Hiltzik: Crypto is melting down. Here’s who’s hurt

These are painful days if you are an investor in stocks or bonds. But things could be worse:

You can have your money in cryptocurrency.

During its heyday, which sometimes looks like it was just a few days ago, the cryptocurrency seems to be on the verge of breaking into the mainstream.

It can be difficult for the average investor to distinguish fact from hype.

– US Department of Labor, warns against investing in cryptocurrencies in 401(k) plans

Prominent investment bankers have left traditional Wall Street firms like Goldman Sachs and Morgan Stanley to join Coinbase Global and other crypto startups.

Entertainers Matt Damon and Larry David and sports legends LeBron James and Floyd Mayweather Jr have lent their reputations to companies in the field.

Investment giant Fidelity announced in April that it will allow investors in 401(k) retirement plans to put some of their assets into cryptocurrencies (companies that fund investments). that plan, but not government regulators, would have to agree).

Crypto companies have done sponsorship deals, giving us the Crypto.com Arena (the former Staples Center in downtown Los Angeles) and those FTX badges on the weights’ uniforms. Major League Baseball Talent. Crypto billionaires like Sam Bankman-Fried, the chief executive officer of FTX, started dreaming about deploying their wealth as political kings.

Since then, the field has lost its shine. Bitcoin, the top crypto asset and the one most familiar to people, has lost about 70% of its value since November 9, when its price peaked at $69,000. The Standard & Poor’s 500, a key stock market index, is down about 24% from its peak of 4,818 reached on Jan. 4.

Other crypto assets have also crashed: Ethereum, the second-biggest, has fallen about 78% in the same period. Dogecoin, which was launched as a parody crypto asset but later taken over by Elon Musk (his company SpaceX was named one of the DOGE-1 planned moon missions), fell about 92% from the peak in May 2021, down to less than six cents today. (All prices are quoted by Coinbase.)

Meanwhile, the financial infrastructure of cryptocurrencies is slowly falling apart. The most recent development to shake up the sector was a June 12 announcement by Celsius, a crypto lender that acts like an unregulated bank, that it is “pausing all withdrawals, swaps and transfers between accounts” of its 1.7 million customers.

This decision appears to be the result of a rapid withdrawal at the company along with the collapse in the price of the cryptocurrency.

But it underscores nagging questions about the company’s business model, in that it offers up to 20% annual interest rates on crypto deposits — traditional banks are paying around zero. 5% on deposits and even junk bonds are paying around 7.5%.

Other crypto assets that describe themselves as havens of reliability turned out to have figurative feet of clay. Consider “stablecoins,” pegged to hard assets such as the US dollar or short-term commercial paper.

The claim behind tether, a key stablecoin that has lubricated cryptocurrency trading in general, is that each tether, priced at $1, is backed by $1 in cash. But since the sponsoring company is unregulated and has never issued an audit based on generally accepted accounting principles, no one really knows.

A bigger problem with stablecoins is that some are not actually backed by hard assets but are “algorithms,” meaning their value is said to be kept stable by computer-based buying and selling. .

The crash of one such coin, terra, triggered a bitcoin sell-off in May. As British systems engineer David Gerard observes, terra’s seemingly stable assets are “stringed worthless trash cans”, so its value has plummeted from $1. The current quote (although no one is buying) is six thousandths of a cent.

Fraud and other forms of crime are so rampant in the crypto space – including its even less salacious offspring, such as NFTs (non-edible tokens) – to the point where A whole vocabulary of scams has appeared. These include “carpet pulling,” where a promotion team abruptly abandons a project and escapes with the money invested.

Many investors abuse tradition is also common. Cryptocurrency deposits have been stolen by millions of hackers. NFT-related online gaming support network “Axie Infinity” has reported that hackers have stolen up to $625 million worth of crypto assets.

State and federal regulators are also investigating cryptocurrency promoters for allegedly illegally selling securities, and the Securities and Exchange Commission is reportedly investigating evidence of trading insider trading at cryptocurrency exchanges.

The manifestations of the crypto crisis are rife. These include layoffs at top trading firms and the withdrawal of job offers issued by Coinbase, a major crypto exchange, to recruit from Goldman Sachs, Morgan Stanley and companies. Another Wall Street was launched in the early fall days.

The wealth of the top seven crypto billionaires, including Bankman-Fried and the Winklevoss twins famous on “The Social Network,” has dropped from $145 billion at the time of bitcoin’s peak in November. $31.4 billion as of June 13, according to Bloomberg’s billionaire index.

What could make the crisis worse than the bear market for shareholders is that cryptocurrencies don’t have any real-world value.

With the exception of stablecoins, it is not backed by gold, corporate profits or any other realizable asset. It does not lose income, nor is its value protected by governments; actually, the benefit of crypto assets, according to their promoters, is that they are independent of government operations.

Many of the property’s claimed virtues are not virtues at all: Transactions are said to be irreversible and require no intermediaries like banks, but that becomes a problem for owners. Owners think they’ve been scammed or robbed and are left without recourse.

Promoters have been trying to articulate the use of cryptocurrency since bitcoin began being traded in 2009, but have never been successful.

Instead, it depends on what’s known as the “greater fool” theory: Crypto assets are worth anything you can convince another fool to pay you. When the supply of fools runs out – or confidence is gone – the market is prone to crash.

One confusing aspect of the crypto crisis is who gets hurt the most: In a nutshell, it’s the small investors that have been sucked in over the past few months. With bitcoin trading at around $21,000, it’s still profitable for anyone who invested before early December 2020 and has stayed the same since (or sold out later, such as early January 2021).

But as is often the case with conventional markets, a wave of investors flocked in as the price spiked, spurred in part by a flurry of advertising by crypto companies that began last year and reached its peak. peak during the Super Bowl in February.

An investor survey published in December by Grayscale, a crypto research firm, found that 55% of bitcoin investors surveyed had launched their investments in the previous year. .

That implies that today a large portion of new investors are in the water; some may have lost their life savings. According to research from MIT and the London School of Economics, most stock holdings are in the hands of a small number of large investors.

Grayscale said it has detected an increase in investor interest in bitcoin, with 59% of survey respondents in December considering bitcoin, up from 36% in 2019.

That apparent receptivity to the portfolio is perhaps what has driven Fidelity’s initiative, through which it is offering companies 401(k) plans to allow workers to book some of their contributions to cryptocurrencies.

However, the idea upset the Department of Labor, which oversees retirement plans. As it should be.

The agency said it has “serious concerns about the plan’s decisions to have participants invest directly in cryptocurrencies or related products, such as NFTs, coins, and crypto assets.” . … These investments can easily attract investment from inexperienced plan participants who expect high returns and have little appreciation for the risk the investment entails. It can be difficult for the average investor to distinguish fact from hype. ”

The agency implied that it could question whether companies that allow workers to invest in cryptocurrencies are meeting their legal obligation to “act solely in the financial interests of their participants.” plan,” and warned that they could be liable for any losses suffered by participants if the companies had breached that obligation.

Cryptocurrency still seems to capture the imagination of some congressional policymakers. Two of the top cryptocurrencies on Capitol Hill, Sens. Kirsten Gillibrand (DN.Y.) and Cynthia Lummis (R-Wyo.), appeared on CNBC This month to promote a bill they introduced to give the industry exactly the regulation they crave, which means virtually none. Based on management expert Hilary Allen of American University, cryptocurrency “is not an innovation worthy of a light-touch order.” [that is, tailor-made] management regime” as proposed by the bill.

When asked during the broadcast if she thinks cryptocurrency belongs in employee 401(k) and other retirement plans, Lummis replied, “That’s a great idea. … You want assets to be a store of value, and I think that’s where bitcoin really shines. … That’s some of the hardest money ever made in the world. “

Ignoring the fact that bitcoin does not meet the definition of “money” in any way, the light has dimmed its “shine”, as it has lost 30% of its value in the eight days since Lummis appeared. .

Advocates might argue that a week is not a long-term asset, but the cryptocurrency has not shown its utility for anything other than crime and fraud in the 13 years since its inception. Bitcoins start trading. Many experts in digital finance and security have expressed frustration as consumers and policymakers buy into advertisers’ coins.

In an open letter earlier this month, a group of 26 experts called on congressional leaders to take steps to protect the public from “risky, flawed and underserved digital tools.” prove this”. According to Stephen Diehl, a British engineer who was one of the organizers, their letter eventually garnered signatures from 1,700 scientists and technologists.

The writers said, “We strongly disagree with the narrative – marketed by those with a financial stake in the crypto asset industry – that these technologies represent a financial innovation. positive main.” Instead, technologies that are “less suitable for all purposes are now being touted as a current or potential source of public interest,” they said.

They are right, as investors who dived into crypto when it looked like it was about to hit the moon have learned.

But promotional trends in the crypto industry are fierce – possibly more than before, in search of more investors to cover their losses. It is up to regulators and political leaders to scrutinize how to protect ordinary families from the unfounded claims and promises that still come from cryptocurrencies, and stop talking about it. how “great” it is.

https://www.latimes.com/business/story/2022-06-16/crypto-crash-has-been-tough-small-investors-but-hasnt-spared-the-big-guys Hiltzik: Crypto is melting down. Here’s who’s hurt

Edmund DeMarche

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