Ask Wall Street’s C-suite types about cryptocurrencies, and they all admit they’re getting into them one way or another. But keep asking questions, and they’ll tell you something else, too: the market is ripe for a crash.
The crypto crash, according to top executives I’ve recently spoken with, could be happening right now with the recent slide in prices. Or it might occur next month or later this year.
Either way, the catalyst will be something the $2 trillion market for digital currency has thus far avoided: Serious regulation that will quash exuberance over crypto. Of course, many true believers in the digital space will scoff at anything traditional Wall Street says. The movement was created in the aftermath of the 2008 financial crisis as an alternative to the then-faltering Wall Street banking system.
Bankers like JPMorgan Chase’s Jamie Dimon were skeptical before embracing crypto and the decentralized blockchain technology it uses to verify transactions. With some fits and starts along the way, Bitcoin, the most popular cryptocurrency, rose to nearly $65,000 early this month, spurred both by speculation and investors looking for an alternative currency because pandemic money printing was debasing the dollar. Nothing, it appeared, could stop it from topping $100,000 before year’s end.
Then came rumors that crypto-hating Treasury Secretary Janet Yellen was about to go on a holy war against digital currency, causing a flash crash last weekend. And late this past week, on top of reports that President Biden is looking to hike capital-gains taxes for the rich, there were rumors that Yellen wants a jaw-dropping 80 percent tax rate for crypto. That helped send Bitcoin tumbling near the $49,000 mark on Friday.
If you believe market history often repeats, and there’s lots of evidence it does, consider what came out of the dot-com bubble of the 1990s. When the bubble burst, the losses were staggering.
Companies like Pets.com came to market with high valuations only to fall into insolvency. The Nasdaq reached a then-high of 5,000 in March 2000, then dropped to less than 1,500 two years later, triggering $5 trillion in investor losses.
As we all know, the bursting of the bubble didn’t last forever. The money was made back and then some. And Bitcoin and other cryptos such as Ether are gaining more mainstream usage. You can buy a Tesla with Bitcoin. Investors now prefer Bitcoin to gold as an inflation hedge, and with all the Fed money printing, distrust of the traditional banking system remains high among sophisticated investors.
That’s why Goldman Sachs just announced it will offer digital currencies to its clients and restarted its digital-trading desk. JPMorgan, run by one-time skeptic Dimon, has gone a bit further creating its own digital coin to rival Bitcoin, and a derivative that would track crypto prices.
But also like the dot-com implosion two decades ago, signs of a crypto bubble reaching its breaking point are everywhere. Even with a recent sell-off, Bitcoin hovers around $49,000 — up 600 percent in just the last year compared to the “paltry” 51 percent increase in the S&P.
Yet you still can’t buy a slice of pizza with crypto, and blockchain technology still isn’t replacing traditional banking anytime soon.
The trigger for the crypto crash could be Washington, many investors believe. For most of its existence, the government allowed crypto to grow largely regulation-free, which helped build the euphoria around its pricing. A likely regulatory burden will knock out at least some of the pricing, but also draw skepticism for the staggering run-up in crypto valuations that we’ve seen this year.
It’s unclear exactly what the top crypto cops, Yellen and SEC Chairman Gary Gensler, have in mind to rein in the market. Wall Street executives tell me they expect increased enforcement actions on specious claims made by crypto sellers and its use in illegal activities.
Others say Yellen and Gensler may seek rule-making that creates barriers to entry, which could slow or prevent more mainstream usage of digital currency.
There is also talk about the government banning crypto altogether for fear that it will become a legitimate alternative currency to the dollar.
More sober minds among those C-suiters I speak to say it’s nearly impossible to ban something that so many people still like. “The horse has left the barn,” a major hedge-fund crypto investor told me.
SEC Commissioner Hester Peirce, known as “Crypto Mom” because of her fierce support of digital currency, recently told Fox Business: “It’s really difficult to ban something that’s essentially a peer-to-peer technology.”
That’s why the smart money believes that, on the one hand, a collapse is coming, and a cold dot.com-like winter is likely to set in for some time. But on the other hand, like the rebirth of tech, crypto will come back because distrust in the government and big banks is here to stay.