The Bank for International Settlements (BIS), an international financial institution owned by central banks that “fosters international monetary and financial cooperation and serves as a bank for central banks”, anticipated some of the contents of the next annual report assessing that “the recent implosions in the cryptocurrency markets indicate that the long-highlighted dangers of decentralized digital money are materializing”. The general manager Agustin Carstens refers, in particular, to the recent collapse of the stablecoins TerraUSD (UST) and LUNA, an event that wiped out almost $45 billion in market capitalization within a week and which we talked about in a recent article, and to the unstoppable descent of Bitcoin which has already eroded 70% of its value from the highs of the last November. Alarm bells of what appears to be a structural problem in the sector.
Carstens argued that “without government-backed authority capable of utilizing tax-guaranteed reserves, any form of money ultimately lacks credibility.” In this scenario, the BIS invites central banks to speed up the creation of their digital currencies to stabilize the market. “Cryptocurrency trading increasingly resembles the US stock market of the late 1920s,” the Swiss Financial Market Supervisory Authority said recently. “It would appear that much of digital product trading resembles the US stock exchange in 1928, the year before the crash, where all kinds of abuse were rife,” its Chief Executive Officer Urban Angehrn added.
With this in mind, we can contextualize the events that last June 15 led the US platform Celsius Network, a cryptocurrency loan company founded in 2017 and headquartered in New Jersey, to freeze the accounts of 1.7 million small savers who were promised double-digit returns by investing in digital currencies. According to analysts, “a classic bank run” translated into the world of cryptocurrencies was materializing. And now the company is hiring advisers to prepare for potential bankruptcy. To make matters worse, Three Arrows Capital (3AC), a cryptocurrency hedge fund founded in 2012 and headquartered in Singapore that had mainly invested in LUNA, appears to be headed for default since it seems unable to repay its loan to Voyager Digital Ltd., a company founded in 1993 and headquartered in New York, which provides APIs and mobile apps to allow anyone to trade, invest, earn and secure digital assets. According to The Wall Street Journal, the loan would amount to 15,250 bitcoins, plus $350 million USD coins.
The underlying problem of cryptocurrencies has always been the strong volatility, i.e. the rapid and intense fluctuations in value, a characteristic that has made it difficult, if not impossible, to use these virtual currencies as an alternative means of money, and hence has not allowed widespread diffusion in all segments of the population. To overcome this problem, the so-called stablecoins were introduced on the market, digital currencies which, through financial products placed as a guarantee, aim to contain variations and ensure parity with currencies such as dollars. But even this experiment seems to have failed since in recent weeks several of these digital currencies have lost the exchange parity promised by managers who too often have distinguished themselves for the scarce transparency on the composition of the capital that should ensure their correct functioning.
The reality is that digital currencies were born and grew after the 2008 crisis, that is to say in a completely anomalous monetary scenario, with negative rates and an abundance of liquidity. Conditions that brought investors looking for some return to invest even in the most-risky assets. Now that monetary conditions are slowly returning to normality, with the increase of interest rates and lower inflow of cash in the system, the mechanism appears to have stalled. To be honest they are not the only assets that have stalled if we consider some of the main stocks on the Nasdaq index.
However, detractors continue to argue that cryptocurrencies are a monumental “Ponzi scheme”, which feed on new investors and not on the actual increase in value or use. It follows that if the flow of investments is reduced, cryptocurrencies collapse like a house of cards. On the contrary, connoisseurs see this phase as a healthy cleaning step that will leave only the most reliable and effective products alive. Who will be right? Certainly, the fact remains that cryptocurrencies are proving to be subject to exactly the same market laws as other speculative assets, and mainly to human greed, rather than to the desire to change the world to make it fairer and juster as dreamed of by the first creators. And for the moment those who are paying the higher price, as recently highlighted by The Financial Times, are those who should have benefited the most from the use of cryptocurrencies, that is the young and the low-income people, being the type of savers who have invested the most in digital currencies in relation to the resources they have.