Crypto Analytics

Crypto Cleanup Shows the Boring Is Back

When Coinbase first listed on the public stock markets last year, it was quite a moment for the crypto exchange itself and for the broader digital asset industry — the moment crypto went behind the velvet rope and into the Wall establishment Street was recorded.

Regardless of the fact that the company’s own regulatory filings say it depends on a small number of customers, or that it says employees “generally don’t follow the same compliance customs and rules as financial services firms.” It was practically a case of “shut up and take my money”. The listing gave Coinbase a market cap of $65 billion, which at the time was the value of Intercontinental Exchange, the owner of the New York Stock Exchange itself.

The stock was a dud from the start. Investors who got in on the first day were already down 25 percent earlier this year. But after a truly dismal week marked by dismal first-quarter results and a disclosure error that forced CEO Brian Armstrong to apologize and deny the company was going bankrupt, shares are now down 80 percent fallen from their opening price on debut.

The “shut up and take my money” approach is dead, crushed by the Federal Reserve’s decision to pull the punch and raise interest rates. The new, more challenging mantra is “Cool story bro. Prove it.” This is a theme that runs through all financial markets. Stories without substance no longer sell.

This is perhaps most evident in the crypto asset market, on which Coinbase is dependent. Bitcoin, Ethereum, and a small group of other coins are attracting the most attention in this space, along with hoax coins, which are typically named after Elon Musk’s pets. (Not really.)

For years, the largest of these tokens have attracted buyers, generally small investors, but also the odd libertarian billionaire and some hedge funds and private wealth accumulators.

The stories behind these purchases were varied. Some true believers say crypto is a new global currency. Give it time, they say. Well, it’s been around now, more than a decade in fact, and I still can’t use it to buy a white americano or other everyday necessities. Others have claimed that bitcoin’s hard cap on the number of coins in circulation makes it an inflation hedge. Well, again, inflation is at a 40-year high in the US and crypto is still falling in price. This is a purely speculative asset, and that’s fine as long as speculation is in vogue. It is not anymore.

Perhaps the biggest storytellers in crypto, however, are operators of so-called stablecoins, which are said to be pegged one-to-one to the dollar. Generally, this is done by accumulating reserves equal to the value of the tokens in circulation. However, details were lacking on what these reserves consist of, particularly from Tether, the biggest player in this space. We asked Tether this week for some specifics on how it is handling tens of billions of dollars in US Treasury bonds. It declined to elaborate, saying information constitutes its “secret sauce.” Tether’s $1 peg has already taken a serious hit over the past few days. This kind of hand-waving is unlikely to convince the doubters.

But the new, more cynical and inquiring tone in the markets is not limited to the wild west of crypto. Stocks in the futuristic technology sector were also hit particularly hard. “It looks like disruptive cash-burner stocks are leading the market lower,” said Charles Cara of Absolute Strategy Research.

The renewed sentiment among investors means companies face greater urgency to move from big disruption plans to old-fashioned cash generation.

“The stocks that don’t make it have no value, while those that do will have slower growth (albeit more earnings), which supports lower valuations,” he said. “In any case, this does not suggest a long-term recovery for these highly valued stocks.”

Quite simply, the game has changed, led by the rise in US Treasury yields – the flip side of a price decline as inflation remains tough and central banks hike interest rates.

“With higher interest rates, investors are less willing to fund cash-flow negative companies,” said David Older, Carmignac’s chief equity officer. The 10-year Treasury yield, which is up from 1.5 percent late last year to 2.9 percent now, is the key metric he’s monitoring here, he says.

“How much of the expansion in multiples was sustainable and valid, and how much was due to low interest rates and home trading stocks? There’s a lot of pain in the market,” he added.

Favorite emerging stocks of the lockdown era, particularly from companies that didn’t realize they were riding a short-term wave, are no longer working. Instead, Older is looking for opportunities in sectors like cybersecurity and software — companies that have real and steady cash flows to their credit.

It can be less exciting than getting into a disruptive stock early or picking the next Amazon. But there are reasons why oil major Saudi Aramco eclipsed Apple as the world’s most valuable company this week. While high energy prices are driving the stock price, so is boring selling.

katie.martin@ft.com

Source: Crypto News Austria

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