Cryptocurrency Has Fallen 70% – When It Should Be Going Up. I Think.

 

Since “President” Biden “won” the last “election”, the economy has had some difficulties.  Inflation is running rampant.  It’s listed at around 8.5%, but the real cost of living for most people has gone up quite a bit more than that.  With cash losing its value, you might expect people to invest their money in the stock market, hoping to keep up with inflation.  This injection of cash would presumably inflate the value of the stock market.  But the stock market has been dropping quickly, with the NASDAQ losing around 30% of its value so far this year.  This has led many Democrats to criticize “President” Biden’s handling of the economy.  And to demand more government spending.  Simultaneously.  Mysterious are the thoughts of Democrats…

I’ve never quite understood cryptocurrency, and have not invested in it.  But one aspect of it that made sense to me was to protect oneself from the vagrancies of the fiscal policies of misguided politicians.  The value of the dollar is at least partially dependent on the fiscal responsibility of whoever is in power in the American government at the time.  If all your money is in dollars, and then Democrats are elected to office, your dollars will lose value.

Bored Ape Yacht Club

But crypto is free from such concerns.  It doesn’t matter how much money the government prints – the value of cryptocurrency is not affected by political winds the way national currencies are.  And as more and more people become concerned about our economy, they would run to invest in crypto, which would then continue its remarkable increase in value over the past 10 years.  Except that crypto has suddenly lost around 70% of its value so far this year.  Which seems counter-intuitive.

So inflation is reducing the value of the dollar (at this rate, the value of your dollars will be cut in half in about 8 years – possibly much faster if the real inflation rate is higher than the reported inflation rate).  As the dollar falls, people invest to try to keep up with inflation.  But the stock market is falling.  So people flee conventional markets and invest in crypto.  But crypto is falling even faster.  All at the same time.

I don’t understand.

I’m not a financial guy, and my understanding of all this is obviously extremely rudimentary.  Although I suspect I may have a better understanding of finance (and perhaps a few other things) than some “Presidents”.

But still, I feel like I’m missing something big, here.  I just don’t understand how these trends fit together.

Can any of our financial gurus here explain this to a novice like myself?

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  1. Ekosj Member
    Ekosj
    @Ekosj

    There is an old Wall St adage:

    “Buy the rumor.  Sell the news”

     

    • #1
  2. Trink Coolidge
    Trink
    @Trink

    What a coincidence.   We just started watching Max and Stacey Keiser – the Bitcoin enthusiasts. –  and as I always multi-task I clicked on your post.  I expressed my concern about the hit they’re taking today and my son chuckled and said they’ll be fine.   They’ve just gone from being fabulously wealthy to merely wonderfully wealthy because they bought it for pennies. :-D

     

    • #2
  3. Arahant Member
    Arahant
    @Arahant

    I don’t understand it, either. In a case like this, gold and silver should be going up, and platinum down. That’s not what the charts say, though.

    • #3
  4. RufusRJones Member
    RufusRJones
    @RufusRJones

    Supposedly, gold went up really sharply right before the inflation hit. 

    • #4
  5. Ekosj Member
    Ekosj
    @Ekosj

    Before inflation arrived one was free to imagine the worst of worst case scenarios … Weimar Germany … Zimbabwe.   And those fears were priced into the crypto market.

    Now that inflation is actually here, bad as it, is it’s not as bad as some people thought.       As those “it’s-going-to-the-moon-Alice” bidders fall away, it drives the prices of crypto down.

    Same for the precious metals.

    • #5
  6. Terry Mott Member
    Terry Mott
    @TerryMott

    Ekosj (View Comment):

    Before inflation arrived one was free to imagine the worst of worst case scenarios … Weimar Germany … Zimbabwe. And those fears were priced into the crypto market.

    Now that inflation is actually here, bad as it, is it’s not as bad as some people thought. As those “it’s-going-to-the-moon-Alice” bidders fall away, it drives the prices of crypto down.

    Same for the precious metals.

    That’s what I figure, too.  There was a crypto bubble that already had this level of inflation priced in, plus some.  In addition to people getting in as an inflation hedge, a bunch more were getting in because it was the latest investing fad.

    • #6
  7. Sandy Member
    Sandy
    @Sandy

    “But one aspect of it that made sense to me was to protect oneself from the vagrancies of the fiscal policies of misguided politicians.”  

    I think you probably meant “vagaries” here, but come to think of it, “vagrancies” is a more accurate description of the bums.  

    • #7
  8. RufusRJones Member
    RufusRJones
    @RufusRJones

    Crypto is a risk asset that correlates strongly with other risk assets. Gold can get sold off like that for dollars in a crisis, but it’s not that bad. That’s the reality. I got that from a hedge fund guy named Larry McDonald. I think he’s really good at talking about it.

    Crypto is too volatile to be money. People in really crappy countries can take advantage of the medium of transfer function, but that’s about it for money.

    I’m not going to look it up right now, but there is a very negative article by doomberg on it that is worth reading. 

    In the long run, big governments are going to need to wipe it out. JMO.

    • #8
  9. RufusRJones Member
    RufusRJones
    @RufusRJones

    I heard an interesting thing the other day. Bitcoin is theoretically extra volatile because of the hard cap.  Gold is very hard money, but it doesn’t have a hard cap. It grows by 1 1/2% every year, which matches population growth globally.

    • #9
  10. Misthiocracy has never Member
    Misthiocracy has never
    @Misthiocracy

    Could it be falling because a lot of crypto investors have bills to pay and their creditors don’t accept crypto so they’re all selling at the same time?

    • #10
  11. Nohaaj Coolidge
    Nohaaj
    @Nohaaj

    My thoughts.  One possible explanation: 

    The cost of crypto is directly tied to energy prices.  It takes massive amounts of electricity to generate additional coins.  Many of the miners were highly leveraged purchasing additional hardware to mine ever harder to obtain coins.  When the price of energy doubled, the cost to mine coins became greater than the value of the coins, resulting in these miners having to dump coins to generate enough real cash to make their loan payments.  This flooded the market with coins.  At the same time, potential purchasers of coins were losing their discretionary cash because of the double whammy of lower stock values and inflation.  Simple market pressures… too much inventory, caused by forced liquidation of assets, and too few interested buyers.  

     

     

    • #11
  12. Hang On Member
    Hang On
    @HangOn

    Rubles are doing very well. 

    • #12
  13. RufusRJones Member
    RufusRJones
    @RufusRJones

    Hang On (View Comment):

    Rubles are doing very well.

     

     

    If the EU and the EMU have to print to save themselves, what do you think the rest of the world is going to do?

    Life is about supply. it is not about central planning, colored pieces of paper, and infinite credit growth. The supply of energy is #1.

    • #13
  14. EODmom Coolidge
    EODmom
    @EODmom

    RufusRJones (View Comment):

    Crypto is a risk asset that correlates strongly with other risk assets. Gold can get sold off like that for dollars in a crisis, but it’s not that bad. That’s the reality. I got that from a hedge fund guy named Larry McDonald. I think he’s really good at talking about it.

    Crypto is too volatile to be money. People in really crappy countries can take advantage of the medium of transfer function, but that’s about it for money.

    I’m not going to look it up right now, but there is a very negative article by doomberg on it that is worth reading.

    In the long run, big governments are going to need to wipe it out. JMO.

    The analogy we use is that crypto is like baseball cards – they have value because someone believes they have value, not because of the merit or utility of the hard asset. In the case of the bit-coin, there is no hard asset…… 

    It does however have tremendous value to those who need or want to cleanse or store fruits of their illegal or unsavory behaviour. And, potential for governments who would like to relieve citizens of their private assets and have unlimited ability to create “money.” Just a cuppla amateurs’ opinion. 

    • #14
  15. BDB Coolidge
    BDB
    @BDB

    Dr. Bastiat: Since “President” Biden “won” the last “election”,

    Literally laughed out loud.

    • #15
  16. Jerry Giordano (Arizona Patriot) Member
    Jerry Giordano (Arizona Patriot)
    @ArizonaPatriot

    Doc, this is a great question.  I haven’t given much thought to crypto.  I do have the advantage of an undergrad education in mathematical economics — back when you and I were listening to the same bands, but generally liking completely different songs.  :)

    I have a hypothesis, I guess.

    What if crypto is a Ponzi scheme?

    It is something inherently valueless, right?  Essentially some crypto company saying that you have units of the cryptocurrency, backed by nothing.  The value depends on the demand of other people.

    You might say that this is the same as government-backed fiat money, but I don’t think so.  Unlike the crypto company, the government has force available to back up its fiat money.  It can seize your property and pay you in fiat money.  It can require you to pay taxes in fiat money.  It can require other people to accept such fiat money in most transactions.  (This last part is generally enforced by the unavailability of specific performance in most legal cases, including contract cases.)

    In practice at present, crypto is probably backed by the fantasies of the Libertarians.  Ponzi schemes, and other asset bubbles, can persist for quite some time.

    In thinking about this on a vape break, I remembered the final scene in Atlas Shrugged.  Do you remember the one?  When Rand’s ubermensch messiah, John Galt, made the sign of the Holy Dollar and announced the Second Coming?

    The faint glitter of light weaving slowly through space, on the highest accessible ledge of a mountain, was the starlight on the strands of Galt’s hair. He stood looking, not at the valley below, but at the darkness of the world beyond its walls. Dagny ‘s hand rested on his shoulder, and the wind blew her hair to blend with his. She knew why he had wanted to walk through the mountains tonight and what he had stopped to consider. She knew what words were his to speak and that she would be first to hear them.

    They could not see the world beyond the mountains, there was only a void of darkness and rock, but the darkness was hiding the ruins of a continent: the roofless homes, the rusting tractors, the lightless streets, the abandoned rail. But far in the distance, on the edge of the earth, a small flame was waving in the wind, the defiantly stubborn flame of Wyatt ‘ s Torch, twisting, being torn and regaining its hold, not to be uprooted or extinguished. It seemed to be calling and waiting for the words John Gait was now to pronounce.

    “The road is cleared,” said Galt. “We are going back to the world.” He raised his hand and over the desolate earth he traced in space the sign of the dollar.

    Man, what a great teenaged fever dream!  Didn’t you all imagine yourselves as John Galt?  He even got the hot rich chick  — and she even knew to keep her mouth shut and listen, as if he were a superposition of Aragorn and EF Hutton.

    Maybe it is the dreams of Rand’s devotees that has maintained some value in crypto, for the time being.

    ****************************

    This is a different point, I think.  I hadn’t looked at the end of Atlas Shrugged for over 30 years, to the best of my recollection.  The final scene has an eerie similarity to one of my favorite parts of Lord of the Rings.  This led to my including Aragorn with EF Hutton above, though I first thought of my own favorite character, Faramir.  I always wanted to be the Faramir of the books (not the movies).

    I never noticed the similarity with the final scene of Atlas Shrugged, but look at that part about their hair blending together.  I wonder if Rand stole that from Tolkien.

    ‘Then you think that the Darkness is coming?’ said Éowyn. ‘Darkness Unescapable?’ And suddenly she drew close to him.

    ‘No,’ said Faramir, looking into her face. ‘It was but a picture in the mind. I do not know what is happening. The reason of my waking mind tells me that great evil has befallen and we stand at the end of days. But my heart says nay; and all my limbs are light, and a hope and joy are come to me that no reason can deny. Éowyn, Éowyn, White Lady of Rohan, in this hour I do not believe that any darkness will endure!’ And he stooped and kissed her brow.

    And so they stood on the walls of the City of Gondor, and a great wind rose and blew, and their hair, raven and golden, streamed out mingling in the air. And the Shadow departed, and the Sun was unveiled, and light leaped forth; and the waters of Anduin shone like silver, and in all the houses of the City men sang for the joy that welled up in their hearts from what source they could not tell.

    Except in Tolkien, the hot chick had the blonde hair.  Dagny’s hair was brown.  John Galt had “gold-copper hair.”

    • #16
  17. BDB Coolidge
    BDB
    @BDB

    Ekosj (View Comment):

    Before inflation arrived one was free to imagine the worst of worst case scenarios … Weimar Germany … Zimbabwe. And those fears were priced into the crypto market.

    Now that inflation is actually here, bad as it, is it’s not as bad as some people thought. As those “it’s-going-to-the-moon-Alice” bidders fall away, it drives the prices of crypto down.

    Same for the precious metals.

    Wonderfully succinctly said. 

    The above, as well as a wave of “rug-pull” crypto scams (think “pump and dump”, but for millennials that term is reserved for dating) has cratered several crypto projects outright, and helped cool enthusiasm for the whole category.

    There’s another possibility, which is that the money controllers also engage in warfare to defend their turf.  It makes sense to me, but I can’t find references which do not invariably devolve into lurid nonsense.  Which is a pretty good way to hide what you’re doing.

    • #17
  18. BDB Coolidge
    BDB
    @BDB

    I do believe that there are sound crypto, unsound, and scam varieties of things, so I’m not anti-crypto.  In my uninformed opinion, BitCoin and Ethereum are sound among probably several more, with a stack of unsound and outright scams surrounding.  Anything labelled a “stable coin” is BS.  Every currency peg eventually gets beaten because it advertises its largest vulnerability.

    • #18
  19. BDB Coolidge
    BDB
    @BDB

    RufusRJones (View Comment):

    I heard an interesting thing the other day. Bitcoin is theoretically extra volatile because of the hard cap. Gold is very hard money, but it doesn’t have a hard cap. It grows by 1 1/2% every year, which matches population growth globally.

    I see the volatility argument, but I hasten to point out (for the general reader) that this is different from a peg.  The cap is also the thing that ensures* a value floor so long as the whole thing doesn’t fall to some (by now extremely unlikely) fatal flaw.  The cap (because it is done well in BTC) means that the product is absolutely limited in quantity.

    In a post-apocalyptic scenario, bitcoin and gold will still carry value (to be determined as circumstances warrant), whereas paper money will not.  Once the OpenBSD people get systems up, digital assets will recover value.

     

    • #19
  20. Misthiocracy has never Member
    Misthiocracy has never
    @Misthiocracy

    BDB (View Comment):
    In my uninformed opinion, BitCoin and Ethereum are sound among probably several more, with a stack of unsound and outright scams surrounding.

    One problem with Bitcoin is that transaction costs are too high to use it as a medium of exchange for everyday purchases, so one has to wonder what it’s actually for.

    In theory, Ethereum is a little more useful because one can use it for contracting, but so far the biggest application of this functionality has been NFTs, so, uh, yeah…

    • #20
  21. BDB Coolidge
    BDB
    @BDB

    Jerry Giordano (Arizona Patrio… (View Comment):

    What if crypto is a Ponzi scheme?

    It is something inherently valueless, right?  Essentially some crypto company saying that you have units of the cryptocurrency, backed by nothing.  The value depends on the demand of other people.

    In fact, this happens a lot.  These are the “rug-pull” scams which morons fall for every day.  The term “Crypto” covers a lot of ground, with some of it being mathematically sound and computationally produced, some of it being arbitrary assignments of value to inherently worthless NFT issuances, and a whole lot in the middle that I don’t understand.

    As the example which I do understand, BitCoin is not a Ponzi scheme.  The cap mentioned by Rufus is one of the things that advertises up front why it isn’t.  However, there are many things under the crypto umbrella which are schemes of one sort or another, often in combination.

    • #21
  22. Henry Racette Member
    Henry Racette
    @HenryRacette

    Jerry Giordano (Arizona Patrio… (View Comment):
    What if crypto is a Ponzi scheme?

    Sung to the tune of “What if the Earth is round?” and “What if Scarlett Johansson is really pretty cute?”

    • #22
  23. RufusRJones Member
    RufusRJones
    @RufusRJones

    BDB (View Comment):

    RufusRJones (View Comment):

    I heard an interesting thing the other day. Bitcoin is theoretically extra volatile because of the hard cap. Gold is very hard money, but it doesn’t have a hard cap. It grows by 1 1/2% every year, which matches population growth globally.

    I see the volatility argument, but I hasten to point out (for the general reader) that this is different from a peg. The cap is also the thing that ensures* a value floor so long as the whole thing doesn’t fall to some (by now extremely unlikely) fatal flaw. The cap (because it is done well in BTC) means that the product is absolutely limited in quantity.

    In a post-apocalyptic scenario, bitcoin and gold will still carry value (to be determined as circumstances warrant), whereas paper money will not. Once the OpenBSD people get systems up, digital assets will recover value.

     

    I don’t understand what “peg” means in the context of bitcoin. I’ve never seen anybody say anything like that. 

    • #23
  24. RufusRJones Member
    RufusRJones
    @RufusRJones

    Misthiocracy has never (View Comment):
    One problem with Bitcoin is that transaction costs are too high to use it as a medium of exchange for everyday purchases, so one has to wonder what it’s actually for.

    This only nets out if you are in a really crappy country.

    edit

    You are out of the banking system etc.

    • #24
  25. BDB Coolidge
    BDB
    @BDB

    RufusRJones (View Comment):

    BDB (View Comment):

    RufusRJones (View Comment):

    I heard an interesting thing the other day. Bitcoin is theoretically extra volatile because of the hard cap. Gold is very hard money, but it doesn’t have a hard cap. It grows by 1 1/2% every year, which matches population growth globally.

    I see the volatility argument, but I hasten to point out (for the general reader) that this is different from a peg. The cap is also the thing that ensures* a value floor so long as the whole thing doesn’t fall to some (by now extremely unlikely) fatal flaw. The cap (because it is done well in BTC) means that the product is absolutely limited in quantity.

    In a post-apocalyptic scenario, bitcoin and gold will still carry value (to be determined as circumstances warrant), whereas paper money will not. Once the OpenBSD people get systems up, digital assets will recover value.

     

    I don’t understand what “peg” means in the context of bitcoin. I’ve never seen anybody say anything like that.

    The so-called “stable” coins that swore their value was pegged to dollars or gold.  Obvious nonsense.

    • #25
  26. RufusRJones Member
    RufusRJones
    @RufusRJones

    BDB (View Comment):

    RufusRJones (View Comment):

    BDB (View Comment):

    RufusRJones (View Comment):

    I heard an interesting thing the other day. Bitcoin is theoretically extra volatile because of the hard cap. Gold is very hard money, but it doesn’t have a hard cap. It grows by 1 1/2% every year, which matches population growth globally.

    I see the volatility argument, but I hasten to point out (for the general reader) that this is different from a peg. The cap is also the thing that ensures* a value floor so long as the whole thing doesn’t fall to some (by now extremely unlikely) fatal flaw. The cap (because it is done well in BTC) means that the product is absolutely limited in quantity.

    In a post-apocalyptic scenario, bitcoin and gold will still carry value (to be determined as circumstances warrant), whereas paper money will not. Once the OpenBSD people get systems up, digital assets will recover value.

     

    I don’t understand what “peg” means in the context of bitcoin. I’ve never seen anybody say anything like that.

    The so-called “stable” coins that swore their value was pegged to dollars or gold. Obvious nonsense.

    Right, right I get it. 

    I couldn’t believe it when I heard Mike Green the #1 cryptocurrency hater explain how those some of those  deals paid “interest”.  It’s what is in effect, selling calls and puts. What madness. 

    • #26
  27. RufusRJones Member
    RufusRJones
    @RufusRJones

    I think the big deal is if crypto ever gets un-volatile enough to be used as collateral. I can’t say I understand it. I still think the big governments have to crush it. Gold isn’t as big of a threat because most of them can just re-value what they have an insane price and they will get by just fine.

     

    • #27
  28. kedavis Coolidge
    kedavis
    @kedavis

    Sandy (View Comment):

    “But one aspect of it that made sense to me was to protect oneself from the vagrancies of the fiscal policies of misguided politicians.”

    I think you probably meant “vagaries” here, but come to think of it, “vagrancies” is a more accurate description of the bums.

    I thought the same.

    And “vagrancies” also works in the sense of crypto possibly appearing at least somewhat “homeless.”

    • #28
  29. Jerry Giordano (Arizona Patriot) Member
    Jerry Giordano (Arizona Patriot)
    @ArizonaPatriot

    BDB (View Comment):

    Jerry Giordano (Arizona Patrio… (View Comment):

    What if crypto is a Ponzi scheme?

    It is something inherently valueless, right? Essentially some crypto company saying that you have x units of the cryptocurrency, backed by nothing. The value depends on the demand of other people.

    In fact, this happens a lot. These are the “rug-pull” scams which morons fall for every day. The term “Crypto” covers a lot of ground, with some of it being mathematically sound and computationally produced, some of it being arbitrary assignments of value to inherently worthless NFT issuances, and a whole lot in the middle that I don’t understand.

    As the example which I do understand, BitCoin is not a Ponzi scheme. The cap mentioned by Rufus is one of the things that advertises up front why it isn’t. However, there are many things under the crypto umbrella which are schemes of one sort or another, often in combination.

    BDB, it depends on how we define Ponzi scheme.  It isn’t a classic Ponzi scheme, in which the promoter sells interests to later investors in order to pay off earlier investors.  With crypto, as I understand it, the issuer does not generally issue further cryptocurrency to pay off prior investors.  There typically are some new crypto units issued, I think, but only a small amount — correct me if I’m wrong about this.

    However, there’s a Ponzi element, as the value of the cryptocurrency depends on the continuation of demand by new investors, doesn’t it?  This seems like a house of cards, to me, which is reminiscent of the Ponzi scheme.

     

    • #29
  30. Stad Coolidge
    Stad
    @Stad

    Dr. Bastiat: It doesn’t matter how much money the government prints – the value of cryptocurrency is not affected by political winds the way national currencies are.

    I’m not so sure.  It seems to go up and down just like the stock market.  Perhaps it should be viewed as stock more than currency, even though it can be used as such . . .

    • #30
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