Bitcoin reached a peak of 69,000 six months ago on Nov. 11.Two weeks ago these coins traded as low as 25,401, a loss of 63%. If you remember back to Super Bowl LVI, the principal ad category this year was ads promoting crypto. The one most mocked featured Matt Damon in which he argued that the future is for the bold. On another one, Tom Brady and Gisele Bündchen were calling everyone they knew on their cellphones, saying: “I’m in!” on crypto. Their ad was for FTX, whose founder , Sam Bankman-Fried, last week was quoted as saying that crypto can never be used as a payment system. Here’s why: the Bitcoin infrastructure can process only 2.5 transactions per second compared to Visa, which can handle 24,000 transactions per second. Sorry but for now, Visa and Mastercard continue to dominate in a landslide.
Other Super Bowl ads touted crypto as the new gold. That argument hasn’t worked so well this year either. For sure, our currency has become rather disconnected from the gold stored in Fort Knox but it is backed by the full faith and credit of the United States of America. Gold began 2022 at 1,790 and is now trading at 1,851. That gain of 3% isn’t great but in a year when most assets, including bonds, have been massacred, it beats cryptocurrency by a country mile.
My key objection is that all these various coins and stable coins are backed by nothing. This came home to roost a few weeks ago when a series of coins totally collapsed. Despite a $3 billion war fund to defend its crypto “stable coin,” TERRA UST collapsed in short order when another coin, Luna, imploded in value in a matter of hours. Six other such coins have collapsed of late. Many crypto coins are not backed by any pool of assets but rather by “algorithms.” The trouble with algorithms is they are merely mathematical formulas. If there are any factors that are not considered in their creation, running them creates a “GIGO” situation (garbage in, garbage out) and they can collapse at any time.
Earlier this month, in describing the house of cards it is, the Wall Street Journal called crypto “an asset without guardrails.” Thus far it is an unregulated asset class. The blockchain technology invented by an unknown entity called Satoshi Nakamoto in 2008 was originally believed to offer great safety against hacking and was to be a person-to-person payment system that could operate outside the banking system and government control. It was hoped to act as a hedge against inflation because it was disconnected from governments running their printing presses to “manufacture” new currency. All transactions are permanently recorded in the blockchain ledger but the individuals doing the transaction are neither identified nor identifiable. That makes it perfect for illicit transfer payments amongst Russian oligarchs or by global drug traffickers. That’s why If you happen to own some and lose your password, bye, bye coins. We now know that hundreds of millions of crypto coins have been stolen over the last few years and that accounts at firms that promote trading crypto have been hacked.
In previous articles I have quoted Jamie Dimon, CEO of JPMorgan Chase, and Ray Dalio, co-chair of the world’s largest hedge fund Bridgewater Associates, each saying that cryptocurrencies are worthless. Last week two other heavy hitters in financial circles said the same thing: former Fed Chairman Ben Bernanke and current President of the European Central Bank Christine LaGarde. LaGarde said: “It is based on nothing. … There is no underlying asset to act as an anchor of safety.”
In other words, there is no there, there, which is why I have refused to invest in crypto at all and have urged you to do the same.
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.