Backers stick tight amid crypto carnage

18/07/2022 - 10:00


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Bad press amid a cryptocurrency downturn has done little to shake the faith of local observers.

Backers stick tight amid crypto carnage
Bitcoin dropped 57 per cent in value in the six months to June. Photo: Michael Förtsch on Unsplash

Credit crunches rarely bode well for investors, as recent gyrations on world markets attest.

In Australia, one need look no further than the ASX 200, where rising interest rates triggering a 13.46 per cent cut in the total value of the index at the backend of FY2022.

Property owners have fared little better, with CoreLogic data consistently finding housing markets across Australia’s five major capital cities losing steam since April, albeit against a longer-term trend of price growth well above inflation.

It’s a mixed story in Western Australia, where the BN30 index has shrunk by 16 per cent and house prices have continued to grow, albeit slowly, in the six months to June.

Globally, however, the carnage runs deep, with speculative assets arguably smashed amid a bear market. Look no further than the cryptocurrency sector for proof investors have lost some of their risk appetite.

Bitcoin, likely the best-known digital token, has suffered the most, shrinking in value by about 57 per cent in the six months to June. It’s now worth just below $US20,000 per token as at the end of the financial year after hitting an all-time high of more than $US65,000 in November.

Its main competitor, Ethereum, has also suffered, dropping nearly 71 per cent in value during that period as it finished the financial year at about $US1,000 per token.

Few cryptocurrencies have proved safe. At the bottom end of the market, so-called ‘meme tokens’ have suffered big losses, with Elon Musk-approved Dogecoin collapsing by 60 per cent over the past six months.

Even purported stablecoins, which unlike other tokens are pegged to government-backed currencies or existing securities, have proved anything but, with flagship crypto terraUSD collapsing in May Investors in that coin, which is now essentially worthless, are pursuing its creators for damages in US federal court.

It doesn’t take much digging to find out what’s causing the bloodbath. Most obvious is that the era of cheap money is over.

Inflation is set to reach 7 per cent by the end of the year, according to Treasurer Jim Chalmers, and the Reserve Bank of Australia seems intent on having that number return to between 2 and 3 per cent.

Interest rates will need to go up for that to happen, and 125 basis points whacked onto the cash rate over the past two months should go some way towards that goal.

With that tightening of the tap comes a strangling of speculative, high-risk assets.

Innovative but unproven businesses are likely victims. Block, the company behind buy-now, pay-later fintech Afterpay, which listed on the ASX in January at about $170 a share, sunk to an all-time low in mid-June, hitting just $81/share.

It’s since recovered, if only slightly, to above $90/share.

Cryptocurrencies have unsurprisingly followed suit. It’s not as if there weren’t any warnings.

In an address to the Australian Corporate Treasury Association last November, RBA head of payments policy Tony Richards laid out a litany of factors that could reverse years of speculative, demand-driven price rises for digital currencies.

They included a few sleeper issues, not least of all the spectre of regulation likely to follow the energy-intensive process required to run Bitcoin and Ethereum’s servers, likened to that of a middle economy.

Most pertinent, though, was that households could become averse to investing in something with ‘no issuer, no backing and highly uncertain value’ (a statement that should surprise no-one).

Celsius Network, a US-based crypto exchange and loan business with a purported $US12 billion in assets under management, indefinitely froze transactions on its platform last month in part to stave off a liquidity crisis.

It’s clear the appetite for risk just isn’t holding up in a high-inflation environment.

None of this will be a problem for individuals who treated cryptocurrency as a minor, if not high-risk, investment. Australians appear to have largely done that. Roy Morgan polling from April pegged cryptocurrency investing as a ‘novelty’, with just 5 per cent of respondents having their money in digital tokens.

They’re predominantly between 25 and 34 years of age with an average investment of $18,200.

It’s a different story for businesses that have leaned hard into blockchain technology, like West Perth-based fintech outfit DigitalX.

Describing itself as the world’s first publicly listed blockchain technology company, DigitalX as recently as December disclosed $43.5 million in Bitcoin and digital asset holdings against $33.5 million of funds under management.

That amounted to a lifetime performance of 502 per cent growth on its Bitcoin fund and 290 per cent growth on digital assets.

It was a different story by May, when its holdings had fallen to $24.5 million with funds under management thinned to $20.8 million.

Lifetime growth of its Bitcoin fund growth had been slashed to 305 per cent while digital asset growth was down to just 96 per cent.

Lisa Wade, who only came in as chief executive in February, seemed at pains to defend the losses as largely outside of the company’s control in a statement to the ASX last month.

“Our portfolio is relatively defensive with large weights in Bitcoin and Ethereum and selected crypto assets that capture thematic opportunities such as data storage and new emerging chains that are low cost and more environmentally friendly,” she said.

“While the macro-outlook remains uncertain, we do expect continued volatility in all markets and are confident this will represent opportunities for long-term portfolio construction.”

It was a message Ms Wade seemed keen to emphasise just two days later, when she acknowledged volatility in digital markets had negatively affected the company’s share price: down about 70 per cent in the first half of 2022 as market cap was slashed from $71.8 million to $21.5 million.

She appeared eager to highlight the company’s significant work with, and confidence in, blockchain technologies in apologising for shares having traded below $0.03 since mid-June.

“Whilst we cannot control the macro-environment that we operate in, we believe we are taking the right steps in terms of what we can control and that this work will hold us in good stead in the long term,” Ms Wade wrote.

Muted confidence in blockchain technologies, if not market sentiment, was a common theme among those who spoke to Business News for this article.

Among them was Tommy Shin, a tech industry veteran who, since 2017, has run National Currency eXchange Group from Subiaco. Market fluctuations don’t seem to have spooked him.

He’s played a role in several Perth-based initial coin offerings and remains thoroughly sanguine about the future of cryptocurrencies.

Lest anyone accuse him of not putting his money where his mouth is, this journalist cited Mr Shin’s substantial Ethereum holdings which, even after recent woes, would be the envy of most retail investors.

Still, he shied away from being described as an evangelist for the stuff. “Me personally? I wouldn’t put all my savings in it,” Mr Shin said.

“Regardless of whether you’re single or have a family, you have to have a diverse portfolio. It’s the same as everything else.

“You can’t really believe in just one thing.”

Supporting this view was Dirk Baur, finance and accounting academic at the University of Western Australia, who has written extensively on cryptocurrencies.

He framed recent selloffs as a well-trodden part of a broader market cycle.

“When we look at history, it seems just like another dip,” Professor Baur told Business News.

He’s not wrong about Bitcoin having dipped before. Prior to the 2020s, Bitcoin peaked at about $US18,000 per coin at the end of 2017 before crashing over the course of the next 12 months.

Those gains weren’t clawed back until the end of 2020.

“I don’t see why this time will be different. We’ve had these strong corrections before where [major coins] have lost 50, 60, 70 to 80 per cent of their value,” Professor Baur said.

“There is that whole decentralised finance space and the potential of stablecoins to make things more efficient and disrupt traditional financial markets to some degree. That still holds, and this is where we also see value.

“I don’t see how that value has suddenly gone to zero.”

Not that he’s falling head over heels to sell himself as a true believer.

“There are people who are very excited about it, and say it’s all positive and will change the world and … I’m not part of that,” Professor Baur said.

“There are positive aspects to it, but it’s not all great. There are also risks; there’s fraud and scams.

“And then there are people who say that it’s all bad, has zero value, no future, and I’m also not there.”

His cautiousness was widespread among those contacted by Business News for this article.

Few seemed willing to write off the usefulness of digital tokens, blockchain ledgers or cryptocurrencies, while accepting that dramatic price fluctuations may be a reality of the market.

Power Ledger is a decent example of this dynamic.

POWR, the company’s Ethereum-based token, allows customers to bypass energy providers and trade energy between themselves, with the token’s price fluctuating with market trends.

At its peak in November, a single token cost $1.07. It’s priced below $0.40 as of writing.

A spokesperson for Power Ledger didn’t deny the inherent volatility of its digital currency when sought for comment by Business News.

“POWR is a utility token, which has a role in the adoption of our technology,” they said.

“Typically, POWR tokens operate as a kind of access fee to our platform for the application host.

“The better we do as a business and the more partners we onboard, the more the token economy will value our token.”

Others, including Perth Heat boss Steve Nelkovski, seemed keen to distance Bitcoin and its brand from the glut of businesses and coins that have collapsed amid market turbulence.

Bitcoin has been the default payment for the Heat’s players and coaches since November.

They’ve not gone full bore on the stuff; remuneration is still denominated in Australian dollars, with employees given the option to nominate the percentage of their pay that’s invested in cryptocurrency.

While two interrupted seasons meant he was unable to provide specific data on the rollout, including how many staff have been paid in Bitcoin and what percentage of salary expenses had gone towards it, Mr Nelkovski stressed the difference between meme tokens and marquee cryptocurrencies.

“They are two very different things and should be viewed as such,” he said.

Some, like The Perth Mint, have simply proved luckier than their global competitors.

Having brought its self-titled token to market in March 2020, each PMGT is linked to a fine troy ounce of physical gold stored at the mint, which carry the guarantee of the state government.

Unlike other coins associated with stable assets, PMGT appears to be working as intended.

Despite gold hitting a 12-month high of about $US2,500 per ounce in March, it’s remained stable amid inflation-driven market carnage, gaining 3.8 per cent in value in FY2022.

PMGT likewise traded at about $US1,800 in June, in line with the market.

The Perth Mint declined to comment through a spokesperson when contacted by Business News.

Whether this resilience, and by extension confidence, holds over the next five years is a subject of conjecture.

Professor Baur for one noted that decentralised finance tokens rather than digital currencies could become increasingly useful amid tight economic conditions.

“In general, in five years … I’m anticipating that there will be more real applications,” he said.

“That whole decentralised finance space where people can invest, get good interest, or borrow at a lower rate than what is what is currently available, there is potential there.

“I’m expecting that space will grow and take some of that market share from banks and financial markets.”

Mr Shin was a bit more bullish about the market’s long-term viability.

In his view, a bit of turbulence now was a good thing, likening it to the shakeup that precipitated the bursting of the bubble.

“This correction is probably going to be good, to some extent,” he said.


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