Crypto

The fall of cryptocurrencies in five questions

Confidence seemed to be back on Friday morning, with about 19,400 existing currencies up 10% to nearly $1.3 trillion, according to CoinMarketCap.

We asked Martin Lalonde, President of Investissements Rivemont, to explain the current situation and what it means for the future. This portfolio management firm offers not only traditional investment strategies, but also options such as cryptocurrencies.

How to qualify what we have seen this week?

What happened this week is a collapse. This is not unusual in the world of cryptocurrencies. This is an asset that is hyper volatile. This is part of the game, and if you choose to invest in it, you should be able to survive those moments that happen from time to time.

What happened?

The reality is that we don’t know for sure yet. Simply put, there is an important stablecoin, TerraUSD or UST, that must follow the US dollar, i.e. 1 token for 1 US dollar. This is a project with an algorithm associated with a cryptocurrency called Luna. Each TerraUSD holder was promised a value equal to one US dollar in Luna.

At the same time, there have been large sellers of TerraUSD recently, and the project lost one to one. People no longer trust the token, and the idea is to have security. Many people have invested in the project, but the Moon has lost all value. In April it cost $120 and now it costs zero. We’re talking about $40 billion in value destruction.

The project turned out to be a failure. This is what has shaken the credibility of the cryptocurrency market.

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What have the coming days prepared for us? Have we reached the bottom?

If I could answer you with confidence, I would be very rich. I think that over a three to ten year horizon, this kind of volatility is normal. You cannot have an asset that returns 40,000% over 10 years without being very volatile.

An interesting stabilization was observed on the market on Friday. We are seeing a significant rebound. Recently, cryptocurrencies have been correlated with the NASDAQ index. [à forte composante technologique, NDLR]. I think the NASDAQ has lost enough. We also need to keep things in perspective: all other financial markets have not been doing very well in recent weeks.

“I would not characterize [les jetons stables] as a real threat to financial stability, but they are growing very fast and represent the same risks that we have seen for centuries in bank runs,” said US Treasury Secretary Janet Yellen.

In your opinion, is there a systemic risk? Is this another example that regulators need to speed up their oversight of virtual currencies?

When there is a loss of capital, it can affect other asset classes because that money is not available. The fact remains that currently the cryptocurrency market is not big enough to be a leader compared to the bond, stock or commodity markets.

People working with virtual currencies try to be subject to supervision as little as possible. On the other hand, if we want this asset class to become more and more serious, more scrutiny is inevitable, especially in the United States. It would be a win-win situation if the authorities left enough leeway for new projects while fighting money laundering and cybercrime.

It has been said that cryptocurrencies can act as a safe haven, like gold, in an inflationary environment. What can we finally conclude from this?

It doesn’t work, but the same is true of other funds that we have thought of as financial hedges against inflation. Gold also dropped significantly. On the other hand, in the long run, I still believe that Bitcoin is a great safe haven and a great way to add value to your portfolio, wherever it is.

Bitcoin has lost 80% of its value several times since its birth. Those who have been big winners are those who have gone through it.

This interview has been edited for brevity and clarity.

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