A crypto fire is raging… and that's a good thing

By Kim Iskyan

Forest fires are brutally devastating to people and property in their path. But they’re also a crucial part of the natural cycle of forest ecosystems.

Fires remove dead vegetation and alien plants that compete with native species. They stimulate new growth. Fires also trigger some plants to release seeds – which actually improves wildlife habitats. Fires remove diseased, decaying trees, making way for new younger ones.

This year, a forest fire has been raging in the crypto world – and it’s been financially devastating.

The crypto market has shed around US$100 billion of market value in the past month and nearly US$600 billion this year. Bitcoin is down 80 percent from its high. The size of the overall crypto market has shrunk by around 90 percent from its all-time-highs.

Is the crypto market now like Russia in 1998?

I’ve written before about my experience in a market that shed 93 percent of its value, from peak to trough, in nine months. I’m talking about Russia in 1998-1999.

At the time, I was in Moscow working as a stock analyst for a local investment bank. But after that kind of collapse, there were almost no more investors... and in practical terms, there was almost no more market. Trading volumes had shrunk to pocket change. A number of banks had fired their research teams. I was one of the few analysts to still have a job, though at a "crisis discount" salary. I spent more time writing letters of recommendation for Russian colleagues applying to graduate school abroad, than I did analysing Russian stocks.

There was close to zero interest in investing in Russia. Anyone who could leave, did. (It took me a few years to get around to leaving.) It was the point of maximum pessimism.

After the fire comes the quiet

One phenomenon after markets lose 80 or 90 (or more) percent of their value is how quiet it gets. There are fewer articles in the news. No one is checking prices on their phones. And there’s no one sharing hot tips. It’s something worse than pessimism – it’s a kind of unintentional ignoring of a market.

At that time, no one outside of Russia was even thinking about investing in Russia. And today – it seems – no one outside of a dwindling group of remaining die-hard crypto fans are even talking about investing in cryptos.

One way to gauge interest in a subject is looking at Google Trends rankings. This is where Google tells you how many people are searching for a specific subject. Searches for the word "bitcoin" have plunged 92 percent since December 2017.

The difference between Russia and cryptos...

In 1998 and 1999, there were hard assets supporting the value of Russian stocks – the billions of barrels of oil controlled by companies traded on the stock exchange... the trillions of cubic meters of gas... the tons of copper... the acres of retail space.

Even if the perceived value of these assets falls, most of them are (probably) still worth something.

That’s one of the differences between cryptos and Russian shares in 1998. Bitcoin is an idea, and it’s a practical application of blockchain, an incredibly powerful network and permanent record of transactions. But does it have any real underlying value? A lot of people aren’t sure.

The rest of the crypto universe faces a similar challenge. When you’re buying a cryptocurrency, you’re buying an idea, and the execution of that idea. But you’re not buying cash flows or part ownership or anything tangible.

I believe that many of these ideas will change the world... and that the crypto universe is like the internet in 1994. However, the path to making money through an extraordinary idea – also like the internet in 1994 – isn’t clear.

The good thing about corrections

It’s thoroughly awful when a financial fire burns an asset class to the ground. But there’s some good.

Firstly, massive corrections force people to assess what it is they own... or they think they own. During the raging bull market when everything was going up, it was easy to throw some darts at the crypto wall, bag some returns and think you’re a genius. As the cliché goes, a rising tide lifts all boats.

But let’s say a cryptocurrency you own is down 50... 70... 90 percent. If you don’t have the foundation of conviction born of research and understanding to fall back on – to support your belief in an asset that’s collapsed in price – then you’ll capitulate.

You’ll sell, take a loss, go home and vow to stay away. If you understand what you bought, you might buy it back at a lower price. If you don’t... you won’t.

Corrections force discipline on an otherwise broadly unsophisticated market. And that’s only a good thing in the long run.

The second benefit is that these fires clear out the deadwood... that is the garbage of the crypto world. Coins like Bitconnect and Dogecoin – and too many others – took advantage of naïve investors. They made life more difficult for legitimate cryptos with big plans, real programmes and strong managers – because too many investors now associate cryptos with the garbage perpetuated by a small number of cynical fraudsters.

Where does it end? Eventually... it does. As with forests, new vegetation replaces what was destroyed by fire.

It may take a while – the current crypto correction is approaching its one-year birthday – but the crypto world will be all the stronger for it.

 

Kim Iskyan
Kim Iskyan is the publisher of Stansberry Churchouse Research, an independent investment research company based in Singapore and Hong Kong that delivers investment insight on Asia and around the world. Kim has nearly 25 years of experience as a stock analyst, hedge fund manager, political risk consultant, and financial commentator in more than half a dozen emerging and frontier markets. He's been quoted in the Economist, The New York Times, the Wall Street Journal, Barron's, and Bloomberg, and has appeared on Fox Business News, China Central Television, and Bloomberg TV, and has written commentary for the Wall Street Journal, Slate.com, Salon, TheStreet.com, breakingviews.com, and other publications. For more of his insights, Click here to sign up to receive the Asia Wealth Investment Daily in your inbox every day, for free.

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