Reflections on cryptocurrencies

Warren Buffett, who is one of the most successful stock investors of all time, once said “Be greedy when others are fearful, and fearful when others are greedy.”

When stocks fall sharply because of a bear market, intelligent investors who buy them eventually make a lot of money.

Although I’m not an expert, I don’t think the same can be said about cryptocurrencies.

Cryptocurrencies were very popular the past few years as their prices increased at a parabolic rate. This allowed many to earn millions as they more than doubled their money in a short amount of time.

Cryptocurrencies also became popular because of their limited supply, unlike fiat currencies which governments can print more of at their discretion. Because of this, many thought cryptocurrencies would make good inflation hedges, expecting their value to go up like gold, when inflation increases as a result of global central banks’ excessive money printing the past few years. In fact, cryptocurrencies are considered to be digital gold.

Finally, cryptocurrencies became popular because they are unregulated. This makes them immune from changes in government regulations, appealing to investors who are frustrated with governments that flip flop on their decisions.

Unfortunately, prices of cryptocurrencies have collapsed the past year, with the price of bitcoin, which is one of the most popular cryptocurrencies, now down 75 percent from its peak in 2021. This has hurt the portfolios of a lot of investors who bought cryptocurrencies as a means to get rich quick.

The steep decline in the price of cryptocurrencies also proves that cryptos are not digital gold as they have been among the biggest losers of global central banks’ aggressive tightening.

Moreover, being regulated might not be so bad given the growing number of hacking incidents, scams, and platforms suffering from bankruptcies recently. Because cryptocurrencies are unregulated, investors who have lost their money due to these fraudulent activities have nowhere to run.

Although the prices of all asset classes are down this year, one of the reasons why value investors will most likely pick bonds or stocks instead of cryptocurrencies is because the said financial assets generate interest income or cash dividends. In contrast, owners of cryptocurrencies do not earn anything, putting cryptos at a disadvantage compared to traditional financial assets. Because of this, it won’t be surprising if bonds and stocks outperform cryptocurrencies once risk appetite returns.

That said, cryptocurrencies still have use cases that will allow them to remain in existence in the future. For example, cryptocurrencies can be used to remit funds more efficiently between different countries. However, I don’t know if cryptocurrencies will eventually have use cases that are compelling enough to push demand up significantly, allowing prices to reach new highs.

Note that it took the Nasdaq 14 years to return to its 2000 peak when the dot com bubble burst. Without the frenzy that we saw the past few years, it might take even longer for prices of cryptocurrencies to exceed their previous peak, if at all. INQ

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