Cryptocurrencies: The Crisis of Faith of the Latest Investor Religion

On January 5 of this year, the billionaire American investor Mike Novogratz excitedly shared on Twitter the photo of his new tattoo, a howling wolf next to the word moon and the round yellow figure of the satellite.

Later, in April, during the conference that for the second year in a row brought together tens of thousands of cryptocurrency enthusiasts in Miami, the former Goldman Sachs banker boasted that he was probably the only person in the world to have the cryptocurrencies painted on his body. bitcoin and moon symbols, then one of the most popular digital currencies on the market.

Only a month later, in an unexpected turn of events, the latter was starring in one of the biggest fiascoes in the short history of the sector, when its value of almost 20 collapsed.

000 million dollars to practically zero in just three days.

Novogratz's fortunes also suffered.

In a seen and not seen, it fell from 8,500 million to 2,500 million.

The drawing on his left arm suddenly became the involuntary reminder of the dangers of investing in high-risk assets.

I'm officially a Lunatic!!!

Thanks @stablekwon And thank you my friends at Smith Street Tattoos.

pic.twitter.com/2wfc00loDs

— Mike Novogratz (@novogratz) January 5, 2022

The case illustrates the strong emotional bond that many cryptocurrency investors have with them.

Perhaps because they see them as their passport to quick riches without the need to work.

A change of life that they would have earned for knowing how to detect the perfect opportunity at the right moment.

This phenomenon is much less common in other risk financial products.

It is strange to think of an Iberdrola shareholder who tattooed a windmill because he believes that the future of renewables is going to catapult the price of his titles, or of a Telefónica shareholder who did the same with an antenna motivated by the advent of 5G .

However, the signs of devotion in the crypto universe are a constant that compares its owners to the members of a soccer team, the members of a political party or the faithful of a religion where the televangelists are

with hundreds of thousands of followers.

followers

As happens with the resurrection for Christians, it has its own founding mystery, this one in the birth of bitcoin, attributed to Satoshi Nakamoto, a pseudonym under which it is not known who he is.

Not even if there is more than one person.

“I have given up predicting his imminent death.

There always seems to be a new crop of believers.

Maybe just think of it as a cult that can survive indefinitely,” economist Paul Krugman said of bitcoin in December last year.

Ángel Barbero, professor at EAE Business School and director of strategy at Nateevo, sees the power of the story as a fundamental part of the success of cryptocurrencies.

“There being nothing tangible, you have to build a story around the coin.

Of how it was created.

You have to give it an epic for people to link.

If not, you are binding to a cryptographic code.

The epic of bitcoin or the founder we do not know hook people to something that is still magic, and that many people use as if it were a bet.

Alejandro Neut, a doctorate from MIT and an economist at BBVA Research, has witnessed the passions aroused in the world's leading power.

“Bitcoin, especially in the US, has been associated with very strong political emotions.

With all that libertarian ideology that defends getting rid of currencies issued by central authorities and being independent of the decisions of the technocrats.”

In their essay

Goes Out , Stephen Holmes and Ivan Krastev describe the endorsement of Donald Trump as "zealous, thoughtless and unwavering."

This attitude is very present in a part of the crypto public, which, being the object of the skepticism of several Nobel Prize winners in Economics, habitually handles a dialectic against the experts, and often joins unproven conspiracy theories or relies on the dialectic of the foreign enemy instead of self-criticism to explain any event contrary to their interests.

The fall of the moon is the latest example: it was immediately accompanied by rumors blaming the investment fund giants BlackRock, Citadel and Gemini for having caused its collapse for profit, to the point that they had to go out and publicly deny it.

Had they been responsible, the narrative that considers the future rise of cryptocurrencies to be irrevocable would have remained more guarded.

Now, the trauma that luna and the algorithmic

UST, two of the ten largest players in the market – together they were worth almost 50,000 million dollars at the beginning of May – have succumbed in just a few hours, weakens the story of their mathematical invulnerability.

And it raises doubts that collide with the techno-futuristic discourse that assumes that they will replace traditional money, or at least, they will revolutionize the world as we know it.

“There is as much speculation as in

start-ups

”

Within the industry, the implosion has generated large material losses, but also a feeling of stupefaction.

Raúl Marcos, CEO of the cryptocurrency platform Carbono.com, admits that he has been amazed at the speed with which two projects until now considered cutting-edge have disappeared, although he draws positive lessons.

“I was surprised by how well the rest of the ecosystem has held up.

The biggest fear was that it would be a kind of Lehman Brothers that would trigger a cascading effect and bring down other

and

—cryptocurrency trading platforms—but none have gone down or had performance issues,” he notes.

Marcos perceives that many were looking forward to such an event to further demonize cryptocurrencies, but believes that risk is inherent in their progress.

“Of course there is investment and speculation, just like in

The world of technological innovation is that anyone with an idea can try something new.

If he succeeds, he will add value to society and the world.

And if not, you will have lost years of your life and investors' money."

In addition, he responds to those who accuse him of selling false expectations.

“We have wonderful things in crypto, like payment systems, artists making a living from this [with so-called NFTs], loans for people who don't have banks…”

More information

Cryptocurrencies: the money revolution that (for now) is just speculation

Perhaps the most important difference between the crypto world and

is the presence of small investors.

There are frequent stories that speak of only one in ten new technology companies succeeding, but their financing comes above all from professional investors with the ability to diversify into multiple projects, talk to their managers, study their numbers and get enough revenue from the one that comes out ahead. to deal with disappointments.

Individuals, on the other hand, dedicate their savings to a few cryptocurrencies, if not to a single one —the famous mistake of putting all the eggs in the same basket—, and they have less quality information, which reaches them largely through social networks, family or friends, and not because they know first-hand the initiative to which they entrust their money.

That, together with the aforementioned emotional link, complicates decision-making and favors social alarm when thousands of people lose what they invested, something that does not happen with professional investors in

.

“It is never good to invest with passion.

Especially with products as cold as coins,” says Neut.

How much are cryptocurrencies really worth?

The roller coaster can be a thrill ride.

But also terrifying if you notice any indication that on the descent you can crash.

Bitcoin, the largest cryptocurrency, and on paper the safest, is today worth about 500 billion dollars, a capitalization similar to that of Facebook.

The price of a bitcoin today hovers around $30,000, less than half of the $68,000 in November, its high.

A year ago it exceeded 40,000.

Two years ago, it did not reach 10,000.

And until five years ago it did not exceed 1,000.

These oscillations prove the difficulty of knowing its real value.

Why not $200,000 per bitcoin?

Why not 100?

Is it possible to value something that does not have income, expenses, losses or profits?

Leopoldo Torralba, an economist at Arcano Economic Research, with 25 years of experience in investment banks, points out that it is not easy to value.

“We have never understood the prices.

A currency has value as long as one believes that it will be exchanged or will actually be used as a means of payment in a general way.

As they do not deliver dividends like stocks, they do not give coupons like bonds, nor do they provide rental returns on real estate, it is an asset that moves only by supply and demand.”

That is, it goes up only because someone buys more expensive, or it goes down because someone else sells cheaper.

For Torralba, the business of a currency that is hardly used for transactions —Tesla announced that it would accept bitcoin to buy its cars in the US, but rectified only 50 days later—, is as useless as that of a mobile phone operator that did not offer coverage to the devices of its subscribers.

"The world uses euros, dollars, visa and mastercard because they know they are accepted," he insists.

Neut, from BBVA Research, agrees on the impossibility of predicting a target price.

“There is no way to value cryptocurrencies.

It is a 100% speculative product”, ditch.

In his opinion, that does not imply that they will disappear.

“There is a lot of speculative asset that maintains its value over time.

Not all of them collapse or burst like a bubble.

Gold and art are two examples.

What is the value that a 150 million Picasso produces for me, which in many cases is kept in a security vault without being appreciated by anyone?

No contagion to the system

Despite the fact that, as Neut says, it is not ruled out that it remains in that gray area for years or decades, one of the most bitter divisions in the investment world is the one that separates those who predict a meteoric rise in cryptocurrencies from those who predict your next funeral.

If the worst scenario occurs and they sink completely, can we expect a contagion to the real economy?

Torralba is blunt: “Its value is negligible in the global economy.

Being an asset perceived as very high risk and highly speculative for most agents, its weight in portfolios is very low”.

Neut expresses himself in similar terms, although he warns of a potential transmission route: “There is no risk of contagion to the system today.

The problem would come if the habit of borrowing to buy bitcoins spread.

In that case, if it collapses, I cannot return it, and it would generate a domino effect, but it is something that regulators are monitoring.”

The blow, therefore, would be borne by cryptocurrency investors — 300 million people, according to the Binance platform — who would have no authority to turn to in order to get their money back.

And the crypto states, for now only El Salvador and the Central African Republic, that accept bitcoin as legal tender.

A bursting of what some consider a bubble swollen by greed and speculation would not necessarily mean the end of crypto assets, just as the puncture of dotcoms

far from that of internet companies.

Quite the contrary.

Years later the great giants that today dominate the network were born.

But it would mean a rethinking: their successors or what remains of them could have a very different approach and valuations than the current ones.

If the myth of technological infallibility has been dismantled by the bankruptcy of Luna and UST, that of its status as a refuge value against inflation has not been better off either.

Most western countries face an annual inflation close to 10%, but if instead of leaving their savings in a boring bank account without remuneration they had put them in bitcoins, today they would have 33% less, and in addition they would continue to suffer that 10% of price increase.

The trend was already negative before the moon crash.

When the Federal Reserve began to raise interest rates, cryptocurrencies showed that they are far from being a decentralized asset and unrelated to the decisions of large organizations, and like the Stock Exchanges, they are signing a 2022 to forget.

The end of cheap money, a litmus test

Just as many point out that many of the checks delivered by the White House —first with Donald Trump, and then with Joe Biden— to tens of millions of Americans to encourage consumption during the pandemic ended up invested in cryptocurrencies, the end of the stimulus and cheap money present a litmus test that threatens to start an opposite trend.

That of the investor Warren Buffett that when the tide goes out is when it is discovered who swam naked.

Its bad moment in the market contrasts with its growing public presence.

Marketing to promote them is increasingly aggressive.

The home court of the Los Angeles Lakers is now the Crypto.com Arena.

Bitpanda recently displayed a huge advertisement on Madrid's Gran Vía and is one of the sponsors of the Mutua Madrid Open tennis tournament, one of the capital's major sporting events.

Personalities such as the actor Matt Damon or the footballer Andrés Iniesta have starred in advertising campaigns.

Companies like MicroStrategy and Tesla are among the first to have bought bitcoins.

Billionaires like Twitter founder Jack Dorsey and the world's richest man Elon Musk openly promote them.

All of this is serving as an argument for those who defend that the adoption of bitcoin continues, and even compare its growth rate with that of the Internet in the 1990s.

Their hopes are that the consolidation of bitcoin - towards which many of the former moon owners are now turning their heads in search of a supposedly safer haven - will make it an increasingly less volatile asset, which would make it easier for more institutional investors to they will be added without fear to the current lurches.

Paradoxically, that would expel those who are only looking for the hit that will make them millionaires to retire and leave behind the heavy office hours behind other riskier cryptocurrencies.

Cryptocurrencies became, at their peak, a three trillion dollar business.

Today, all of them, almost 20,000, are worth 1.2 billion.

For its defenders —or believers—, it is a technological innovation destined to change our relationship with money that will provide human beings with financial freedom exempt from the dictates of central banks.

For its detractors, an expensive speculative madness —in the purest style of the Dutch tulips of the 17th century— that hardly anyone understands and will leave millions of people without financial culture or with a too lax concept of risk without money.

After losing his investment in the South Seas Company bubble in 1720, Isaac Newton went on record about the difficulty of getting it right when it comes to investing.

“I can predict the movement of heavenly bodies,

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