Whatever happened to all the crypto bros?

Published: June 8, 2022 | 12:53 AM ET

By: Ivory Johnson, CFP, ChFC, Founder, Delancey Wealth Management, LLC

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It seems like just yesterday the crypto currency enthusiasts were counting chickens weeks before they were scheduled to hatch. That of course was before a 50% decline in bitcoin, and if you bought the wrong crypto currency, it may have dropped to zero.

Investors are navigating both the stock market volatility and the roller coaster ride of digital assets that according to the Digital Asset Council for Financial Professionals are eight times as volatile as the S&P 500. This may very well be what happens when monetary innovations meet the real world and narratives become intertwined with macro-economic conditions.

Nevertheless, the value statement for bitcoin is that investors are exchanging something in abundance like fiat currency for something that is scarce like bitcoin because bitcoin will permanently cap its supply at 21 million coins. That’s a great proposition when 40% of the money supply is created by the Federal Reserve in a period of 24 months, but it works in reverse when the Fed begins to tighten.

So now what? Why would any investor want to own an asset class that loses so much of its value in such a short period of time? The answer might be found in value proposition itself, that bitcoin trades on a blockchain with no intermediaries and is less likely to be manipulated by third party actors.

One could legitimately suggest that the stock market would be just as volatile as bitcoin if it were ever forced to stand on its own two feet. Imagine what would have happened to equities if the Fed’s balance sheet didn’t balloon from $1 trillion in 2008 to $4.5 trillion in 2014 to $9 trillion today. According to the Wall Street Journal, 100% of net new purchases of stocks since 2008 were stock buybacks, the result of cheap money making it easier for executives to strip mine the company’s balance sheet and increase their stock-based compensation.
Deutsche Bank believes 20% of U.S. publicly traded companies are zombie companies that have no business model and only exist because they have access to low interest rate loans to keep the lights on. Even if that number is exaggerated, let’s assume it’s only 2%, we still have worthless companies giving investors the impression that they’re doing better than they really are.

Despite the unspoken expectation for endless Federal Reserve intervention, 40% of NASDAQ stocks had fallen by 50% from their one-year highs by January of this year before the real carnage had even begun. By the time the month of March rolled around the list of tech stocks that were down 75% continued to grow. If we’re going to have an honest conversation about bitcoin falling so far and so fast, why stop there?

Ultimately investors who are interested in bitcoin should know that when the Fed increases the money supply, that’s good for bitcoin. When they reduce liquidity, that of course is bad for bitcoin. If you believe the Fed will stop creating money out of thin air over the long-term with a $30 trillion national debt and 70 million retiring baby boomers who want every dime of the entitlement benefits promised to them, you should be bearish on bitcoin long-term.

For the past 15 years the Federal Reserve has refused to hold what has been billed as a free market accountable for their actions and now has a spoiled child with no coping skills on its hands. In this environment it makes sense to not only diversify the asset classes in your portfolio, but to vary the infrastructures these assets exist in.

The central bank is in the midst of removing the punch bowl that fueled so much of the stock market’s growth. This creates a prisoner’s dilemma, a situation where two completely rational individuals might not cooperate even if it appears that it’s in their best interests to do so. Instead, the Fed just might allow future consequences to become more and more pronounced to avoid far less pain in the present, and if that happens, if they resort to loose monetary policy (or the loose monetary policy itself becomes the problem) those crypto bros will likely come out of hiding.

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Bitcoin and other cryptocurrencies are a very speculative investment and involves a high degree of risk. Investors must have the financial ability, sophistication/experience and willingness to bear the risks of an investment, and a potential total loss of their investment. Information provided here is for informational purposes only and is not intended to be, nor should it be construed or used as investment, tax or legal advice, a recommendation, or an offer to sell, or a solicitation of an offer to buy, an interest in cryptocurrency. An investment in cryptocurrency is not suitable for all investors. Past performance is no guarantee of future results. All investments involve risk and may lose value. There is no assurance that the objectives of any strategy will be achieved. No strategy can guarantee a profit or fully eliminate the risk of loss.

Ivory Johnson, CFP®, ChFC
Delancey Wealth Management, LLC
20 F Street, NW, Ste. 750
Washington, DC  20001
(202) 507-6340

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