It was never a question of “if” the crypto party would end but “when” the music would stop. Following the collapse of crypto platform, FTX, it is looking increasingly likely that the market is about to call time on the whole crypto party.
Mind you, there are still some diehards out there who believe that what we are witnessing is an interlude rather than the final curtain. Let’s hope that they are investing their own money rather than playing fast and loose with investor funds.
The point about crypto currencies is that it might be an asset, but it is not an asset class. There is a difference. To qualify as an asset class, there must be some way of valuing the entity other than relying on blind faith.
Shares have a fundamental value based on earnings or dividends. Property has a rental yield. Bonds have coupons and cash pays interest. We might argue about the assumptions used in estimating the value of the asset. But that merely boils down to a matter of opinion. Cryptos have nothing other than hope.
Investors who buy cryptos are hoping that someone out there will be prepared to pay more for the digital token after they have bought it. That is the definition of the greater fool theory of investing. In other words, a buyer is hoping that there will be a greater fool who will buy the asset afterwards.
Warren Buffett and his business partner, Charlie Munger, have disparaged cryptocurrencies. Buffett said he would not buy all the bitcoins in the world for $25. Munger went even further. He said bitcoin could go to zero.
What happens next will be crucial to the survival of cryptocurrencies. We could see further falls in their value as holders rush to convert their imaginary money into real cash. Nobody wants to find themselves as last person in line only to find that the cupboard is bare.
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