A New Day for Crypto?

May 16, 2024

I just finished reading Michael Lewis’s latest book, Going Infinite: The Rise & Fall of a New Tycoon. It tells the story of cryptocurrency wunderkind Sam Bankman-Fried—SBF to his friends—and his fall from crypto grace. The story is fascinating and frustrating, like watching the final seconds of the Super Bowl LVIII on continuous replay—if you’re a San Francisco fan. If you are at all interested in Bitcoin and cryptocurrencies, I highly recommend the book. But be prepared. Nothing in the book will give you warm fuzzies about the crypto market.

The stunning collapse of SBF’s crypto empire in November 2022, and his subsequent convictions for fraud, conspiracy, and money laundering in November 2023, was not an isolated event. According to the FBI, crypto fraud losses in 2023 totaled $3.9 billion, up 53% from 2022. In addition, the SEC brought 46 enforcement actions against crypto market participants in 2023. Fraud is endemic to the crypto world.

Even investors in so-called “safe” cryptocurrencies have suffered devastating losses. The TerraUSD collapse is one of the best-known examples. TerraUSD was a type of cryptocurrency known as a stable coin, meaning its value was pegged at one dollar. Luna, a sister currency, was supposed to underpin TerraUSD’s stability by providing a release valve in times of volatility. Unfortunately, it didn’t work out that way. On May 7, 2022, TerraUSD came under selling pressure, and its value sagged from $1.00 to $0.98. Spooked by the decline, investors fled for the exits. A week later, the price of TerraUSD had collapsed to $0.10, and Luna had plummeted from $116 to a mere fraction of a penny. Investors were estimated to have lost $40 billion.

In my nearly 40 years in investing, I know of no other market so rife with corruption, controversy, and massive meltdowns as the global crypto market. Huge fortunes have been made, lost, and stolen. Still, hardcore “crypto bros” (yes, they are predominantly male) continue to believe the hype.

In January of this year, the US Securities and Exchange Commission approved Bitcoin exchange-traded funds (ETFs). You can now buy Bitcoin in a regular brokerage account using any of several available ETFs. The most actively traded Bitcoin ETF is the iShares Bitcoin Trust (ticker: IBIT), with a 30-day average daily trading volume of 31.3 million shares. At IBIT’s price as of this writing, that equates to a dollar volume greater than $1.1 billion per day. The combined daily dollar volume of the top 7 Bitcoin ETFs has surpassed $1.7 billion.

Some Bitcoin fans think the launch of Bitcoin ETFs signals brighter days ahead for crypto, like a vote in favor of its institutional acceptance. The irony here is especially pointed, since Bitcoin was originally a reaction against traditional financial institutions and the inept regulation leading to the 2008 financial crisis. But the SEC’s acceptance of Bitcoin ETFs is less a loving embrace than it is an act of expediency. Bitcoin is here to stay, and regulators are going to have to deal with it. Yet, even after approving the ETFs, SEC chair Gary Gensler said, “Bitcoin is primarily a speculative, volatile asset, that is also used for illicit activity, including ransomware, money laundering, sanction evasion, and terrorist financing.” He wasn’t wrong.

Crypto ETFs may be new, but crypto problems are as old as humanity itself: corruption, fraud, self-dealing, and greed. Fortunately, three simple principles will keep you out of trouble:

  • Never invest in what you do not understand.
  • Limit your bets to limit your losses.
  • Ignore the hype and think for yourself.

 

 Please see important disclosure information here.

Steven C. Merrell  MBA, CFP®, AIF® is a Partner at Monterey Private Wealth, Inc., a Wealth Management Firm in Monterey. He welcomes questions that you may have concerning investments, taxes, retirement, or estate planning. Send your questions to: Steve Merrell, 2340 Garden Road Suite 202, Monterey, CA  93940 or email them to smerrell@montereypw.com.