The following is an amended version of the Nov. 9 Daily Contrarian. This briefing and accompanying podcast are released to premium subscribers each market day morning by 0700. To subscribe, visit our Substack or Supercast.
These are difficult times in cryptocurrency markets. The industry is dealing with unfolding fallout from the FTX meltdown and digital currencies are tanking. Bitcoin has dropped by about 20% so far this week.
There is plenty of Schadenfreude (a German word you should be familiar with) to go around over this crypto meltdown. It’s been a long time coming. Some of these crypto bros have been so obnoxious on the way up (and continue to be annoying AF with their denial on the way down) that you can’t help but root for the entire industry to incinerate in a giant mushroom cloud.
That’s all fine and good, but there could (and likely will) be second-order effects that transcend the goofy world of cryptos. That’s the concern, that this could lead to a liquidity event in other asset classes. So far stocks are holding up fine. But it’s early days as they say. You figure somebody somewhere is going to take a massive markdown on their crypto portfolio that will require selling in other assets. Moves like this are very rarely contained.
Remember that investors hate uncertainty more than they hate bad news. So far all the uncertainty has remained isolated to cryptos. At current levels, that may even be justified, but does anybody think $16k is the bottom for Bitcoin? A drop of 20% is nothing for an ‘asset’ with no intrinsic value that is backed by nothing other than an algorithm and the seemingly blind faith of its adherents. So yeah, the risk that crypto just dies is real, as Noah Smith writes here.
To summarize: It’s hard to see how the crypto damage is a) contained and b) over. But that’s just one person’s opinion. Do your own research. Make your own decisions.