ALEX BRUMER: Investors are attracted to cryptocurrencies on the grounds that they are super secure – they will learn that they no longer shine like gold
- Even the “respectable” end of the crypto market – the stablecoin pegged to the dollar – is in trouble
- The withdrawal of monetary benefits by central banks has consequences
- Bitcoin has fallen 35% since the beginning of the year; Coinbase shares fell 80%
Central banks around the world have done a great job of protecting Western economies from the worst effects of the “Great Financial Crisis” and ten years later Covid.
When banks looked into the abyss in 2008 and the financial system fell into chaos in March 2020, the US Federal Reserve, the Bank of England and, ultimately, the European Central Bank remembered the economic history.
Interest rates have been slashed, and money wizards have come up with a quantitative easing (QE) tool.
All that shines: the bubble has now burst, and an even more respectable end of the crypto market – a stablecoin pegged to the dollar – is in deep trouble
The goal was to avoid a recession and loss of Argentine-style savings.
The rescue service did its job. Significant banks were rescued and came out on the other side stronger.
Greece and Italy did not find themselves in a state of insolvency during the insolvency in 2010, and when the shock of Covid was absorbed, the U.S. bond market, the world’s most important, did not melt. The anthem of the Great Depression of the 1930s “Brother, can you spare a penny?” not repeated.
Central banks were so convinced that they were the main saviors of the world that ultra-low interest rates and monetary taps remained in place long after it was reasonable. The Bank of England bought bonds worth 895 billion pounds (almost half of public debt).
And the Fed’s balance sheet increased almost ninefold from $ 1 trillion in 2008 to $ 9.9 trillion (£ 8.1 trillion) in April this year.
The lifeboat, launched by Chairman Ben Bernanke, backed afloat by Janet Yellen and then re-inflated by Jay Powell, did what it was supposed to do. But if such large sums enter the monetary system, some of them will inevitably be in the wrong place.
Stock prices on the Nasdaq stock exchange, where technology dominates, have jumped.
This year, it has shrunk by about 25 percent. Promotions of memes recommended on sites like Reddit have skyrocketed, and it would seem they could be bought for free on Robin Hood.
Celebrities have entered their names into special purpose vehicles (Spacs) without knowing what they are subscribing to.
And what is most toxic, ordinary investors (and a growing number of professionals) have fallen in love with the idea that crypto – money minted in the meta-universe – is as good, if not better, than gold.
Undoubtedly, when bitcoin rose to its peak price of $ 68,000 in November 2021, there were professional investors, smart amateurs and beginners who became very rich by buying dips, selling highs or trading derivatives.
Sometimes I remember my taxi driver a few years ago who, after dropping me off at the City, was heading to a tobacco shop in the East End where he was selling virtual currency.
It would be great if, despite my ludicrous advice to stay away, he had his own fleet. Now the bubble has burst, and even the more respectable end of the crypto market – the dollar-pegged stablecoin – is in serious trouble.
Bloomberg reports that supporters of Terra USD, the creator of algorithm-driven stablecoins, are seeking $ 1.5 billion (£ 1.2 billion) in bailouts to support its Luna currency after it fell 50 percent from pegging to the dollar .
This is not one.
When the Coinbase cryptocurrency exchange appeared in New York a little over a year ago, shares rose 25 percent above the value of the offer in a matter of minutes, valuing it at $ 86 billion (£ 70 billion).
This has made it worth more than $ 56 billion to the Intercontinental Exchange, the owner of the New York Stock Exchange and more.
As bitcoin has fallen in value, falling 35 percent since the beginning of the year, Coinbase shares have fallen 80 percent.
The withdrawal of monetary generosity by the world’s central banks has dramatic consequences.
Speaking as Premier League football manager on the eve of his dismissal, Coinbase CEO Brian Armstrong tweeted “your funds are safe with us”.
The consequences of cryptocurrency capture, including the widespread use of a blockchain digital book, may well be beneficial.
Central banks also recognize that a crypto with official support may be the best way to conduct monetary transactions when cash becomes unfashionable.
Investors are attracted to bitcoin and other crypto on the grounds that it is super secure due to the limited capabilities of computer mining. They learn that it no longer shines like gold.