It’s not been a good start to the year for cryptocurrencies, with Bitcoin halving in price from its November 2021 high to below $33,000 last month and barely moving since. Other crypto’s have suffered a similar fate, with second most traded Ethereum also losing half its “value” in recent months.
The powers-that-be are coming after Bitcoin in particular, with the IMF coming for El Salvador which had previously allowed its citizens to use Bitcoin for any transactions. From the BBC:
The IMF has warned President Nayib Bukele of the risks the cryptocurrency poses to the country, stressing that it would be difficult to get a loan from the institution.
The board’s directors have now “urged the authorities to narrow the scope of the Bitcoin law by removing Bitcoin’s legal tender status”, according to a statement. They highlighted the “large risks associated with the use of Bitcoin on financial stability, financial integrity and consumer protection” and with issuing Bitcoin-backed bonds.
It’s not just sovereign nations that are having troubles with the allure of crypto’s, but the world’s carbon footprint. Bitcoin and other crypto mining is using vast amounts of electricity. From the Guardian:
The latest calculation from Cambridge University’s bitcoin electricity consumption index estimates that bitcoin mining consumes 133.63 terawatt hours a year of electricity – more than the entire countries of Ukraine and Norway. This figure keeps growing: bitcoin mining currently uses 66 times more electricity than in 2015.
And it’s not just the world, its stacks of individuals across many nations that are getting caught up in out and out fraudulant action, particularly when new tulips, I mean new coins are created. From Kotaku:
Paul “Ice Poseidon” Denino, a former Twitch star who now streams on YouTube after the Amazon-owned platform banned him in 2017, was caught in a flagrant crypto scheme in which he took some $500,000 from his fans…and kept most of it. Ice Poseidon tricked his followers to invest in CxCoin, a platform the streamer founded for content creators to get cryptocurrency donations, then pulled the rug from everyone. He took that money ($500,000 in total), pocketed $300,000, and allegedly bought a Tesla.
With more than $1 trillion lost in this crash – so far – can it be fairly compared to the subprime crisis of 2008 and setup for financial disaster further down the road? Paul Krugman thinks so, penning an op-ed in the NYT recently:
Krugman does not believe that crypto is likely to cause a wider economic crisis, but he says that a crypto bear market would disproportionately affect the more vulnerable people in society, referencing research which finds that 55% of crypto investors do not have a college degree and anecdotal evidence that it is particularly popular among the working class.
He compares this to the way that subprime mortgages made home ownership a possibility among people for whom it was previously unlikely.
Indeed. With trillions lost in wages during the pandemic, crypto currencies and share trading have become powerful incentives for the working class to try to get ahead as house price inflation goes to the moon, exarcebating the gap between the have houses and the have-not houses.
Gregory Price, economics professor at the University of New Orleans, noted that the collapse in subprime mortgages caused economic distress due to “deleveraging” as financial firms and households had to sell assets to cover losses from debt finance.
This caused a downward spiral in asset prices overall, putting recessionary pressures on the overall economy.
“Subprime mortgages could be used as collateral for other asset purchases as well, and this is not true for cryptocurrencies,” he said. “As far as I know, there are no formal markets for the debt-financing of cryptocurrency purchases. Thus, a collapse in cryptocurrency prices is not likely to have the same catastrophic effects as the collapse in subprime mortgages.”
Mychal Campos, head of investing at Betterment, said the subprime comparison is justified to a certain extent, noting that “some of the products that have emerged for decentralized finance (DeFi) blockchains give me the eerie deja vu of experiencing 2007-2008 all over again.”
“When you can lend and earn yields based on specific blockchain protocols in DeFi that are so far beyond what the actual interest rate market will offer at this point, you can’t help but feel that we’re in ‘tulip mania’ territory,” he said, referring to a period in the Dutch Golden Age when tulip prices soared.
He added that it should not be a surprise to anyone that crypto has “become part of the story in terms of the overall frothiness in the pricing of risky assets.”
Following ASIC’s crackdown on Bitcoin CFDs (now down to only 1:1 leverage), financing of cryptocurrency is literally coming from house deposit savings or home equity as was seen last year in Australia as the Bitcoin bubble hit fifth gear and those out-of-work from the pandemic tried to source other income beyond paltry government support.
While the stock of Bitcoin and other cryptocurrency “wealth” lost may not be enough in a single hit to affect financial markets, a further collapse could be a Minsky Moment that trips up overleveraged and overexposed “investors” into other systemic problem just as governments are trying to wrestle economies out of the pandemic.