DEDUCED RECKONING: The cryptocurrency crowd is showing desperation as exchanges collapse

·3 min read
Joan Lappin
Joan Lappin

The continuing implosion in cryptocurrencies has been quite stunning. It was only on June 2 that I last warned you to stay away from this much touted but worthless class of investments.

Just half a year ago, the crypto universe was valued at over $3 trillion and now totals only $1 trillion, a 66% drop. You may not like the dollar but it is backed by the “full faith and credit of the United States.” Crypto is backed by nothing.

Consider this. Stocks only trade during the week. You get time to recharge over the weekend. This time of the year you might like to spend your Saturdays out on the golf course or at the beach frolicking in the waves. But Bitcoin and other crypto coins do trade on the weekends. If you happened to check in last Saturday, you would have seen bitcoin faltering to $17,593, a drop of almost 10% from the previous day’s close. That’s enough of a one-day drop to ruin your weekend away from work.

Lately, at least one cryptocurrency exchange is collapsing per week. Earlier this month it was Terra and Luna and Three Arrows. Some are getting margin calls. Some are refusing to allow customers to redeem their coins. This week it was BlockFi being bailed out by Sam Bankman-Fried’s FTX. He is not being altruistic. His goal is to bail out the smaller ones so they don’t fail and pull down FTX, too. An entire industry has been built around crypto. Those folks want their jobs and companies to continue. There are over 200 exchanges and dozens and dozens of coins. So far this month: Three Arrows Capital, Luna, Terra, and BlockFi and others have needed outside help.

One bit of good news is that only about 12% of planners and advisers have been steering their clients to own any crypto products. Most didn’t believe there was any value in these modern day tulip bulbs so have avoided them. That implies that the $2 trillion loss of crypto value has been borne by a limited group of investors. My guess is they are what’s left of the 2021 Robinhood crowd of young and new investors who thought investing was super easy. They thought leverage only made it better when they hitched a ride on CBS/Viacom (now Paramount), or AMC or some other company the meme crowd ran to the sky. The trouble with leverage is this thing called “margin calls” on the downside when the equity in your account evaporates at breakneck speed and you have hours to produce more collateral.

When Bitcoin collapsed from its November peak to $40,000, they told you to buy, because it was a super duper value. Now it is half that again. They will argue the charts look washed out. They desperately need a rally and will do what they can to promote one. Remain wary.

Many of the aspects of crypto that were alluring to oligarchs and drug and gun dealers, such as untraceable transactions, are now an Achilles' heel. If you lose your password or your account or your crypto exchange itself is hacked, you have no recourse to recover your investment. Regulators are not there to help you yet, and there is no Federal Deposit Insurance, either. If your crypto firm folds and you lose your investment, Uncle Sam is not going to bail you out.

It may be the summer solstice this week but it sure seems like “crypto winter” to me.

Joan Lappin CFA has been called an “investment guru” by Business Week and a “top manager” by the Wall Street Journal. The Sarasota resident founded Gramercy Capital Management, a registered investment adviser, in 1986. Email JLappincfa@gmail.com. Follow her on twitter: @joanlappin. Her past columns appear at heraldtribune.com/business/columns.

This article originally appeared on Sarasota Herald-Tribune: JOAN LAPPIN: Desperation pervades the crypto crowd as exchanges fail