Bitcoin has been on a five-day slide that has brought its price - and this is perhaps what we care about most - to its lowest level since July of last year. Other coins are experiencing similar drops, amid a larger economic fallout.
The Wall Street Journal reports:
"Cryptocurrencies have fallen in lockstep with the broader stock market in recent days. The trend of bitcoin and other digital assets falling in lockstep with stocks has intensified in recent years, investors say, as traditional money managers such as hedge funds and family offices have moved into the space. Such funds will tend to sell crypto holdings rather than hold them in times of volatility."
This nut chart (journalist-speak for a summary) shows the changing conditions of the crypto industry in relation to the overall economy. Public blockchains like Bitcoin and Ethereum are open markets. They are experiments with financial and computing systems that make a wide range of economic and cultural activities accessible to everyone, much like the Internet leveled access to information and social media flattened social hierarchies.
Cryptocurrencies are often thought of as a retail game. People can buy Bitcoin from banks, brokers, and trading apps like Robinhood - without prior approval or advice. And that's what people are doing. Some retail investors have a game plan: They stick to dollar-cost averaging (or buy over an extended period of time regardless of market price to avoid "timing the market"). Others "pile in," spurred by a sense of missing out when the market's Ponzi mechanisms kick in.
But there are big, big, big players in the crypto world now. These are individuals or institutions that have "scale," meaning an amount of capital that can move markets or cause a slip, depending on how they play. A few "homegrown" crypto names: Alameda Research, a trading firm co-founded by crypto luminary Sam Bankman-Fried; hedge fund Three Arrows Capital; and venture firm Andreessen Horowitz.
It's perhaps easier to list traditional firms that aren't involved in cryptocurrencies, at least in some way. Warren Buffett's Berkshire Hathaway conglomerate, in particular, is not interested in cryptocurrencies.
It's not always easy to see who loses the most when markets shrink. We, or at least I, tend to take a sentimental view of the economy, knowing how much people's pensions and livelihoods are tied to capital. And so "corrections" seem more personal than just the mechanics of money. After all, people make buy, sell, or hold decisions often based on incomplete, contradictory, or confusing information.
However, it seems clear that the market turmoil is related to the Federal Reserve's commitment to raise interest rates at a time of rising inflation. Jeff Sommer, a columnist for The New York Times, called this policy decision "perplexing," considering that interest rates have been kept low for the past two decades of "easy money" in order to drive people to riskier assets in search of yield.
The economy is now slowing by design. And investors "don't know how to respond," Sommers writes. It's a difficult game, largely because it's never clear which way things might go, or what other events - such as a global pandemic, a European war, an escalation of geopolitical tensions between the U.S. and China, lockdowns - might occur.
The Wall Street Journal quotes analysts as saying that prices could return to pre-pandemic levels or even lower after a two-year rally that has driven the market for tech stocks by 60% and that for cryptocurrencies to astronomical heights.
So decisions need to be made to potentially protect your assets while decisions are made to theoretically protect the economy. Some people have it incredibly tough: Do Kwon, founder of the pioneering crypto ecosystem Terra, is working to save his risky algorithmic stablecoin after losing its one-to-one peg to the U.S. dollar. Terra's backers had previously planned to buy $3 billion worth of bitcoin to hedge their bets, and yesterday took the incredible step of selling a large chunk of it when UST, the stablecoin, fell to $0.61. CoinDesk columnist David Z. Morris called this "kwontitative easing," alluding to one of the Fed's generous measures to spur economic growth through spending.
Michael Saylor, CEO of a software company that has become a quasi-Bitcoin fund, also made a decision. His company, MicroStrategy, has purchased more than 129,000 Bitcoins since August 2020 at an average price of $30,700 and has borrowed against some of those assets to buy more Bitcoins. If bitcoin falls below Saylor's purchase price, he may have reason to sell (in part to hedge his company's loans). Today, he said he will never sell - following the "hodl" mantra popular among Bitcoiners, as he believes that in the long run all assets will lose value against hard-capped BTC.
Chances are that you, dear reader, will have to make choices as well. It may not always be clear what to do, and who knows what your financial situation looks like or will look like if the economy deteriorates. As Sommers notes, the current situation is anything but "normal.
He invests his money in "broad-based index funds that track the overall market," which get hit as hard as anything else, but have historically been considered safe investments.
Lily Francus, an extremely astute market commentator and "quantitative memeticist," noted that even though cryptocurrencies currently track tech stocks, these digital assets are fundamentally different because they do not pay dividends or offer future cash flow. Crypto assets are basically risky floating signifiers that move according to people's desire or fear. Accordingly, they could rise or fall, she said. The direction is as open as the market.
That may not sound like sage advice, but at a time when everything seems chaotic and out of control, it pays to examine what you can hold. You can't make decisions for other people, you can't change Fed policy, but you could act with conviction.