The Tribune

ACTIVTRADES WEEKLY

By Ricardo Evangelista

www.activtrades.bs

BITCOIN is the original cryptocurrency, created in the aftermath of the 2008 global financial crisis when someone known as Satoshi Nakamoto (their real identity is unknown) published the blueprint. The aim was to bypass traditional financial intermediaries and end central banks’ control over money, relying instead on a peer-to-peer system supported by blockchain, which is the name given to cryptographic information distributed across a decentralised network.

The appeal of cryptocurrencies is understandable. Income inequality is rising, the social state has shrunk, and globalisation has caused the loss of millions of jobs in the west. The financial system’s greed and lack of morals brought it close to collapse, almost taking the global economy down with it in 2008. All these factors created an appetite for magical solutions. In politics, the answer was populism. In finance, bitcoin.

Speculators embraced bitcoin, propelling its value from $0.0025 when the first transaction was recorded in 2009 to almost $70,000 at the end of 2021. Those who got in early can certainly boast about their foresight.

This astonishing rise accelerated as the COVID-19 pandemic triggered a speculative fever in the financial markets. With non-essential workers confined at home, economic activity abruptly halted, forcing authorities to deliver unprecedented stimulus. The money printers at the world’s main central banks worked around the clock generating an extraordinary abundance of cash. At the same time, the costs of borrowing dropped - in some cases into negative territory - as did the yield generated by bank accounts. This combination of factors was like a shot of adrenaline for the financial markets, and risk appetite jumped through the roof.

The share prices of Zoom, Netflix, Amazon and other big technology names, all well suited for the work-from-home economy, reached stratospheric highs, despite many of these companies being unprofitable. Such was the level of stimulus injected into the economy that, between April 2020 and December 2021, the stock market behaved as if pumped up by steroids. The S&P 500, the main US stock index, gained more than 86 percent during that period, reaching fresh maximums almost every week.

These goldilocks conditions for risky assets did not just support the rise of stocks. They also provided the ideal environment for a crypto boom. Between April 2020 and November 2021, the price of bitcoin surged from $6,138 to $68,976. It was a gain of almost 1,000 percent, fuelled by central bank and fiscal stimulus.

The party eventually had to end, and It happened in late 2021. Consumer prices started to rise and the Federal Reserve, worried about inflation, switched off the money printers and hiked borrowing costs. The impact of these measures was soon felt in the financial markets, and bitcoin crashed from $70,000 to $18,000 in less than seven months.

Cryptos do not have intrinsic value, and will always be exposed to shifts in risk appetite. Gains can be quick and big, but so can losses, and this is bad news, especially for late adopters and inexperienced traders.

Having said all that, it is unlikely bitcoin will completely crash. Early adopters are still in profit, and several large institutional investors also placed big bets during the pandemic. Both will probably hold their positions, at least for now. Still, the risks are high. Those confident enough to speculate in cryptos should manage their money carefully, only using funds they can afford to lose. Finally, portfolio diversifications, including risk-hedging assets such as gold, or even cash (dollars), are advisable.