Cryptocurrencies Have Risen so Much

Cryptocurrencies have risen so much in value over the last year of the COVID-induced market craze. Bitcoin has increased by around fivefold, while many other crypto projects have increased by substantially more. Even hesitant Wall Street banks have begun to dabble in the space.

Bitcoin has risen over 50% in two weeks thanks to a raging rally that began earlier this month. Various pieces of news fueled it, such as George Soros’ family office revealing that it owns some. But the most powerful force was the growing certainty that the federal government would approve. The first bitcoin-based exchange-traded fund allows retail investors to buy in more easily. Including through 401 (k) accounts. (Trading in the ETF might begin as soon as Monday.)

However, skeptics persist, and among them are many of the same prominent investors who predicted the 2008 financial disaster.

Hedge-fund tycoon John Paulson, who made $4 billion in 2007 by shorting subprime mortgages. He believes cryptocurrencies have risen and are a bubble that will burst. No one is paying attention to crypto’s leverage, says Michael Burry. The quirky hedge-fund manager in The Big Short (Christian Bale). He’s been predicting bitcoin’s demise for months. To add insult to injury, Professor Nassim Taleb, author of the seminal book The Black Swan. Bitcoin is said to be a Ponzi scheme.

Other Famous Critics

The economist, Nouriel Roubini, was one of the few in his industry to correctly foresee the financial catastrophe. And hard-money adherent Paul Singer, who predicted the “wipeout” of mortgage securities at a major investing conference in 2006.

He feels cryptocurrencies are a scam, but is sick of hearing about them. “Pulling out your hair is an option, but only if you have hair left,” Singer said in his first-quarter investor letter this year. The day will come when we may say, ‘We told you so.’

But bitcoin bulls have grown more enthusiastic since then. Amid fears that the Securities and Exchange Commission, the US Treasury, and even the Department of Justice may crack down on the cryptocurrency industry. Individual and institutional investors alike have kept purchasing. When China banned all cryptocurrency activities on September 24, bitcoin declined less than 6%. A single bitcoin now trades for approximately $60,000. (Up from around $4,000 during the broader market fall in March last year).

Investors in cryptocurrency have also been undaunted by the fact that the name “currency” is a misnomer in the case of bitcoin. “Nothing is priced in bitcoin,” said Roubini in a Goldman Sachs report. While Starbucks allows customers to pay with bitcoin, no one actually does.

The Crypto Mania

Cryptomania is “the ultimate love child” of those two eras, according to Josh Wolfe. He is also a co-founder of the venture capital firm, Lux Capital. The cryptocurrency sector combines the technological innovation of the dot-com bubble with the leverage of complicated securitization and regulatory evasion. (Wolfe believes the revolutionary blockchain infrastructure will survive despite the many cryptocurrency advocates and pumpers.)

One of the longest-running bitcoin bearish tales concerns Tether, the Hong Kong-based stablecoin with over $68 billion in circulation. Stablecoins are designed to be risk-free assets that lubricate crypto-trading platforms globally. Regulators and investors alike have long questioned Tether’s collateral and its viability. Bloomberg has revealed that some Tether reserves may be in Chinese commercial paper. A risky asset class following the collapse of Evergrande.

America is currently trying to regulate stablecoins and their possible influence on the financial system. For example, Gensler calls them “poker chips” and argues they should be regulated by the SEC. Cryptocurrency marketplaces “will not end well” if unregulated, he predicted recently. The Treasury Department is also considering regulating Tether. Which is being investigated by the Justice Department for money laundering and tax evasion.

The Crypto World is Clearly Nervous

More regulation certainly worries the cryptocurrencies have risen so much. “What could crypto go wrong? “What may go wrong is bad regulation, which will slow things down,” Michael Novogratz. He is also a founder of Galaxy Digital and a former hedge fund manager. Told delegates of Anthony Scaramucci’s SALT conference in New York in September. At the same conference, Bridgewater Associates’ Ray Dalio stated he believes regulators will “kill” bitcoin if it becomes too popular.

Spitznagel concurs. “I see why governments must combat this. They will probably shut it down.” Notably, bitcoin is a decentralized global network that no single government or even a group of states can “shut down.” (Bitcoin is theoretically alive and well as long as there are computers running the program worldwide.)

Even a US bitcoin prohibition a la China may not be realistic. To make matters worse, Gensler’s regulatory hawkishness has included exclusions for bitcoin. His department is ready to let a bitcoin-futures ETF trade on a US market next week. Former Fed chairman Jerome Powell has stated that he did not plan to outlaw it.

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