Tag Archives: Cryptocurrency

Cryptocurrencies – Nonproductive Assets

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Do not Invest in nonproductive assets like cryptocurrencies, says Warren Buffett, Chairman and CEO, Berkshire-Hathaway.

“Anytime you buy an asset that can’t do anything, produce anything, you’re simply betting on whether somebody else will pay more for [the Greater Fool Theory], again, an asset that can’t do anything…

“I would bet on good-producing businesses to outperform something that doesn’t do anything over any period of time.” ~ Warren Buffett

— 2011 BERKSHIRE ANNUAL MEETING

“Cryptocurrencies basically have no value and they don’t produce anything. They don’t reproduce, they can’t mail you a check, they can’t do anything, and what you hope is that somebody else comes along and pays you more money for them later on, but then that person’s got the problem. In terms of value: zero…I don’t have any cryptocurrency and I never will.”

— 2020 CNBC Squawk Box interview.

“It draws in a lot of charlatans who are trying to create various sorts of exchanges or whatever it may be. It’s something where people who are of less than stellar character see an opportunity to clip people who are trying to get rich because their neighbor’s getting rich buying this stuff that neither one of them understands. It will come to a bad ending.”

— 2018 shareholder meeting (and four years before FTX and Sam Bankman-Fried alleged fraud)

JP Morgan’s CEO Called Crypto a ‘Pet Rock’

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“Bitcoin itself is a hyped-up fraud. Crypto is a decentralized Ponzi scheme…It’s a pet rock.” ~ Jamie Dimon

At the World Economic Forum in Davos, Switzerland, JPMorgan Chase CEO Jamie Dimon bashed cryptocurrencies as a distraction and fraud.

“I think all that’s been a waste of time and why you guys waste any breath on it is totally beyond me,”Jamie Dimon, chairman and chief executive officer of JPMorgan Chase told CNBC Squawk Box in Davos. “Crypto is a decentralized Ponzi scheme. Bitcoin itself is a hyped up fraud. It’s a pet rock.”

“They are decentralized Ponzi schemes, and the notion that’s good for anybody is unbelievable,” he told lawmakers in a previous congressional testimony, calling Bitcoin and other cryptocurrencies “dangerous.”

“Cryptocurrencies that don’t do anything, I don’t understand why people spend any time [thinking about them],” Dimon said, adding that JPMorgan was “not even sure that [Bitcoin] is a real market.”

Bitcoin, like all cryptocurrencies, is a risky and highly volatile investment, making it difficult to predict exactly how the market will play out in the short and long term.

References:

  1. https://fortune.com/2023/01/19/jpmorgan-ceo-jamie-dimon-bitcoin-hyped-up-fraud-cryptocurrencies-waste-of-time-but-blockchain-deployable-technology/amp/

Blockchain and Cryptocurrency Scam / Ponzi Scheme

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“Cryptocurrencies are like ‘pet rocks’.” ~ Jamie Dimon, CEO and Chairman, J P Morgan Chase

A blockchain is a digital ledger associated with an asset, recording the history of that transaction in that asset…who bought it and from whom. In other words, blockchains are simply append-only spreadsheets maintained across decentralized “peer-to-peer” networks, writes Sohale Andrus Mortazavi, in an article entitled “Cryptocurrency Is a Giant Ponzi Scheme”.

What distinctive about blockchain is that the ledgers are supposed to be decentralized: they aren’t sitting on the computer ‘or ledger’ of a single bank or company. They are in the public domain, sustained by protocols that induce many people to maintain records on many servers.

Cryptocurrency blockchains allow users to maintain a shared ledger of financial transactions without the need of a central server or managing authority. Users are thus able to make direct online transactions with one another as if they were trading cash.

Cryptocurrency blockchains generally don’t allow previously verified transactions to be deleted or altered. The data is immutable. Updates are added by chaining a new “block” of transaction data to the chain of existing blocks.

In theory, blockchain and cryptocurrencies were supposed to offer a lower cost and more secure method to keep track of transactions. But, cryptocurrencies don’t produce anything of material value. Investors can only cash out by selling their digital coins to other investors.

Which makes them an experiment in the “greater fool” theory of investing, in which investors attempt to profit on overvalued or even worthless assets by selling them on to the next “greater fool”. Price manipulation plays as much or more of a role than demand in driving prices higher.

Furthermore, the parent company of Tether and Bitfinex, is printing tethers from thin air and using them to buy up Bitcoin and other cryptocurrencies in order to create artificial scarcity and drive prices higher. Sam Bankman-Fried’s company FTX imploded due to similar fake proprietary tokens artificially inflating and propping up risky trades by FTX’s affiliate Alameda.

Tether has effectively become the central bank of crypto. Like central banks, they ensure liquidity in the market and even engage in quantitative easing — the practice of central banks buying up financial assets in order to stimulate the economy and stabilize financial markets. The difference is that central banks, at least in theory, operate in the public good and try to maintain healthy levels of inflation that encourage capital investment. By comparison, private companies issuing stablecoins are indiscriminately inflating cryptocurrency prices so that they can be dumped on unsuspecting investors (greater fools).

Cryptocurrency has been one of the greatest destroyers of wealth in the financial history of mankind. ~ Jay Adkisson

This renders cryptocurrency not merely a bad investment or speculative bubble but something more akin to a decentralized Ponzi scheme. Unbacked stablecoins are being used to inflate the “spot price” — the latest trading price — of cryptocurrencies, like Bitcoin, to levels totally disconnected from reality. If cryptocurrency and NFT markets cannot keep luring in enough new money or capital becomes to expensive due to rising interest rates to cover the growing costs of mining (think Ponzi scheme), the scheme will become unworkable and financially insolvent.

Cryptocurrency has been one of the greatest destroyers of wealth in the financial history of mankind, writes Jay Adkisson, in Forbes.

“Many Bitcoin promoters are simply shilling and attempting to pump the price of Bitcoin up because they themselves are invested in cryptocurrency companies.” ~ Jay Adkisson

“It is hard to imagine cryptocurrency being a suitable investment for all but those who are sufficiently wealthy that they can burn wads of cash off a bridge and not be distressed by it,” writes cryptocurrency watcher Charles Padua. Many Bitcoin promoters are simply shilling and attempting to pump the price of Bitcoin up because they themselves are invested in cryptocurrency companies.

Bottomline, Bitcoin itself may not be a total fraudulent scam, but how Bitcoin and all cryptocurrencies are being promoted and sold by its legions of ‘conflict of interest’ advocates to the average retail investor is the definition of a scam and Ponzi scheme.

References:

  1. https://jacobin.com/2022/01/cryptocurrency-scam-blockchain-bitcoin-economy-decentralization
  2. https://www.forbes.com/sites/jayadkisson/2018/11/20/the-great-cryptocurrency-scam/?sh=fc556be359fe

CME Group CEO called Bankman-Fried ‘an absolute fraud’

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“When you have the greatest quarterback of all time and a supermodel wife doing a commercial picking up the phone saying ‘Are you in, are you in, are you in.’ To me, it looks like a pump-and-dump scheme. People get very influenced by people like Tom [Brady].” ~ Terry Duffy, CME Group Chairman and CEO

FTX’s sudden and catastrophic collapse sent reverberations throughout the entire cryptocurrency industry. What was once the third-largest cryptocurrency exchange has filed for bankruptcy and has billions of dollars left in limbo.

FTX is a cryptocurrency exchange headquartered in the Bahamas. The exchange allowed users buy, sell, hold, and trade cryptocurrency (although those functions are currently unavailable due to the firm’s collapse as a result of FTX founder and CEO Sam Bankman-Fried’s fraud and misappropriation of its customers’ accounts), writes The Verge.

CME Group Chairman and CEO Terry Duffy suspected the fraud at the cryptocurrency exchange the day of his first one-on-one meeting with Bankman-Fried, stated during an interview with Melissa Lee on CNBC Fast Money.

Duffy recounted his March 2022 meeting with Bankman-Fried on the “On the Tape” podcast, which is hosted by “Fast Money” traders Guy Adami and Dan Nathan.

“You’re a fraud. You’re an absolute fraud,” Duffy said he told Bankman-Fried. Moreover, he tried to warn Congress and the financial sector that the disgraced FTX billionaire Bankman-Fried was a “fraud.”

Additionally, Duffy wanted to know why the Commodities Futures Trading Commission was even considering Bankman-Fried’s request to ease regulatory rules to push his trading model. He was told it was required under innovation guidelines.

“Right away my suspicions were up,” Duffy said. “Why is there so much pressure coming for this application? And then when I met with him, I knew right away this a joke.”

The FTX collapse is the biggest cryptocurrency exchange bankruptcy on record.

Duffy alleges that a former senior executive of the Commodity Futures Trading Commission (CTFC) was closely aligned with Bankman-Fried. “I hope someone has the courage to ask, ‘Was anybody putting pressure on the CFTC to move forward with an application that could have put everything at risk?’” Duffy said.

The former CEO Bankman-Fried is facing a barrage of civil and reportedly criminal investigations after allegedly transferring billions in customer funds from FTX, the crypto trading platform he founded in 2019, to Alameda Research, a crypto trading firm he founded in 2017.

References:

  1. https://www.cnbc.com/2022/11/23/absolute-fraud-cmes-terry-duffy-says-he-saw-trouble-before-ftx-collapse-.html
  2. https://www.foxnews.com/media/sam-bankman-fried-easy-pick-out-fraud-cme-group-chief-terry-duffy

“Any time there is a boom cycle like this, otherwise smart investors do dumb things because they see their pals and peers piling in and worry they will be left out. Envy is a pernicious quality — and one that is all too human.” ~ Andrew Ross Sorkin

FTX Debacle and Lessons Learned

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The lessons investors can learn from the FTX debacle are not all that new or even groundbreaking. But, the lessons are important ones for investors to learn who desire to build long-term wealth and achieve financial freedom.

The significant lessons are the importance of investors understanding an asset and doing thorough research on companies in which they intend to invest.

In FTX’s case, here is a company, led by it’s under thirty CEO Sam Bankman-Fried (SBF), that in three years grew from relative nothing to $32B literally overnight. It’s meteoric rise attracted thousands of investors who were more than happy to invest their capital in a young company and its brash CEO.

Yet, by performing just basic research on how the company made its money, on the experience and acumen of the CEO, and on the executive management team, and on the company’s financial profitability would have raised red flag to cause serious investor to pause before investing their capital in the company.

Additionally, SBF, FTX’s thirty-something CEO was consider a “wunder-kid” of sorts and featured by Forbes as its #2 “The Forbes 400” in 2022.

In a relatively short time, SBF took FTX from near zero is capitalization to $32B. His feats caused both seasoned and retail investors to flock to FTX.

Now, at the beginning of the week, FTX possessed a capitalization of $32. By Friday, FTX was at near zero capitalization, SBF had resigned, and the luster and shine of the once high flying company had been completely tarnished.

Thus, this is a classic and stark example why investors must understand and do thorough research, and remain disciplined before investing their capital.

References:

  1. https://www.forbes.com/sites/jemimamcevoy/2022/09/27/10-under-40-the-youngest-billionaires-on-the-2022-forbes-400/?sh=2455189c397e

FTX Fraud, Political Donations and False Altruism

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FTX founder Sam Bankman-Fried (SBF) admits masquerading as ‘woke Westerner’.

Sam Bankman-Fried (SBF), the founder and CEO of collapsed cryptocurrency exchange FTX, revealed that ‘the woke appearance’ that he personified and his company displayed was all a “dumb game.”

In an interview, Bankman-Fried confessed that the fake window dressing of altruism was mostly a front and that the performance was done “so everyone likes us.”

Until last week, FTX was the world’s second-largest cryptocurrency exchange and was valued at $32 billion. However, the digital coin exchange collapsed and filed for bankruptcy.

In addition, between $1 billion and $2 billion in customer funds reportedly vanished from the FTX cryptocurrency exchange via corporate fraud, via an apparent hack and/or via an “unauthorized access” by Bankman-Fried.

In an emergency court filing, evidence suggests Bahamian regulators directed former CEO Sam Bankman-Fried to gain “unauthorized access” to FTX systems to obtain digital assets belonging to the company and to transfer those assets to the custody of the Bahamian government.

Bankman-Fried was a Democrat megadonor.

  • He reportedly contributed more than $5 million to Joe Biden in the 2020 presidential campaign.
  • He was the second-biggest individual donor behind George Soros to Democrats in the 2021-2022 election cycle – donating $37 million.
  • He planned to donate “north of $100 million” to Democrats in the 2024 presidential election, but pledged to have a “soft ceiling” of $1 billion in donations to Democrats if former President Donald Trump ran again.

The concern now is whether Democrats will be obliged morally to ‘give back’ the apparent illicit political donations from Bankman-Fried.

A liberal darling

Bankman-Fried, a self-proclaimed “effective altruist,” was promoted by Democrats and hyped up by the media. However, in a new interview, Bankman-Fried confessed that he used his virtuous stances as a front to win the game.

SBF was one of the featured speakers at World Economic Forum 2022 in Davos, Switzerland.

In September, SBF was a featured speaker at the annual meeting for the Clinton Global Initiative.

SBF was slated to be a featured speaker at a summit hosted by the New York Times on Nov. 30, along with BlackRock CEO Larry Fink, New York City Mayor Eric Adams (D), and Ukrainian President Volodymyr Zelenskyy.

Bankman-Fried said it was “never the intention” to squander away investors’ money, but “sometimes life creeps up on you.”

References:

  1. https://www.theblaze.com/news/ftx-sam-bankman-fried-woke-esg
  2. https://www.cnbc.com/2022/11/17/ftx-suggests-sam-bankman-fried-transferred-assets-to-bahamas-government-custody-after-bankruptcy-filing.html

The Impact of FTX’s Collapse

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“Never in my career have I seen such a complete failure of corporate controls and such a complete absence of trustworthy financial information as occurred here.” ~ John Ray, new FTX CEO

Crypto exchange FTX filed for bankruptcy after a stunning five-day collapse of the once-$32 billion dollar crypto company as concerns over its financial health led to a surge in withdrawals and a plunge in the value of its native FTT token. FTX’s founder, Sam Bankman-Fried (SBF), resigned as CEO.

As a result of the collapse, the company and its leadership are facing investigations and potential criminal charges in both the Bahamas and the U.S. for its misappropriation of users’ assets and allegations of fraud. 

Before its collapse, FTX offered retail and professional traders spot crypto investing as well as more complex derivatives trades. At its peak, the platform was valued by investors at $32 billion and had more than 1 million users.

FTX’s books revealed the exchange had more than $9 billion in liabilities, but less than $1 billion in liquid assets the day before its bankruptcy filing. And, after an apparent hack (or “unauthorized access” via a backdoor by SBF) drained $477 million of the company’s remaining assets, customers are facing long odds of ever recovering much of their deposits.

After FTX collapse, at least $1 billion in customer funds are unaccounted for, and FTX may owe as many as one million creditors. Additionally, FTX’s collapse has resulted in:

  • Crypto’s total market cap has dropped below the $1 trillion mark since FTX’s trouble started early last week, and sits near $826 billion as of Wednesday morning, November 9. 2022.
  • After the firm’s bankruptcy filing, BTC price sank nearly 25%, dropping below $16,000, before slightly recovering; ETH fell by more than 30% in the same span.
  • Market contagion and liquidity issues have spread to a growing number of crypto businesses that have suspended redemptions, citing “extreme market dislocation … caused by the FTX implosion.”
  • Several major players have halted customer withdrawals and cited “significant exposure to FTX.” Others are planning to file for bankruptcy.

CNBC reported that Alameda Research, FTX’s sister company, had borrowed billions in customer funds from the exchange to make risky leveraged trades, leaving FTX caught short when users wanted to withdraw their money.

In general, mixing customer funds with counterparties and trading them without explicit consent is illegal, according to U.S. securities law. It also violates FTX’s terms of service. “Never in my career have I seen such a complete failure of corporate controls and such a complete absence of trustworthy financial information as occurred here,” said newly appointed FTX CEO John Jay Ray III – a bankruptcy expert with more than 40 years of restructuring experience who liquidated Enron.

Former CEO Bankman-Fried declined to comment on allegations but said the company’s recent bankruptcy filing was the result of fraud, misappropriation and issues with a leveraged trading position placed by Alameda Research.

“In the Bahamas, I understand that corporate funds of the FTX group were used to purchase homes and other personal items for employees and advisors,” Ray wrote. “I understand that there does not appear to be documentation for certain of these transactions as loans, and that certain real estate was recorded in the personal name of these employees and advisors on the records of the Bahamas.”

Moreover, larger investors and traditional firms been impacted

  • Since its founding in 2019, FTX raised nearly $2 billion in capital from sources like venture capital firms and pension funds, and its bankruptcy means that many of its investors will likely need to write their investments off as losses. 
  • SoftBank, Tiger Global, and Sequoia Capital are among the many well-known firms who made now-worthless bets on FTX. Sequoia was marking its $213 million stake down to $0. 
  • The impact isn’t limited to venture capital firms either — the Ontario Teachers Pension Fund lost $95 million investing in FTX’s funding rounds and professional athletes celebrities like TV producer Larry David and NFL quarterback Tom Brady are among the individuals who had equity stakes in and promoted the company. 
  • In an emergency court filing, evidence suggests Bahamian regulators directed former CEO Sam Bankman-Fried to gain “unauthorized access” to FTX systems to obtain digital assets belonging to the company and to transfer those assets to the custody of the Bahamian government.

In the wake of the FTX exchange’s collapse, there has been calls from financial business leaders and lawmakers regarding the need for greater oversight and regulation of the crypto industry.

U.S. Congressman Patrick McHenry, the top Republican on the House Financial Services Committee, said: “It’s imperative that Congress establish a framework that ensures Americans have adequate protections while also allowing innovation to thrive here in the U.S.”

Source: Coinbase Bytes

References:

  1. https://www.cnbc.com/2022/11/15/ftx-says-could-have-over-1-million-creditors-in-new-bankruptcy-filing.html
  2. https://www.businessinsider.com/ftx-managers-used-online-chat-emojis-approve-official-expenses-ceo-2022-11
  3. https://www.cnbc.com/2022/11/17/ftx-suggests-sam-bankman-fried-transferred-assets-to-bahamas-government-custody-after-bankruptcy-filing.html

FTX Downfall

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“It’s only when the tide goes out that you learn who has been swimming naked.” Warren Buffett

Things may look good and rosy up to a certain point, but if a company is leveraged too much expecting a wave to come, but instead the tide goes out, everything will be exposed. Federal Reserve Chairman Jerome Powell aggressive interest rate hikes to counter inflation exposed all sorts of companies that were relying on cheap capital to either grow or survive.

In FTX case, a Bahamian cryptocurrency exchange, things were great for a while. Investors were excited about the way the stock price continued to melt up.

FTX was the third-largest crypto market in the world at the start of last week when it announced liquidity problems and would need a massive infusion of cash to stay afloat. However, the tide went out and the problems at FTX began to surface and then totally self-destruct.

In theory, exchanges like FTX make money by allowing customers to trade cryptocurrencies and collecting fees for transactions.

“It was a success story almost too good to resist. In just over three years, FTX would go from nothing to a $32 billion company. Now it’s back to nothing.” ~ Brandon Kochkodin, Forbes Staff

According to WSJ, FTX problems are a result of the loans it extended to Alameda using money that customers had deposited on the exchange for trading purposes. It was a decision that Mr. Sam Bankman-Fried (SBF), the crypto wunderkind who founded the exchange and then drove it into bankruptcy, described as a poor judgment call, writes the Wall Street Journal.

In March 2022, the Fed started raising interest rates to battle inflation. Speculative investment assets started tanking and a number of crypto funds and brokerages crashed. FTX came in as a bailout “savior” with the apparent purpose of sweeping in depositor funds into FTX.

Additionally, SBF’s hedge fund Alameda Research was also hit hard by the crypto drop. SBF was able to temporarily hide the problem by “borrowing” customer deposits at FTX to plug the hole at Alameda. This move may be a violation of the terms of service and potentially violate regulations.

All in all, FTX had $16 billion in customer assets. It is believed that the unregulated exchange transferred more than half of its customer funds to its sister company Alameda, according to WSJ.

In traditional markets, brokers must keep client funds segregated from other company assets. Cryptocurrencies and brokerages that trade them remain unregulated, which means it may not be legally possible for any government agencies to step in to reimburse FTX customers, said corporate lawyer Eric Snyder, chairman of bankruptcy at Wilk Auslander.

“Absent any regulation, it’ll be difficult to show fraud if the agreements between FTX and their customers allowed FTX to use investments at their discretion,” Synder said.

The root of FTX’s downfall lay in its relationship with Alameda, a firm known for aggressive trading strategies funded by borrowed money and allegedly operated by Mr. Bankman-Fried’s ex-girlfriend as CEO of Alameda. Mr. Bankman-Fried is the majority owner of both firms, FTX and Alameda. He was CEO of Alameda until last year, when he stepped back from the role to focus on FTX.

“There’s one fundamental takeaway: Bitcoin itself should never be leveraged. It cannot be leveraged safely. And anybody who thinks that they can lever it safely is going to learn a very hard lesson: that illiquidity is the same thing as insolvency,” commented Caitlin Long, founder and CEO of Custodia Bank, on CNBC’s The Exchange

References:

  1. https://www.forbes.com/sites/brandonkochkodin/2022/11/11/the-red-flags-on-ftx-we-all-seemed-to-miss/?sh=23f8a20111f6
  2. https://www.wsj.com/articles/ftx-tapped-into-customer-accounts-to-fund-risky-bets-setting-up-its-downfall-11668093732
  3. https://www.oldschoolvalue.com/investing-strategy/warren-buffett-quotes/#8_Swimming_Naked_is_Cute_Only_for_Babies
  4. https://www.cnbc.com/amp/2017/12/11/bitcoin-millionaire-grant-sabatier-dont-buy-bitcoin.html
  5. https://www.marketwatch.com/story/ftx-filed-for-chapter-11-bankruptcy-heres-what-account-holders-should-know-about-this-very-messy-and-complex-bankruptcy-case-11668202547?mod=mw_latestnews

The Greater Fool Theory

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“The greater fool theory states that the price of an object is determined not by its intrinsic value, but rather by irrational beliefs and expectations of market participants. As long as there is a greater fool around the corner willing to pay a higher price, the value will continue to rise,” — Ashwin Sanghi

The “greater fool theory” refers to the principle that one can make money by investing into overvalued assets and selling them for a profit later, because there will always be someone else, “the greater fool”, who will come along and pay a higher price for the assets.

Billionaire Microsoft co-founder and investor Bill Gates has dismissed investments in cryptocurrencies, such as Bitcoin, and non-fungible tokens (NTFS). He opined that the digital assets market is largely driven by rampant speculation, greed and the greater fool theory.

Gates stated that the phenomenon of cryptocurrencies and non-fungible tokens as something that’s “100% based on greater fool theory,” since there will always be other speculators willing to pay more for assets.

Gates said he doesn’t own any crypto because he prefers investing in assets with determinable intrinsic value (value that is justified by facts) or “things that have valuable output.”

Thus without having a determinable intrinsic value, — a value that is justified by “facts”; such as assets, liabilities, earnings, dividends and other definite values — investing in cryptocurrency and NTFs is purely speculative by investors.

In the past, intrinsic value was equated to a company’s “book value”. Subsequently, a new concept was developed; the intrinsic value was determined by the earning power or the present value of the discounted future cash flow of a company.

Regarding intrinsic value: “To use a homely simile, it is quite possible to decide by inspection that a woman is old enough to vote without knowing her age or that a man is heavier than he should be without knowing his exact weight..” — Security Analysis by Benjamin Graham, David Dodd, Warren Buffet.

According to Corporate Finance Institute, the best way to avoid being a “Greater Fool” is to:

  • Do not blindly follow the herd, paying higher and higher prices for something without any good reason.
  • Do your research and follow a plan.
  • Adopt a long-term strategy for investments to avoid bubbles.
  • Diversify your portfolio.
  • Control your emotion of greed and resist the temptation to try to make big money within a short period of time.
  • Understand that there is no sure thing in the market, not even continual price inflation.

References:

  1. https://decrypt.co/102973/bill-gates-crypto-and-nfts-100-based-on-greater-fool-theory
  2. https://corporatefinanceinstitute.com/resources/knowledge/trading-investing/greater-fool-theory/
  3. https://medium.com/the-peanut/the-concept-of-intrinsic-value-in-security-analysis-baa26ed1d42a

Bitcoin’s Bursting Bubble

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“I have to confess that I find it all exhilarating. I’m only concerned somewhat for the relatively new investors who get drawn into these things and then find out the hard way. I sympathize completely with these people out there enjoying this bubble, but they’ve always ended very badly, and I have no doubt this one will too.” Jeremy Grantham

The price of Bitcoin dropped below $40,000 for the first time in months and the cryptocurrency fell more than 40 percent off recent all time highs.

There are reasons for the recent crash in the price of Bitcoin, according to Barron’s Magazine. Recently, China banned the use of cryptocurrencies for financial institutions asserting that “virtual currencies shouldn’t be used in the market as they are not supported by real value”. Instead, China intends to create its own indigenous cryptocurrency that will allow the regime to monitor and track its citizens

Furthermore, other countries might be considering tighter regulation, particularly as cryptos become the currency of choice for ransomware hackers and money laundering. Additionally, Tesla stopped accepting Bitcoin as payment for vehicles and Elon Musk expressed climate-related concerns over Bitcoin’s mining process.

But sometimes things go down because they are going down, according to Barron’s. Investors who bought early are looking to lock in gains, while recent arrivals to the crypto game are panicking. Selling begets selling.

Image Source: Getty Images

Bubble Burst

“We’re a crazy marketplace full of irrational human beings who behave themselves 80% of the time and then 20% of the time totally freak out one way or the other.” Jeremy Grantham

Retail investors piling into Bitcoin have fueled a historic price bubble that has finally burst. When stock bubbles pop, the selling usually stops when shares drop well below intrinsic value and become attractive to a new class of value investors who didn’t partake in the market froth.

Cryptocurrencies are different. They have no intrinsic value, which means there’s no telling when the selling might stop.

Essentially, Bitcoin is a digital currency that is not tied to a bank or government and allows users to spend money anonymously. The coins are created by users who “mine” them by lending computing power to verify other users’ transactions. They receive Bitcoins in exchange. Overall, the mainstream acceptance of Bitcoin is still limited.

Bitcoins are basically lines of computer code that are digitally signed each time they travel from one owner to the next. Transactions can be made anonymously, making the currency popular with tech enthusiasts, speculators — and cybercriminals.

“The concerns among investors and traders is that perhaps we are about to see another crypto winter and it may take a long time for Bitcoin price to see any recovery as the bull cycle may be over,” said Naeem Aslam, chief market analyst at AvaTrade.

“The actual answer is that no one really knows about that and the only thing that we do know is that institutions are still buying Bitcoin on every dip,” said Aslam.

Maintain a long-term outlook

Stock market and assets, like cryptocurrencies, bubble bursts can be intimidating, but they’re no cause for panic. Historically, the market has always recovered from every one of its downturns — and it’s extremely likely it will bounce back again.

If you maintain a long-term outlook, it’s easier to avoid panic-selling when asset prices begin to free-fall. Remind yourself that the market will recover eventually, and you’ll be able to ride out the storm.

The key to investing for the long term is to ensure you’re investing in quality assets. And, investing during market downturns can actually be a cost-effective move.

Because asset prices are lower during market downturns, it can be a good opportunity to buy good assets, like stocks (and cryptocurrencies, if you’re so inclined), at bargain prices.

References:

  1. https://www.barrons.com/articles/china-issues-crypto-bitcoin-warning-51621416378
  2. https://www.dallasnews.com/business/technology/2021/05/19/bitcoin-falls-below-38000-whats-going-on/
  3. https://barrons.cmail20.com/t/ViewEmail/j/62CDF96507F967432540EF23F30FEDED/9E2B0856731CA0B32018F019E6F15D33
  4. https://markets.businessinsider.com/currencies/news/jeremy-grantham-gmo-stock-market-bubble-burst-before-may-2021-2-1030118339
  5. https://www.fool.com/investing/2021/04/03/3-ways-im-preparing-for-the-stock-market-bubble-to/