What’s happening with cryptocurrencies?

Please note: Reference to specific companies in this article is not an opinion as to their present or future value and should not be considered an investment recommendation, investment advice or a personal recommendation.

Cryptocurrencies have seen their value plummet in recent weeks, generating dramatic media headlines in the process. As retail investors around the world are left dealing with the fallout, many are now wondering if the bubble has burst. Or is this merely a short-term blip?

What we know so far

Bitcoin, the largest and most well-known of them all, broke an important technical support when it traded below $20,000 (Bloomberg, 18 June 2022). That valuation was its previous cycle’s all-time high, and the level hadn’t been breached since late 2020 (Bloomberg, 18 June 2022).

More broadly, the sharp drawdowns in ‘cryptos’ have had cascading effects on the entire blockchain universe. Last week alone, a leading crypto lending platform halted withdrawals, while a prominent crypto hedge fund appeared to be facing insolvency.

A ripple effect

Outside of blockchain and the crypto world, the stress in digital currencies is having real macroeconomic repercussions for two core reasons:

• First, while cryptos are relatively small on their own ($2.9 trillion at the peak in November 2021¹), hundreds of billions in unrealised gains have been lost in the process. When combined with the ongoing weakness in more traditional stocks and bonds, the negative wealth effect is significant.
• Second, virtual losses have translated into real job losses. Last week, crypto exchange Coinbase announced its plans to lay off 18% of its workforce (around 1,100 employees) in 2Q22 citing the economic downturn². In fact, tens of thousands of jobs could be cut across the industry in the coming months as a result of the crypto crash. At the margin, crypto-driven wealth and job destruction will likely weigh on consumers’ willingness and ability to spend, putting additional pressure on the global economy. That being said, in our opinion, this is far from a systemic issue.

In conclusion

Cryptocurrencies are unsuitable for private client portfolios, for reasons including (but not limited to) a lack of global regulation, and a high degree of unpredictability. Even professional investors need to stay cognisant of the fact that any crypto holdings in today’s environment will invariably be subject to large volatility swings, and significant drawdowns.

Current events reinforce the need for caution but that’s not to say things won’t change in the future. Blockchain and the technology underpinning digital currencies, have longer-term potential but a number of issues need to be addressed. It’s an area we continue to monitor closely.

In the meantime, we recently shared our thoughts on the other digital asset generating a lot of hype at the moment – NFTs. You can read all about them in this article, or you can listen to our recent podcast on the subject.

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