Crypto Doldrums- Bitcoin, Ethereum, and COIN Move Lower

The bloom has been off the rose in the cryptocurrency arena since the November 10 record highs in Bitcoin and Ethereum. The NASDAQ listed Coinbase (COIN) shares, a leading cryptocurrency exchange, in April 2021. On the listing day, the shares traded to a high of $429.54, a level that put the market cap at nearly $100 billion. Over the past months, cryptocurrencies and COIN shares have not delivered for investors. 

Cryptocurrencies have been the best performing asset class over the past years. In 2021, the market cap rose by over 182% after moving nearly 300% higher in 2020 and 53% to the upside in 2019. On December 31, 2021, the cryptocurrency asset class’s market cap stood at the $2.084 trillion level. On May 11, at $1.364 trillion, it was 34.5% lower in 2022. COIN shares have done even worse, falling more than 77% in 2022. 

Bitcoin and Ethereum have dropped in 2022

Bitcoin had already declined from the November 10, 2021, all-time high by December 31, 2021. 

The chart highlights the drop from $68,906.48 on November 10, 2021, to $46,329.11 on December 31, 2021, a decline of 32.77%. At the $31,217.62 level on May 11, Bitcoin had dropped another 32.6% since the end of last year.

Ethereum fell from $4,865.426 on November 10 to $3,688.877 per token on December 31, 2021, a 24.18% decline. At $2,301.293 on May 11, Ethereum was down 37.6% in 2022. 

COIN Shares are having even more problems

COIN had already been falling before Bitcoin, and Ethereum reached their respective peaks. COIN traded to a high of $429,54 on April 14, 2021, the listing day. On November 9, 2021, it traded to a lower high of $368.90 and was at $252.37 on December 31, 2021, 31.59% below the November 9 high. 

The chart shows at $56.00 on May 11; COIN was down 77.8% in 2022 as the shares far underperformed Bitcoin and Ethereum. 

Another victory for a short seller

In March 2022, famed short-seller Jim Chanos called COIN a “bubble stock,” saying he expects fee compression as competition increases across cryptocurrency exchanges as a reason why COIN will not achieve profitability in 2022. Chanos went on to say, “We basically think Coinbase is over earning; if you do the numbers, their revenue base is roughly 3% to 4% of their custodian assets, their customer assets.” The bottom line is that Chanos’s analysis means their earnings level is unsustainable.

The short position has yielded substantial profits for the short seller at $56 per share. Meanwhile, there could be a floor for COIN shares as the market cap has dropped from nearly $100 billion on the listing day to the $15 billion level on May 11. Other leading exchanges like the Chicago Mercantile Exchange (CME) and Intercontinental Exchange (ICE), with $72 billion and $54 billion market caps, could look to expand into cryptocurrencies with a COIN acquisition if the market cap continues to decline. 

A generational conflict over the asset class

The debate over the future of the cryptocurrency asset class continues. At the recent Berkshire Hathaway annual carnival in Omaha, Nebraska, Warren Buffett said he would not pay $25 for all the Bitcoin in the world because “it doesn’t produce anything tangible.” His partner Charlie Munger went further, saying, “In my life, I try to avoid things that are stupid and evil and make me look bad in comparison to somebody else—and Bitcoin does all three. In the first place, it’s stupid because it’s likely to go to zero. It’s evil because it undermines the Federal Reserve System…and third, it makes us look foolish compared to the Communist leader in China. He was smart enough to ban Bitcoin in China.”

Technology innovators disagree. Elon Musk and Jack Dorsey have been huge supporters of cryptocurrencies, and Jack Dorsey believes Bitcoin will replace the US dollar. Peter Thiel, a co-founder of PayPal (PYPL), Palantir Technologies (PLTR), and Founders Fund, said Warren Buffett is Bitcoin’s enemy number one, calling him a “sociopathic grandpa.”

The generational debate over cryptocurrencies is likely to continue and add volatility to the asset class. 

Risk-reward has improved- Only invest what you can afford to lose

Any market participant that bought cryptocurrencies for the first time in November 2021 when they were peaking is nursing lots of losses in May 2022. Cryptocurrencies moved to a lower low, below the January 24 low on May 9, with Ethereum near the January 24 bottom. 

Meanwhile, since 2010, substantial selloffs have been golden buying opportunities in the asset class. At the current prices, the reward versus risk dynamics has dramatically improved for the asset class for anyone looking to dip a toe into the crypto arena. 

Cryptocurrencies threaten the government’s control of the money supply. Charlie Munger referred to the undermining of the “Federal Reserve System.” Control of the money supply is not something governments will surrender easily.

Meanwhile, cryptos represent the evolution of the fintech revolution, as they are the children of blockchain technology that improves efficiency, speed, and record keeping. The debate will likely lead to two-way price variance in Bitcoin, Ethereum, and many of the other over 19,400 cryptocurrencies. Anyone considering dipping a toe into the asset class must accept that the potential for substantial rewards comes with significant risks, and any crypto investment carries the risk of total loss. If Charlie Munger turns out to be correct, the cryptos could go to “zero.” If Jack Dorsey is right, they could soar. Risk-reward favors a prudent approach, but it is much better at the current prices on May 11 than those seen in November 2021.