Why I would sell any cryptocurrencies now.
As you all know, I am no fan of crypto currencies. I have been proven wrong for long, but I have not changed my mind. The reasons are many, but the urgency to avoid any crypto currencies has only increased. This is not any investment advice but rather my opinion.
The crypto bubble is shaping up to be the biggest financial bubble ever, probably even exceeding the US housing bubble in 2007/8. Contrary to the housing bubble, when this one blows up there are only shattered dreams and broken promises left behind (the housing bubble still had brick and mortar which was not valued at zero).
Bitcoin, the first and most dominant crypto currency, is everything it pretended not to be. It was supposed to be cheaper to do transactions than through the traditional banking system, but it is very expensive. As usage of Bitcoin increases, the transaction fees are going to increase. Each transaction also takes an extraordinarily long time to be processed, because of the internal transaction approval process. While Bitcoin approves one transaction, a company like Visa manages to do 10 000. One of the big critics of “fiat” currencies (or traditional currencies like the Rand, USD, Euro, etc) was that central banks had the power to print new money, thereby creating money out of nothing. In contrast new Bitcoins are created by solving a mathematical formula with a finite possible solutions. But because of the steep rise in the Bitcoin price, users use their Bitcoins in fractions. The problem is that you can always do an infinite amount of divisions of a number, therefore the real supply of Bitcoin as a medium of exchange is infinite. And by its very nature, the value created by Bitcoins and other cryptocurrencies is out of thin air. There was no more efficient use of capital, it is just a belief that someone else would pay more for one coin tomorrow than you have paid today.
Bitcoin was also heroed as the ultimate safeguard of wealth because every transaction is recorded forever in its blockchain, therefore in theory at least, each coin would always be possible to trace. For such a “safe” asset it is amazing to hear how often they get stolen by hackers attacking and stealing wallets. The blockchain does not seem to discourage the underworld from using it as a means to extract ransoms.
The volatility of Bitcoin is a further failure for it to qualify as a currency. Imagine you are a distributor of imported goods, and all the trade is in Bitcoin. You place the order when one Bitcoin is trading at $15 000, but by the time you receive the goods it is at $25 000, you will be out of business very quickly. That’s why, in general, over a long period, currencies appreciate or depreciate by the inflation differential between two countries plus a bit of country specific risk. Even these small swings put a lot of pressure on the margins of importers and exporters, using a currency that swings wildly is like a death knell.
You might argue that Bitcoin was the first, and therefore has got a few teething problems that are addressed by the 8 000 plus Cryptocoins and Tokens listed today. Some might have tried, but largely failed. The volatility of the value of Bitcoin was addressed by the invention of stable coins. But they are flawed because no stable coin is backed 100% by a single currency. If it is not, it can never move in unison with the currency. If it is backed by a basket of assets, then you have a big allocation risk and possibly a counterparty risk. Both are unsuitable to keep anything stable. Many “stablecoins” are only backed by a fraction of a fiat currency, making them highly volatile especially when it comes to a downturn.
Some Cryptocurrencies do offer an interest rate, so that the holding cost is not purely negative. However, an interest rate above 2% in the USA is hardly achievable, so anything higher than that is doubtful, unless obviously it is issued in its own currency. This leads us to one of the biggest problems with Cryptocurrencies: most issue volumes are entirely at the issuer’s discretion. Whoever invented the cryptocurrency can decide how much to issue, which is precisely what Bitcoin initially tried to avoid.
There have been some remarkable innovations made in the Cryptocraze: the technology of blockchains is a game changing innovation for the safekeeping of documents in a digital world. I could imagine it being used in the title deeds office or in the personal medical fields. Adjustable personal contracts, where a money transaction is coupled with an individual contract that is automatically recorded makes the field of money lending a lot more personal, streamlined and quicker. You would rather want shares in the companies that issue the cryptocurrencies than own the issued currency. Why? Simply put, you are stuck in a legal limbo if you own the currency and expect a return based on the performance of the company. As a shareholder you are the provider of capital and in turn have certain rights and obligations, as a debt provider you have a contractual legal framework to back your claim. It is uncertain if there is any legally enforceable obligation towards Cryptocurrencies issuers. It might just be the cleverest way to finance a new start-up.
The great innovations made are also reasons why central banks all over the world are experimenting with their own virtual currency. They don’t like cash, because it is hard to trace and it is expensive. The blockchain technology addresses both problems. They are surely not going to allow any local rivals and I do expect Central Banks to crack down on many cryptocurrencies. In South Africa, our Reserve bank has already announced that any money taken out of the country via the unregulated Crypto market is seen as an illegal money transfer which bypasses the exchange control regulations, thereby making it a criminal offense. There is another reason Central Banks would want to control the Crypto issuers. An unregulated money supply leads to too much liquidity, which in turn leads to inflation, which is the biggest killer of wealth. Seeing that inflation typically affects poor people more, the Central Banks will have a moral obligation to intervene.
The Central Banks are not the only ones looking at the Cryptomarket critically. The Covid-19 epidemic has forced all governments to borrow heavily. Each finance ministry has got big holes in their budgets to fill, and taxing Cryptotrades seems very attractive. That means they are going to investigate much more closely if you hold any cryptocurrencies. If the same tax rules apply as those that apply in share trading, you will have to pay your marginal income tax rate on any profits made on each trade (assuming you hold the currency for less than 3 years). Tax avoidance is a criminal offence.
Lastly, the criminal underworld loves using Cryptos, and therefore the law enforcement agencies hate them. They are upping their game though and have been able to trace a few extortions paid. They are going to put pressure on politicians to come up with laws to control the use of Cryptos.
Dangers that lurk in the Cryptotrade and that the headwinds seem to get stronger, which is why it is a good time to exit any positions.