The crash in the price of cryptocurrencies is a timely reminder to retail investors to stay far away from this highly speculative asset class. Bitcoin, the most popular cryptocurrency, has lost over two-thirds of its value since its peak in November last year and has wiped out many retail investors. Other cryptocurrencies have witnessed even larger losses with some (Luna) plunging to zero. The current crash was a long time in the making. Cryptocurrencies were initially touted to be alternatives to fiat currencies. Since the supply of a lot of cryptocurrencies is limited by design, investing in them seemed like a good way to protect one’s wealth from inflation fuelled by central banks. But as it became obvious that cryptocurrencies have had very little acceptance as money, crypto-enthusiasts began to argue a slightly different case. Cryptocurrencies were now touted as an independent asset class like gold and silver that could serve as an effective hedge in times of crisis. The crash in the crypto market amidst wider market correction has put to rest the argument that crypto, as an asset class, is as good a hedge as precious metals. There is little reason to believe that cryptocurrencies possess any intrinsic value that can make them serve the role of widely accepted money or as a legitimate asset class such as precious metals.
The acceptability of cryptocurrencies in the wider economy has remained minuscule and there are no signs of their use for purposes other than wild speculation. But the only tailwind that has kept cryptocurrencies rallying despite concerns about their fundamental or intrinsic value has been the climate of easy monetary policy adopted by central banks. Easy money from central banks fuelled the rise of a get-rich-quick industry that depended on selling to a greater fool. Just as Internet stocks and tulip bulbs were the hallmarks of liquidity-fuelled bubbles in the past, cryptocurrencies are the leading symbol of the current bubble in markets. But perhaps the biggest threat to their prospects has been an existential one. Governments and their central banks have been largely unwilling to recognise cryptocurrencies as a legitimate investment asset. They are also unlikely to recognise private cryptocurrencies as they infringe on the state’s fiscal and monetary authority. Moreover, this hostile attitude is at least partly to blame for the shady nature of the crypto industry at large. Retail investors looking for quick market gains have had to plunge into an unregulated space marked by scams and other pitfalls in the absence of a legal environment that can protect investor interests. So, regardless of the investment prospects of cryptocurrencies, a proper regulatory framework may help in protecting retail investors, at least from outright scams.
