According to recent reports, the prevailing crypto “winter” wiped out over 70,000 Bitcoin millionaires during 2022. Pria Masson walks us through the rise and fall of crypto, fad investing and risks.
A basic reading on investments will tell you that, investments, like most aspects of life, are about balance. So, where there are returns, there will be risks. In fact, the definition of returns is “the price provided for the risk borne by investing in a given asset”. However, how many people actually think about this? Well, they do think about it, but usually when the risks seem very high. Ironically, when the returns seem high, the idea that the risk could be just as high, seems to be far from the mind.
This is exactly what we seem to be seeing with one of the most interesting developments in the last decade– cryptocurrencies, NFTs and other similar asset classes.
As per data from CoinGecko 1, in November 2021, the total value of cryptocurrencies surpassed USD3 trillion. Around the same time, one Bitcoin was worth approximately USD68,000 and the Non Fungible Token (NFT) market was worth close to USD25 billion2.
What drove this super rise?
A number of complex factors were at play and the need to create new systems was probably the most prominent. The meteoric rise of new companies, even Crypto banks with double digit interest rates, created an entire ecosystem. The returns from these were so attractive that cryptocurrencies was commonplace dinner discussion and it seemed like the easiest and most interesting way to “get richer quicker”.
What did the sceptics think?
The sceptics, myself included, were very cautious. One reason is the basics of economics and investment – do not invest in that which you do not understand in depth. And depth, in a system which is under a decade old, seemed impossible. These investments seemed to fall into what’s been called by many as “fad investing”.
What is “Fad Investing”?
It is when a few prominent people, identify an investment avenue, the returns are great, and everyone jumps in. What happens next? The interest generates more demand and the size of the pie “appears” to be getting larger and larger. But, sometimes, it could be just a bubble.
Why the fall?
For Cryptocurrencies, the dominoes were lined up, and one after the other, the pieces started to fall. Stablecoin TerraUSD crashed, NFT crashed, FTX closed, Celsius Bank (a crypto bank) filed for bankruptcy. As of the end of 2022, almost all these avenues had eroded more than 50 percent in value. The total value of the world’s cryptocurrencies tracked by data company CoinMarketCap is now around USD850 billion, down from USD3 trillion a year ago. The average value of cryptocurrency trades per day has fallen from USD131 billion in May to USD57 billion in December — a drop of more than half, according to CoinGecko2.
“Winter shall come” is a truism across all investment avenues. Whether equities, real estate, bonds or any other form of investment, undoubtedly, there will be a phase of decline. However, the propensity of the human mind to act as though the outcomes will be favourable, and to justify logically risky actions – that’s what makes life interesting in so many ways. For now, economies and governments have to deal with the aftermath of the current phase – job losses, income losses and regulatory questions. However, whether this is the winter of this asset class, or the “ice age”, only time will tell.
1 coingecko.com/en/global-charts
2 washingtonpost.com/business/2022/12/18/crypto-winter-ftx-collapse-bitcoin-prices
Pria is the Founder of GMI Advisory WLL– a Management Consultancy that helps companies with their strategy, business plans, presentations and preparing for investors . You can visit her company website http://www.gmiadvisory.com to connect with her. You can follow Pria at her Instagram handle @guide_my_idea
