Uncertainty is roiling the cryptocurrency market, and crypto companies across the industry are in flux. Cryptocurrencies such as Bitcoin returned to the market last week, but fears of a “crypto winter” persisted. Bitcoin, the world’s most popular cryptocurrency, has given up more than half its value this year.
In general, since late 2021, the market values of digital assets such as cryptocurrencies and non-fungible tokens have declined. Some major lenders such as Celsius Network and Three Arrows Capital have filed for bankruptcy protection amid allegations of mismanagement of risk, while some of the biggest players, such as Coinbase, are laying off staff.
Despite the market turmoil and declining values, some are optimistic about the future of cryptocurrencies. William Kaye, co-founder and managing partner of financial services firm Wilshire Phoenix, which was founded in 2018, said the recent crash does not necessarily signal a crypto crash.
“Our biggest idea is that this time it’s different than previous crypto winters,” Kay told Marketplace Morning Report host David Branchio. “I think one of the things that cryptocurrency investors and all investors should look at is that the cryptocurrency market has been taking a lot of cues from general markets, economic conditions and stocks.”
Below is an edited version of their conversation.
David Brancaccio: Things go up and things go down. But what has happened – what is happening – to cryptocurrencies over the past eight months, can you say they broke the foundations?
William Kay: No, definitely not. It was very interesting. Our biggest insight is that this time it’s different from previous crypto winters. I think one of the things that cryptocurrency investors and all investors should look at is that the cryptocurrency market has been taking a lot of cues from general markets, economic conditions and stocks.
Brancaccio: So general economics. Look, worries about inflation, central bank hikes, money out of the stock market, do you think cryptocurrency is partly caught up in those currents?
Tsai: absolutely yes. If you look at the past six months, or even shorter, the price correlation between the crypto markets and the S&P 500, [or even] Better, Nasdaq, it was pretty high. I think if you anonymize the data, or take out the index or bitcoin or any of the tech stocks, if you just collect the time series, it’s going to be hard to tell if you can tell if it’s bitcoin or against some tech stock. So the interesting thing about this is, even if let’s say we’re in the crypto winter, we won’t get out of the crypto winter unless the overall economic activity improves or the stock market starts to improve. It’s really taking cues from the general market, rather than — and we’ve seen some major events, bankruptcies and events within the crypto space, but it really didn’t, to what you were saying, [been] foundation formation. He showed a lot of flexibility. I think he is waiting for the market to improve in general.
Brancaccio: Ah, the power of the metaphor, you refer to it as “crypto winter”, which means there will be a “cipher spring” so I understand your point maybe it’s not crypto armageddon, that’s not what I’m hearing.
Tsai: of course not. of course not. I think it’s similar to the so-called crypto winters, basic foundation, evolution, technology, dependence [of crypto] It was continuous. And yes, I think we here in Wilshire are very optimistic about the future of cryptocurrency.
Brancaccio: But it must be worrying. When companies like Celsius see this crypto lender now undergoing bankruptcy protection or it appears that the stablecoin is not stable.
Tsai: definitely. [For] Every one of those events is, in our view, “Does this matter? Yes. But at the same time, they aren’t.” Let me explain what we are and what we think. It’s a new technology. Sometimes new technologies fail, but better and newer technology will come and replace it. Actually I want to mention, because you mentioned Celsius, we think this is not a bug in the coding space, per se. This is a bit of a redundancy for all the new and speculative asset classes. This comes from, you know, greed and a bit of a lack of risk management. So that’s kind of a shake from the one that’s been over-levered. This is extended. And I think that’s generally a good thing for the coding space until we come to a better foundation.
Brancaccio: Surely some of this was an obsession, right? However, bitcoin, last November it was $65,000 each, and it’s now down, you know, when we’re talking about less than $20,000. You know, is it like an 18th century tulip? I mean, tulips are still useful, you can put them in your garden, but it’s not a huge investment, or is it a different kind of obsession, you think?
Tsai: Some ideas come to mind. So Bitcoin itself, I’d be worried if the entire crypto space was just Bitcoin, right? But Bitcoin has proven to be resilient and technical, but it has also built the foundation of blockchain technology and that has really expanded that you have ecosystem blockchains like Ethereum or Solana and people are building decentralized finance and apps and products on top of it. And that’s really where we think the very exciting growth in the crypto space is going to be. In terms of your kind of example of crashes or asset bubbles, I think perhaps an interesting example that somehow compares to tulips are NFTs.
Brancaccio: Yes, non-fungible codes, which is a way to verify the authenticity of what you know, for example, a work of art that you can use primarily this digital device.
Tsai: I think the NFT has definitely gone crazy in the last several months and now along with other assets, in terms of pricing, it’s definitely gone down in terms of rates and interest. But yes, at the same time I think that even in the NFT, these are the irreplaceable tokens, their representation of art, they are not totally worthless to me. It brings happiness to people. It’s like art, it’s art, and to me there is value in such tools, especially in terms of blockchain terms of decentralized ownership and partial ownership. It is good that there is also cementation and bubble degassing. But I think they are NFTs that, just like other assets, are here to stay.
Brancaccio: As you know, I hear from you that cryptocurrency can still play a role in a portfolio owned by a sophisticated investor, and an institutional investor. But you know, this has to happen to you, this happens to me, I mean, nephews and nephews say, you know, should I put everything in coding? You know, that’s one thing if someone worth $100 million puts 2% into cryptocurrency, knock yourself out, but when a newbie puts five or ten thousand, that’s half of everything they own. I mean, that’s a different story.
Tsai: No, you are absolutely right. There are risks in cryptocurrency investments, but I think you kind of mentioned it, it comes down to understanding the risks, and more importantly, sizing, sort of how does crypto or any risky investment fit in, and how does it fit into your portfolio, are you comfortable with risk? It certainly shouldn’t be, I think, for 99% of investors, and it shouldn’t be 50% or higher of your total investment portfolio. And I think what should help and I think one thing as we work with regulators is a strong, protective regulatory framework that includes crypto assets that will help sort of help educate investors and provide a level of protection in terms of, for example, educating investors and what they’re really putting into their investment portfolio.
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