Contributed by Doug Walters, Max Berkovich, David Lemire
Reality fired a warning shot at cryptocurrency participants this week as a bank run of sorts caused disruption across the space. The major headlines focused on, so-called, “stablecoins,” which broke their peg to the dollar. But the reverberations were felt across the crypto-space, with Bitcoin down as much as 30% on the week at one point Thursday. It is still early days for cryptocurrencies, and this will not be the last crisis of confidence. For now, these vehicles lack some core tenets of an investment.
It has been a rough patch for cryptocurrencies. The most famous of the cryptos, Bitcoin, was at one point this week down over 60% from its peak (the most infamous, Dogecoin, was off closer to 90%). On Wednesday, TerraUSD, a stablecoin, broke its peg to the dollar. Stablecoins are designed to track real currencies (like the US dollar) and provide some ballast to the broader crypto market by giving crypto traders a safe haven for their cash between trades.
TerraUSD is now virtually worthless. The stablecoin involves tokens called Lunas which can be swapped for Terra coin. They are backed by a central bank of sorts called The Luna Foundation Guard, which holds reserves in assets such as bitcoin. So a digital coin, swappable with a digital token, backed by another digital currency that has no real fundamental value other than scarcity. What could go wrong? Apparently a lot. More concerning for crypto-watchers were the shockwaves. Another, much more influential stablecoin known as Tether, also broke its peg. While it recovered, the episode revealed the “fragile nature of private stablecoins” according to ratings company Fitch.
In our recent whitepaper (Cryptocurrency 101 – A Primer), we highlight the risk of thinking about cryptocurrencies as investments. They just are not there yet. Too often, investors are lured into “exciting opportunities” that lack any real investment justification. At Strategic, one of our guiding principles is to maintain a straightforward approach. We believe that investors should always:
- Understand what they own.
- Know how much it is worth.
- Be able to cash it in easily.
If your investments do not check off these boxes, you are probably overcomplicating your portfolio.
Stocks fell again this week. The S&P 500 is now down over 15% on the year. Cryptocurrencies have fallen much further and have been in the news this week for all the wrong reasons. The “will he / won’t he” drama between Elon Musk and Twitter continued, with Musk putting the proposed acquisition “on hold.” But it is inflation that makes our headline of the week.
Peak Inflation?
On Wednesday, the Consumer Price Index (a measure of inflation) was out, and there was fodder for both inflation bulls and bears.
- For the bears, the headline measure (ex-food and energy) was higher than expected at 6.2%. Analysts had been expecting 6.0%.
- For the bulls, 6.2% was down from the prior month of 6.5%, perhaps signaling peak inflation is behind us.
Inflation is stubborn, and The Fed now has it as its primary focus to bring it down through higher interest rates and reducing its balance sheet. According to The Chairman on Thursday, achieving its target inflation of 2% will cause “some pain.” Stock investors have already felt “some pain” this year.
A not-so-fun fact: Inflation pains are much greater elsewhere in the world. The highest rates of inflation are currently in Sudan (260%), Venezuela (222%), and Lebanon (208%). The highest inflation in Europe is in Turkey (70.0%). Those are sizeable numbers, but Venezuela’s inflation was close to 350,000% just a few years ago!
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