Crypto crash

Stocks have been battered by the Federal Reserve’s quest to rein in the highest rate of inflation in 40 years.

So far, however, investors have expressed little concern over the crisis that has rocked cryptocurrencies. It’s a far cry from the reaction to Lehman’s demise in 2008, which sparked the financial crisis and nearly wrecked the global financial system.

Table 1: Key Index Returns

Source: Wall Street Journal, MSCI.com, Yahoo Finance, Bloomberg

MTD returns: October 31, 2022—November 30, 2022

YTD returns: December 31, 2021—November  30, 2022

*Annualized

*In US dollars

Investing in cryptocurrencies is highly speculative. For instance, legendary investor Warren Buffett has not been shy about expressing his disdain.

A couple of years ago, Buffett said, “Cryptocurrencies basically have no value, and they don’t produce anything….”

“They don’t reproduce, they can’t mail you a check, and what you hope is that somebody else comes along and pays you more money for them later on, but then that person’s got the problem. In terms of value: zero.”

Bitcoin, the oldest and best-known cryptocurrency, was trading around $65,000 a year ago. Last month, it dropped below $16,000 (MarketWatch).

Earlier in the year, TerraUSD, which is a ‘stablecoin’ that used algorithms to peg its value to the dollar, worked well— until it didn’t and collapsed.

Crypto trading platforms such as FTX and Celsius Network are languishing in bankruptcy, rocked by the digital version of bank runs and a lack of liquidity. Those who hold funds with the likes of FTX, whose demise is being compared to the collapse of Enron, can no longer withdraw funds, and may never see their investments again.

And it’s not simply investors. Celebrities who lent their names to some of these platforms are feeling the fallout through soured investments and lawsuits.

But the storm that descended upon the crypto world has barely made a ripple in traditional financial markets and finance. 

“Crypto space…is largely circular,” Yale University economist Gary Gorton and University of Michigan law professor Jeffery Zhang write in a forthcoming paper. 

“Once crypto banks obtain deposits from investors, these firms borrow, lend, and trade with themselves. They do not interact with firms connected to the real economy.”

In other words, the dominoes that fell in crypto only knocked down other crypto dominoes.

A recent article in the Wall Street Journal suggested the crisis may have done the economy and equity investors a favor, notwithstanding losses for those in crypto. Eventually, traditional firms and investors would have embraced an industry that lacks regulatory controls. An implosion several years from now could have had far different consequences.

I hope you’ve found this review to be educational and helpful. If you have any questions or would like to discuss any matters, please feel free to give me or any of my team members a call.

As always, I’m honored and humbled that you have given me the opportunity to serve as your financial advisor. As we move into 2023, know that we are here to serve you and your family. We are excited about what the new year will bring, and we are anxious to move forward with you.

Best Regards,

Bill