Crypto Markets Fall and Investors Burn Their Fingers

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People investing their hard-earned money in a floundering cryptocurrency unit at the heart of digital currencies’ latest sharp decline may be wishing they hadn’t read a recent article by Canadian fintech academic Ryan Clements showing why it was destined to fail. .

In fact, all investors who have accumulated crypto assets since the end of 2020 and have not yet sold can feel remorse for not taking Clements’ comments in my last column on cryptocurrencies as a word of wisdom. Most will be deep under water: in other words, their investments will be worth much less than what they paid for them.

“I’m not sure … that people knew what they were getting into,” Clements said Thursday as he surveyed the damage on his computer screen.

Billion dollar losses

Now, other financial commentators are echoing his warning that this time, the loss of more than US$1 trillion in asset value from global cryptocurrency markets will have an impact far beyond the “crypto bros” putting your own money.

Clements, a securities lawyer who now teaches at the University of Calgary and advises Canadian securities regulators, said that doesn’t mean the most popular crypto assets can’t rise again. They have done it before.

But while Canadians who still hold a stake wait to see what Friday the 13th will do with asset values, Clements said last week’s crypto sell-off has settled some questions. One is whether, like gold, the limited supply of major cryptocurrencies means they are a hedge against inflation or the decline of other risky assets. Now we know they are not.

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As inflation rose and markets declined, even the best-known crypto token, bitcoin, was trading down almost two-thirds from its high of $69,000 in November of last year.

Almost anyone who has followed movie star Matt Damon’s January advice that “fortune favors the brave” will have lost money investing in cryptocurrencies. (

“Crypto assets are risk assets, they are not stable assets, they are not stores of value,” Clements said. “And that’s why we’re seeing a general market sell-off.”

Anyone who followed movie star Matt Damon’s advice last October, “Fortune favors the brave,” in his promotional video for Singapore-based may be lamenting their bravery.

Unstable stablecoins

Perhaps ironically, one of the destabilizing features of the current crypto decline this time around is related to what are known as “stablecoins”, which despite their name have put the entire market on edge.

As London’s Financial Times warned on Thursday, another difference this time is that traditional markets could suffer from the collapse of cryptocurrencies.

“Unfortunately, even those fund managers in normal markets like stocks and bonds who have deliberately avoided focusing on this free asset class need to pay attention.” wrote the paper’s markets editor, Katie Martin.

A man and a child walk past “No Bitcoin” graffiti in San Salvador in March. There were reports on Thursday that El Salvador, which has accepted bitcoin as legal tender, had lost $40 billion, with credit rating agencies warning of an increased risk of default. (Jose Cabezas/Reuters)

There were reports on Thursday that El Salvador, which has accepted bitcoin as legal tender, had lost $40 billion, enough for the cash-strapped Central American country to cover its next bond payment, and credit agencies credit rating warn of increased risk of default. .

On Thursday, the conventional market shares of the company Coinbase, which runs a platform for trading digital tokens, had lost half their value for the week. And as Canadians add up their bitcoin losses or sell to escape further losses, they no longer feel so rich.

“Any time there is a sell-off in one segment of the market, there can be a flight to safety and a cascade of sell-offs in other assets,” Clements said, describing the potential contagion that can lead to systemic risk.

An example of contagion is the sharp drop in terra, one of the so-called stablecoins that, unlike other types of cryptocurrencies, are not supposed to go up and down, but must remain pegged to the US dollar, to be used as a substitute for the US dollar. dollar. in digitized global markets.

‘catastrophic failure’

On Thursday, terra was “officially halted” for two hours, said the company, Terraform, which runs the crypto unit blockchain, the software that establishes the value of a cryptocurrency and reveals who owns each of the cryptocurrencies. units. Before the activity stopped, the value of the unit had plummeted to 23 cents.

Clements warned about terra in a widely cited article titled Built to Fail, which focuses specifically on what are called “algorithmic stablecoins”, of which terra is the most important example and of which he predicted would face catastrophe.

“I think its catastrophic failure has contributed to the cryptocurrency selloff,” Clements said.

He is not the only one with that opinion, nor is Clements the only one who thinks that some cryptocurrency units could eventually recover. But he sees more potential trouble ahead.

SEE | Conservative candidates take aim at Pierre Poilievre for his stance on bitcoin:

Conservative candidates target Pierre Poilievre for his stance on bitcoin

Conservative leadership candidates Jean Charest and Leslyn Lewis accused Pierre Poilievre of encouraging Canadians to invest in the digital currency.

Now that the tokens have proven to be no hedge against inflation, a major rationale for holding them, as Henry Kim of the York University Schulich School of Business explained to me earlier this year, may be gone. As a risky asset, not money or an innate store of value, cryptocurrencies should function more like tech stocks but without any underlying income, falling as inflation and interest rates rise.

Steeper falls could lead to forced selling for those who have borrowed to buy. Clements is convinced that some of the 19,419 crypto examples now listed on CoinMarketCap will drop to zero or worse. He too fears that some crypto examples will turn out to be blatant fraud.

Clements says that as crypto units test new lows, now may be the time to reassess the purpose and value of cryptocurrency and the energy-intensive global software that keeps them alive.

“I think it’s a good time in the market to find out what the real utility is in blockchain,” he said. “Other than cryptocurrencies for speculative trading purposes.”

Follow Don on Twitter @don_pittis


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