A lot has been written about the current crypto winter, where billions, if not trillions of dollars in the value of cryptocurrencies, were wiped off in the space of a few months.
The chill is certainly felt by those who bought into cryptocurrencies at the peak of the market or at any price above US$20,000 ($28,374.20) for Bitcoin, the world’s largest cryptocurrency by market capitalisation.
At this point, you may be wondering if the recent price declines may be the right time to enter the crypto market and make a killing when the wintry season finally ends.
The short answer, in my opinion, is no.
But before you write me off as a crypto sceptic, hear me out.
Crypto as a speculative investment
Let me begin by throwing some colour on speculative investments (such as crypto) via a historical lens. The way I see it, there are some similarities between the meteoric rise of the price of Bitcoin from US$1 in 2012 to US$60,000 in 2021 to that of the tulip mania, a period during the Dutch golden age in the 17th century.
For the uninitiated, the tulip mania was often referred to as the mother of speculative investments. In a nutshell, it was the first recorded speculative frenzy where there was a huge divergence between intrinsic value and asset prices. At the height of the bubble, it was said that a single Semper Augustus tulip, while deemed the rarest and valuable among the high-end tulips, was sold for approximately 10,000 Dutch guilders, which is the same price of a waterfront mansion in Amsterdam, the capital of the Netherlands, at the time.
The speculative bubble burst in February 1637. Tulips now cost just a few dollars in Singapore today.
Back to cryptocurrencies, my point is that the value of these coins may be part of a speculative bubble that holds no intrinsic value.
For those who are planning to or have bought into the hype, I’d like to ask you this simple question. Why are you investing in cryptocurrencies?
Did you think that cryptocurrencies offer you the security of blockchain or that you are looking to hedge against the potential demise of fiat currencies?
My guess is that you bought into crypto because you thought that the price would, to borrow a phrase from meme stock watchers, go to the moon.
Frankly, I have no issues with you wanting to make a lot of money but I do have a problem with your beliefs!
You may ask, what is wrong with wanting to make a fortune by ‘investing’ in cryptocurrencies such as Bitcoin, Ethereum, Dogecoin, Altcoins? Absolutely nothing wrong.
However, there is a distinct, albeit thinly veiled difference between investing and gambling. This not-so-apparent dichotomy hinges on the weighted average reliance on hope. Let me explain.
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How do you value Bitcoin?
Bitcoins bulls believe in the “Folly of Thy Greater Fool” theory. In other words, it means that one inherently believes that someone else will always pay a higher price than what he or she did irrespective of reasonable judgement.
For instance, if you’ve taken a position at US$20,000 for one Bitcoin, this means that you believe that there will always be someone out there who will be willing to pay more than US$20,000 sometime in the not-too-distant future and you will find all sorts of justification as to why that will happen. Alan Greenspan, the former chairman of the US Federal Reserve (US Fed) once termed this behaviour referring to the infamous dot-com bubble as an irrational exuberance where prices paid are decoupled from reality.
The first golden rule of investment is not to lose money and the second golden rule is to remember the first rule. So how do I minimize my chances of not losing money? Don’t overcomplicate matters.
In fact, most of you should already be able to spot a good buy or bargain because you recognise the intrinsic value of the item you’re looking at. Take, for example, Apple’s latest iPhone 14 (128GB). The phone normally retails at $1,649. Yet, if Apple Singapore were to offer a limited number of iPhone 14s for sale at a flat $200, most of us would rush to the store to score a phone of your own. Because we both know that the price (value) of the phone is more expensive than what they’re being sold for now.
This illustrates the fact that you already know how to value stuff and you already understand why valuation is so critical to determining whether you would win or lose in any investments. But yet, the storyline changes as to how to make your money grow. Suddenly, everyone and anyone become an ‘investment’ guru. Common sense seems magically absent either by default (greed) or by design (justification). Even my janitor-turned-self-proclaimed crypto analyst declared that Bitcoin will one day rule the world, replacing the almighty dollar. To say I was sceptical was an understatement.
Crypto winter? Permafrost, more like, says this writer
Come to think of it, the current crypto winter in my view is more like permafrost. To add salt to the wound, there is currently no logical way to tag on a fair value to a single Bitcoin. At this point, any number is a good number as your guess is as good as mine.
In order to value anything, you either need to have a reference value or a tangible measurable methodology. Neither exists in the speculative mania of cryptocurrency.
In my opinion, no one honestly knows what the value of one Bitcoin should be. In other words, we have no idea whether it is a good time to bet on whether the current crypto winter is just a passing moment or not. It might still be considered a crypto summer at this point for all we know.
A ‘wild wild west’ out there
In terms of the value of crypto, it is still a wild wild west out there as far as utility value is concerned. The jury is still out on this one and it will probably take decades or more with extensive multiple legal hurdles to determine the value of one Bitcoin/Ethereum to enable you to use it at McDonald’s (for example) in exchange for a Happy Meal. Could you imagine that at some time last year you could get a base model Tesla model 3 in exchange for one Bitcoin (at US$48,000)!
In a recent publication by the Boston Consulting Group and ADDX, the latest securities derivative called asset tokenisation of non-traditional illiquid asset classes is expected to gain traction from 2022 to 2030 in an attempt to provide liquidity and utility value mainly targeted at the crypto/non-fungible token (NFT) market. A tokenised asset is similar to an asset-backed security (eg; REITS) but in the opposite manner. It is, in essence, a reversed securitisation.
The token value is tied to the underlying asset value. In layman’s terms, for example, you could make 20,000 tokens (let’s call them MiniCoins) out of one single Bitcoin with an underlying ‘value’ of US$20,000, effectively giving each MiniCoin a value of US$1. So, you could theoretically walk into any McDonald’s outlet to buy a Happy Meal in exchange for five MiniCoins. In this instance, a usable currency (utility) is created in the process.
It sounds promising at face value but if you look closer, herein lies the problem. How could you reverse securitise an asset if the value fluctuates wildly with no underlying acceptable methodology of valuation to begin with?
Should it be adopted widely across the financial system, the counterparty risk would be immense. This is almost akin to building a skyscraper with untethered foundations. This will make the 2008 global financial crisis (GFC) subprime financial rout seem like a walk in the park should the underlying assets crumble along with the globally adopted tokenised assets and its sub derivatives be unwound in a disorderly manner. The subsequent ripple effects would be unprecedented in proportions and we could be staring down a long dark tube of an economic abyss. This sounds eerily similar to the story of tulip mania with history repeating itself but this time on a global scale!
Political righteousness aside, I would rather choose Russian rubles, which fell sharply recently over “MiniCoins” as a medium of exchange.
On the other hand, crypto bulls have maintained their bullish stance based on the premise of unregulated currency or decentralised finance (DeFi). The nirvana for crypto bulls is a world where no one, not even governments, owns currencies. Again, the main premise of crypto is the independence from stifling regulation and centralised government control. That is to say, you do not want anyone, especially the government to dictate and know who owns what (ensuring total anonymity), and how it could be used and transferred in a utopian world of DeFi.
Yet, when there is fraudulent activity such as the collapse of Three Arrows Capital, they cry foul and lament the lack of legislative regulation to “govern” the industry. So, which is it? They want freedom only when it suits their narrative but at the same time seek the safety of a centralised regulatory authority when the tables are turned on them.
As you can probably tell, I am what you’d call a permabear when it comes to cryptocurrency or NFTs, as I am an understudy of Warren Buffett’s school of thought when it comes to long-term fundamental investing. Both he and Charlie Munger did not mince their words when asked about cryptocurrencies as an investable asset class. Until such a time when cryptocurrencies or NFTs have gained legitimacy as an investable asset class either via credible valuation methodology or utility value, I would class them in the same investable category as rare arts/artefacts.
History lessons are taught so that mankind would not repeat the mistakes of the past. Yet, we never seem to learn, or we have allowed greed to cloud our sense of logical judgement. We humans tend to have a default money-for-nothing tendency. Our memories are short and our minds are inherently lazy. There is a famous saying that sums this up: “Those who cannot remember the past are condemned to repeat it.” – George Santayana, The Life of Reason, 1905.
That said, despite being a Gen Z, where buying into cryptocurrencies seem to be the norm, I seem to be the anomaly; I am not buying crypto in any season, winter or otherwise!
Weiyang is an aspiring analyst in the fields of investment banking and private equity. He is currently an undergraduate at the National University of Singapore (NUS). He is also an equity research analyst at NUS Investment Society and serves as a macroeconomics analyst for the Victoria Investment Charitable Trust Fund.