Downfall of cryptocurrencies part 2
Since we are constantly receiving inquiries from many sides on the topic of cryptocurrencies in the current environment, we would like to provide a short addendum to our article “Downfall of cryptocurrencies” from January 2021 at this point. At that time, we had warned of further bankruptcies due to incomplete regulation, missing safety nets and, above all, a lack of intrinsic value.
What has happened since then?
The marketing strategists of cryptocurrencies, trading platforms, funds, etc. have set off incredible fireworks. Promises were made of “doubling the investment within a year”, “0.5% return per day”, opening of “income accounts”, which by the term alone suggests fantastic prospects. Nothing of the grandiose announcements was implemented in reality -- nothing at all. But much worse: Not only were no returns delivered, in numerous cases bankruptcy followed and with it the total loss of the invested capital. It was not uncommon for retirement savings accumulated over an entire working life to vanish into thin air.
Examples? Celsius, Compute North, Envion, Terra, Vauld, Voyager Digital, Three Arrows Capital, Nuri…with El Salvador even a whole country was dragged into the abyss. Its president Bukele introduced Bitcoin as the national currency, but the propagandistic slogans were quickly followed by real disillusionment.
The series can easily be continued if necessary, and there is no end to it. Currently, FTX is under fire; here, too, careless investors are threatened with the loss of the invested capital. Due to cross-investments, there is also the danger that the bankruptcy of one company will drag several others into the downward spiral.
Cryptocurrencies are also increasingly coming under fire from a sustainability perspective. An article in manager magazin dated 02.10.22 states, among other things, “The global bitcoin climate damage from 2016 to 2021 is estimated at a total of twelve billion US dollars, according to the study. Finally, the team compared the climate damage caused by Bitcoins with that of other products. Damages from cryptocurrency averaged 35 percent of market value from 2016 to 2021, according to the study.” This is not surprising, considering that in order to mine new coins, computing power is still becoming more complex, thus requiring massive amounts of energy.
In general, it can be said that cryptocurrencies are severely battered, even bitcoin, as the representative of this segment par excellence, suffers from massive losses:
To make matters worse, there are regular reports of dubious and shady market participants who have discovered the crypto market for themselves as a solution for money laundering, terrorist financing and other criminal acts. The door is still wide open for abuse, which is a thorn in the side of many states (also under the aspect of a parallel currency that cannot be controlled). The list of countries where bitcoin is banned, for example, is getting longer and prominently headed by China.
What does this mean for you as an investor?
When you buy a stock, you are investing a company. This may have real estate, a fleet of vehicles, functioning production lines, a well-filled warehouse and ideally a well-filled order book. If the company achieves economic success in terms of profits, you will benefit from rising share prices as well as from the annual dividend.
When you buy cryptocurrencies, you are buying hot air. There is no intrinsic value that you can bet on. We are also not talking about investment here, but high-risk speculation that can lead to the total loss of your savings.
We understand every single investor who succumbs to the allure of such speculation. Especially in a year like this one, where stock and bond markets are sometimes under massive pressure, it is perfectly human to “try out” an investment form where there seem to be so many winners.
Whenever high profits are tempting, it is crucial that you remain calm. Do not get infected by hypes. Do not be blinded by surreal promises of returns. Cryptocurrencies are pure speculation. If you want to put money in your hands here, ask yourself before investing how you will fare should the capital be gone -- psychologically as well as financially.
What does it mean for us as asset managers?
Of course, we follow the issue closely. After all, it is your mandate for us to find solid investment options for your assets and to implement them accordingly. So far, we have decided against any activities in cryptocurrencies and see the developments not only this year as confirming our line. The regulation of the market is too intransparent, we are too critical of many providers, and the networks of individual players on the market are too opaque -- all in all, the risks that we would have to take for you as a customer are simply too high and unacceptable for us.
We can certainly imagine that there will be room for digital currencies in the medium term. However, in order to make the market segment attractive for us in the sense of a serious investment, it will take more than just a shakeout, which is bound to happen as a result of the current distortions. Even if a certain independence from state supervision and a means of payment that can be used worldwide at any time is justified in a fully digitalized world, the most recent events make it crystal clear that it will not work without some form of regulation.
We will stay on the ball for you and keep you up to date.
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