on deposits, with little insight into how this type of financial alchemy is achieved and zero regulatory protection for depositors.
Given the lack of regulation, DeFi depositors often seem to rely on the goodwill of product providers to not scam them or steal their funds with no guarantee that the deposits are safe.
Before its liquidity problems, Celcius reportedly had around $12 billion in assets, while venture capital fund Three Arrows is on the verge of bankruptcy after last reporting $18 billion in crypto assets under management.
In May, holders of the Luna coin lost $85 billion after its value plummeted to zero in yet another withering evisceration of the DeFi sector’s credibility.
On Wednesday, the world’s largest cryptocurrency exchange Coinbase announced that it will lay off 18 percent of its workforce, or 1,100 employees, in its attempt to survive the crypto winter. Coinbase shares are down 85 percent since they were listed on the Nasdaq in April 2021.
The industry upheaval came during the same week of terror, Microsoft founder Bill Gates saying that cryptocurrencies and non-fungible tokens (NFTs) are “100 percent based on The Greater Fool Theory”.
The strategy of relying on the biggest suckers to pay more is likely to be tested in the next 18 months if it’s possible to earn 4% or more on a time deposit as central banks aim to cut inflation by 2 %.
Cryptocurrency investors also tend to be price followers in that they will buy what goes up and sell what goes down, rather than investing in an asset such as a property or a stock that offers utility, future cash flows, or both. .
The price-follower phenomenon spread to equity markets during the pandemic, as many retail investors monitored social media to buy the fastest-rising stocks.
In Australia, popular buy now, pay later and tech stocks like Zip Co and Sezzle surged to prices above $14 a share and $11 a share, respectively, but both have plunged 95 percent since then.
In the US, Afterpay owner Block bought $170 million worth of bitcoin in February 2021 when it was trading around $45,000, but has since plunged nearly 80%. The speculative burst has taken the biggest toll on losing tech companies.
While cryptocurrencies were sold on the idea that they were free from regulation and the shackles of central banks, ironically, they now seem likely to be brought down by their own enemies.