The Decline of Cryptocurrencies in Five Questions

Confidence appeared to be returning on Friday morning as the roughly 19,400 currencies in existence rose 10% to total nearly $1.3 trillion, according to CoinMarketCap.

We asked Martin Lalonde, President of Investissements Rivemont, to explain the current situation and what it means for the future. This portfolio management firm offers not only traditional investment strategies but also options like cryptocurrencies.

How can you qualify what we experienced this week?

It’s a breakdown what happened this week. This is not uncommon in the cryptocurrency world. It’s an asset that’s hypervolatile. It’s part of the game, and if you decide to invest in it, you have to be able to get through the occasional moment.

What happened?

The reality is that we don’t know for sure yet. Simply put, there is one major stablecoin (stablecoin), the TerraUSD or UST that is supposed to follow the US Dollar, so 1 token for 1 US Dollar. It is a project with an algorithm connected to a cryptocurrency called Luna. Each TerraUSD holder was promised a value of one US dollar in luna.

Recently, there have been big sellers of TerraUSD at the same time, and the project has lost this one-to-one. People don’t trust the token anymore while the idea is to have security. Many people had invested in the project, but the Luna lost all of its value. It was worth $120 in April and is now worth zero. We’re talking about $40 billion in value destruction.

The project was a failure. This has shaken confidence in the cryptocurrency market.

What do the next few days have in store for us? Have we hit rock bottom?

If I could answer you with certainty, I would be very rich. Over a three to ten year horizon, I think this type of volatility is normal. You can’t have an asset that makes 40,000% over 10 years without being very volatile.

There was an interesting stabilization in the market on Friday. We have seen a significant recovery. Recently, cryptocurrencies have been correlated with the NASDAQ index [à forte composante technologique, NDLR]. I think NASDAQ has lost enough. We also have to put things into perspective: all the other financial markets have not fared well in recent weeks.

“I wouldn’t characterize that [les jetons stables] as a real threat to financial stability, but they are growing very rapidly and pose the same kinds of risks that we have seen in bank run-ins for centuries,” said US Treasury Secretary Janet Yellen.

Do you think there is a systemic risk? Is this another example of regulators needing to speed up virtual currency oversight?

If there is a loss of capital, it can impact other asset classes as that money is not available. The fact remains that the cryptocurrency market is currently not big enough to lead when compared to the bond, stock or commodity markets.

People working in virtual currencies try to be monitored as little as possible. On the other hand, if we want this asset class to become more serious, additional oversight, particularly in the United States, is inevitable. A winning situation would be if the authorities allowed enough leeway for new projects while fighting money laundering and cybercrime.

It has been said that cryptocurrencies can act as a safe haven like gold in an inflationary environment. Finally, what can we conclude from this?

That doesn’t work, but the same goes for other tools that we thought were financial hedges against inflation. Gold has also fallen significantly. On the other hand, I think bitcoin is still a great safe haven asset over the long term and a great way to have value in your portfolio anywhere in the world.

Bitcoin has lost 80% of its value multiple times since its birth. Those who were the big winners are the ones who made it.

This interview has been edited for brevity and clarity.

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