Columnists

Watch out for more bloodbath if you are a virtual cash player

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Summary

  • Bitcoin, the leading crypto, has almost halved to Sh3.3 million to date (a Sh100,000 investment made at the peak would be worth just Sh55,560 today).
  • Events such as China-US relations, the Russia-Ukraine conflict and Middle East unrest, serve as a clear basis for a bearish, or pessimistic tone for investors.

Forgive me if I am stating the obvious, but isn’t the whole crypto investment thesis totally debunked now? It’s completely correlated with equities, reliant on interest rates and central banking, the opposite of a store of value.

Last week's cryptocurrency crash is solid proof that they will trade like any other high speculative asset during a broader market pullback (meaning it tanks faster and harder than anything else).

So far, the mini-crash has wiped out more than Sh100 trillion in market value since early November. Shares of companies with heavy exposure to crypto have also tanked.

Bitcoin, the leading crypto, has almost halved to Sh3.3 million to date (a Sh100,000 investment made at the peak would be worth just Sh55,560 today).

Other cryptocurrencies suffering major setbacks included Ethereum (down nearly 24 per cent year to date), Solana (down 30 per cent year to date) and Cardano (has lost 8.5 per cent of its value in 2022). I am sure the President of El Salvador probably isn't too happy right now.

But investors ought to be forgiven for thinking that markets only go up. I don’t blame them since most of them seem to be Gen Z’s who are yet to experience a real market correction.

Now that major equity benchmarks (Nasdaq, S&P 500 et al) are being substantially recalibrated from lofty heights, they are likely to experience a bear market (not a dip).

For sure, as the largest economy in the world (US economy) heads into a new monetary-policy regime in the battle against the pandemic and surging inflation, there’s likely to be more pain ahead.

Besides, events such as China-US relations, the Russia-Ukraine conflict and Middle East unrest, serve as a clear basis for a bearish, or pessimistic tone for investors.

But back to our crypto lovers, most investors seem not to appreciate the flow and economic cycles. Many particularly seem not to understand the effect of excessive Fed liquidity and its impact on inflating asset classes.

The fact is a lot of meme stocks, dozens of unprofitable tech stocks, SPAC’s (special-purpose acquisition companies) and cryptocurrencies have been major beneficiaries of easy monetary policy.

Now that the US central bank is ready to combat high inflation, it would remove hundreds of billions of dollars of liquidity from markets.

This is what is causing the cratering in prices. Moreover, for cryptos, having a tough selling argument is also a hindrance. For instance, bitcoin is extremely limited in use due to high transaction costs (and not strictly because of low volume/no network effect) and it needlessly harms the environment.

How far will the crash go (and this isn’t even a real pullback yet)? Only four words; prepare for the worse.

There'll be blood on the dance floor. But if you liked Bitcoin at Sh6.78 million, you probably are going to love it at its present prices (or at zero), right? If not, perhaps, it's time to get a real job.

But in all seriousness, if you think Cryptos are a real investment, appreciate one thing; they will suffer from the same market disease: they rise and fall.

Mwanyasi is the managing director at Canaan Capital