2022.07 The Taiwan Banker NO.151 / By Shi Zong-ben
The Line Between Finance and Value is BlurringBanker's Digest
Bitcoin has dropped by 32% from the beginning of 2022 to June 17, to US$ 20,555. If calculated from the highest price in the first half of the year of US$ 31,784, it has dropped by 35%; the price in New Taiwan dollars has fallen from about 1.36 million yuan to 615,000. In particular, on June 12, it fell 15% in a single day, and another 11% on June 15. The second-largest cryptocurrency, Ethereum, fell from a high of US$ 3,521 to US$ 1,025, shocking the market. The LUNA coin has plummeted 99% this year, and now the Bitcoin price slump has driven the whole virtual currency market to plummet. The American business software company MicroStrategy spent a total of US$ 3.97 billion to buy nearly 130,000 bitcoins. When Bitcoin fell to $22,603, its current book loss was at least U$ 1 billion. Worse, it even pledged 19,466 bitcoins to Silvergate in April for US$ 200 million, and is now under pressure to top up its collateral. El Salvador feels the pain as Bitcoin, Ether tumble The Singapore-based hedge fund Three Arrows Capital (3AC) pledged more than 211,000 Ether because it borrowed Bitcoin for investment. Block Fi, an American crypto asset platform, made a margin call, so it sold at least 14,000 Ether for cash. The stablecoin USDD, which is maintained by the TRON DAO reserve algorithm, lost parity with the US dollar on June 13, and fell to a minimum of US$ 0.91. In order to stabilize the price, the reserve bought US$ 50 million in Bitcoin on June 11 (at about US$ 28,000), and TRON (TRX) plummeted two days later. The cryptocurrency lending platform Celsius suffered a run, and issued a sudden announcement suspending all withdrawals, transactions and transfers on the platform. The US cryptocurrency exchange Coinbase announced 1,100 layoffs, or 18 percent of its workforce. Others such as Gemini, the exchange founded by the Winklevoss brothers, laid off 10 percent of its staff, and lending firm BlockFi cut about one-fifth of its workforce. Cryptocurrency exchanges, lending platforms, and investment holders have been hit hard, showing that a chain reaction is taking place. Who knows which other cryptocurrency institutions will fail by the end of June and July? Meanwhile, El Salvador had announced Bitcoin as legal tender in 2021. Originally, on May 10, when Bitcoin was at a price of US$ 31,000, it “bottom-fished” 500 coins, but on June 14, Bitcoin fell below US$ 26,000. François Villeroy de Galhau, president of France’s central bank, said at the Davos forum that El Salvador’s experiment using Bitcoin as legal tender shows just how risky it is to accept cryptocurrencies. The myth of fundamental value: scarcity does not mean value creation After the collective slump of cryptocurrencies, one might ask again, what is the nature of cryptocurrencies? Are they currencies? A few years ago, as cryptocurrencies were on the rise, Morgan Stanley’s chief global strategist Ruchir Sharma said that digital currencies could end the dollar’s dominance, or at least they posed a significant threat to the dollar’s hegemony. A Financial Times headline more ominously suggested that “Bitcoin’s rise reflects America’s decline.” Within a few years of Bitcoin’s creation, criticism of the decentralized virtual currency emerged. Warren Buffett likened Bitcin to the Dutch tulip craze of the 17th century. Economist Nouriel Roubini even called Bitcoin the “mother or father of all scams and bubbles.” Central bankers have questioned the actual function of Bitcoin. At the Davos forum on May 23, Kristalina Georgieva, president of the International Monetary Fund (IMF), said that Bitcoin may be called a coin, but it is not money, and it is not a stable store of value; furthermore, some cryptocurrencies are more akin to digital-age pyramid schemes in that they are not backed by any physical assets. Villeroy of the French Central Bank, commented that a currency must be a reliable payment method. Someone must be responsible for the value, and the medium must be generally accepted as a means of exchange, which is not the case with cryptocurrencies. Cryptocurrencies need to be convertible into USD “Scarce supply is not enough to create value. Cryptocurrencies must be redeemable for US dollars before the public will be willing to invest. It is impossible for ordinary people to use cryptocurrencies as payment tools,” said a fund manager with NT$ 1 billion on hand, who declined to be named. In fact, paying with cryptocurrencies is expensive and slow. It takes about 10 minutes to verify a Bitcoin transaction, and the recent average fee about US$ 20. However, on February 26, after Russia invaded Ukraine, the US, UK, and EU announced that certain large Russian banks would be expelled from the Society for Worldwide Interbank Financial Telecommunication (SWIFT), Bitcoin rose from US$ 37,000 to a high of US$ 47,000. It turned out that Russia turned to Bitcoin as a way to evade Western sanctions. The head of the Russian Energy Commission said that Russia would be willing to accept Bitcoin and gold to pay for oil and gas exports to China, Turkey and other countries. This incident was reported not only by business media such as the BBC and Business Insider, but also by the well-known The Diplomat. Russia’s move seems to challenge the definition of cryptocurrencies by central bankers in Western countries. People have been discussing the relationship between cryptocurrencies such as Bitcoin and real assets and financial systems since the 2008 global financial crisis and the advent of Bitcoin. Early on, cryptocurrency was popular in the underground economy and emphasized decentralization. In recent years, however, others believe that its architecture and price behavior are increasingly like a real currency. The governments of Russia and El Salvador regard it as legal tender. Two points of contention about cryptocurrencies in the market are worth highlighting. First, the linkage between cryptocurrencies and capital markets is getting stronger, but if Bitcoin is viewed only as an investment asset, like art, the holding price will not be strongly correlated with traditional instruments like stocks and bonds. However, academic research comparing Bitcoin prices with the S&P 500 index over 5 years (November 24, 2013 to February 25, 2018) found a linear correlation coefficient of 0.78, which is strong. A report by the firm Arcane Research found that Bitcoin’s correlation with the S&P 500 index hit a record high in May. Babel Research also found that the 120-day and 240-day correlations between Bitcoin’s movements and the S&P 500 have remained high since May 2020; the 30-day correlation reached nearly 0.8 on June 6, the highest level since July 2017. Many investors have long viewed Bitcoin as a potential hedge against rapid price increases or a falling dollar, but this is starting to change as the stock market and Bitcoin start to move together. The impact of Fed rate hikes Second is the reaction of cryptocurrencies to central bank rate hikes. One of the hottest debates before this June was central bank rate increases. Generally speaking, with better bond yields, the market sells stocks with worse yields. What about Bitcoin and other cryptocurrencies? Paradoxically, in 2020, when the RBA and the Fed announced rate cuts to stabilize domestic and global markets, Bitcoin, gold, and the S&P 500 index saw an unprecedented synchronized rise, but after the Fed announced a rate hike in 2022, Bitcoin also gained 2.4%. “Because more and more international funds are also investing in cryptocurrencies, stock markets and currency markets, which were previously independent, have become interlinked” said Lin Yu-zheng, who has been hired by many securities companies as a lecturer on options. Lin has worked over the past several years to understand cryptocurrencies. In April 2021, Canada will lead the world to list three Ethereum ETFs, namely Ether ETF, CI Galaxy Ethereum ETF, and Evolve Ether ETF, with a scale of US$ 1.1 billion. On May 11, Australia also launched a Bitcoin/Ethereum ETF. Lin is proficient in options investment strategies and can form various spread trading portfolio positions. Applying his trading experience in options, Taiwan index futures and the stock market to cryptocurrencies, however, “The strategies I have been using for more than ten years don’t work for cryptocurrencies, and I found that traditional technical analysis simply doesn’t work.” Cryptocurrency has attracted increasing capital investment since its advent, increasingly linking it with the “centralized” financial market. Although its price behavior is inconsistent with technical analysis of stock prices, it fully reflects human nature, particularly fear and greed. Interestingly, critics of cryptocurrency within the existing financial system, as well as those who support it for spending and investment, are both increasingly blurring the line between finance and value.