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Feb 1, 2023

Is Crypto Coming Back? Nope.

by Wynn Quon

Like all bubbles, cryptocurrency had to have a moment of reckoning. Since hitting a peak last November 2021, Bitcoin has fallen from US$64,000 to around US$22,000, a plunge of 64%. Ethereum has plummeted from US$4800 to about US$1600. Other cryptocurrency has fared worse. Cardano and Dogecoin have seen brutal drops of 80% from their all-time highs. Crypto fans call this a crypto “winter”, merely a seasonal patch of bad weather, they say. People just need to “hodl” (hold on for dear life), and all will be well. In fact, this is not so much winter as an Ice Age.

There have been three prior crypto winters: in 2011, 2013 and 2018. Each time prices fell by over 80% before recovering and soaring to new highs. Why can’t the same thing happen again?

First, bubbles require a steady influx of new investors to drive prices up, but now the supply is drying up. A decade ago, Bitcoin was an obscure oddity popular with a fringe group of techno geeks and just starting to get mainstream attention. By 2018, a poll found that eight percent of Americans had crypto holdings. By 2021 that percentage had skyrocketed to 24%. (We’re using American numbers here, but they are broadly representative of the general market). For crypto to reclaim its 2021 highs, the number of new participants must go far beyond that figure. This might seem like a low bar but consider all those who don’t have the money, those living paycheque to paycheque. (In Canada, that’s around 50% of the working population, in America, it’s 61%).

And what about those who wouldn’t touch crypto with a ten-foot pole? In a 2021 poll, thirty percent of Americans had a “very negative” opinion of cryptocurrencies. The ranks of the sceptics have likely increased since then. The sector has been a gong show of fraud, predatory behaviour and sheer incompetence. Molly White at web3isgoingjustgreat.com reports that investors have been scammed out of US$10.6 billion via hacks, rug pulls and other shenanigans.

For incompetence, Exhibit A would be Terra’s UST stablecoin. UST was “pegged” to the U.S. dollar, guaranteeing their investors an exchange rate of one U.S. dollar per UST coin. The right way to do this was to have a reserve of U.S. dollars backing the UST coins. Instead, they backed UST with another coin called Luna. Which begged the question: what was backing Luna? Nothing. Yes, that’s right, the guaranteed exchange rate was as solid as a bucketful of smoke. When push came to shove, UST collapsed.

This, in turn, led to the rapid demise of several crypto firms, all of whom had foolishly ignored risk management. The crypto lender Celsius went bankrupt, owing $4.7 billion to its 1.7 million customers. Voyager Digital’s implosion took out another 3.5 million investors. These numbers matter. They are angry, devastated people. Are they likely to throw good money after bad?

To understand the second reason for the crypto Ice Age, look at the dot-com bubble of 2000. At the dawn of the internet age, investors were infatuated with the emergence of the Web, driving the tech stock NASDAQ Index to a high of almost 5000. The mania had some familiar trappings; Super Bowl ads for hot dot-coms, for instance. When the crash came, the Index fell by, yes, 80% in a year. The vast majority of the dot-com darlings went extinct. However, the Index did come back. How long did it take? Fourteen years. One hell of a winter. But here’s the kicker, it came back because companies like Amazon.com, Google and Apple were making profits. They were providing real products and services, innovations that made life better for us. What has the crypto world given us in its decade-long twirl in the limelight? Know anyone who’s bought groceries with it? Know anyone who gets their salary in Bitcoin? Know a blockchain business that’s got a service you have to have? What use is it? Without a good answer to that question, crypto is doomed to a deep freeze.

Market Outlook

I’m writing this on the Labour Day weekend. There has been a late summer rally in the markets, but I expect this won’t last.

 A simple way to look at the market:

Crypto. Is it coming back? Nope.

I think we’re in the OVERVALUED quadrant. Would you say the economy is in better shape now than before the pandemic? Interest rates are high and getting higher because inflation has hit a 40-year high. And yet the TSX stands around the 20,000 mark. (The Dow Jones is at 31,500).

Merely returning to pre-pandemic stock market levels means a further fall of 10%. A good argument can be made that a larger decline will happen. Consider the precarious European economy with its energy crisis and China with its imploding property bubble—two major crises that will impact global markets. Consider as well, a large amount of consumer debt in North America that will weigh heavily with increased interest rates.

I didn’t predict the extreme bull market that came during the pandemic. But I am predicting a dramatic fall. The bigger the bull, the bigger the bear.

Two Stocks To Avoid

What a bull market this has been. Punters drove meme stocks up to stunning levels. Forget P/E ratios or book value. At its peak, Tesla had a market capitalization of US$1.25 trillion. Yet it reported a mere US$17B in sales in the most recent quarter. Shopify reported sales of only $1.3 billion in its last quarter. Its market cap during the peak of the market frenzy last year was $250 billion. Astounding. After the declines of this year, Shopify’s market cap is down to around $46 billion. Still vastly overvalued for a company whose sales are stagnating.

Investors have fooled themselves into thinking that these companies won’t face competition, that they are immune to macroeconomic crises, or that valuation doesn’t matter.

Shopify is at $40 at the moment. I will not be surprised if it hits $10 within two years. Tesla is at US$270, and it can easily fall below US$100 in the same timeframe.

There’s an old cliché that you should buy and hold. Like all clichés, there is a grain of truth to it, but in cases of extreme speculation, the more important thing is to know whether the thing you’re holding onto is an illusion.

Wynn Quon is a technology analyst and investor. You can reach him at wynnquon1@gmail.com