‘Where is the floor for bitcoin?’ – and other urgent questions we need to ask about crypto

Another question is whether a crash in crypto might destabilise the world financial system, writes Hamish McRae

A week ago, bitcoin was trading at over $30,000 – now it’s around $22,500 (Getty)

The bears are still in charge. After the headlong plunge of all risky assets on Monday there was a momentary pause for breath. But there was little sign of a return in confidence in the highest-risk end of the spectrum: cryptocurrencies.

A week ago, bitcoin was trading at more than $30,000. It is currently struggling to stay above $22,000, having lost more than half its value this year. Ethereum, the second-largest crypto, has done worse. It seems to have steadied around $1,200, which leaves it 68 per cent down on the year to date. The total market capitalisation of all cryptocurrencies is now below $1 trillion according to CoinMarketCap, back to the level of January 2021. At the peak last November, the market valued them at just under $3 trillion, so nearly $2 trillion of wealth has been destroyed in little more than six months.

This experience raises a string of questions. For some of those, we already know the answer. For example, are cryptocurrencies an effective hedge against inflation? No, absolutely not. The most traditional hedge of all, gold, has not been a perfect store of value. It was trading at $1,880 an ounce a year ago and was actually down to around $1,826 on Monday, the lowest for four weeks.

What seems to have been happening is that it has been pushed down by a combination of the strength of the dollar and gold holders needing to sell to pay for their losses on other assets. Last week it was almost exactly where it was a year earlier. But if gold is an imperfect hedge, crypto has been a sight worse.

Another question is whether a crash in crypto might destabilise the world financial system. The answer to that seems also to be no. We have had pretty much of a crash, and that is miserable for people who have lost money. But it is not systemic, in the sense any of the big banks are endangered. Most investors in crypto are individuals rather than institutions. Some research published by Blockworks last month noted that institutions had started to move in, but I suspect that the reverses since then will have meant that crypto has become a very difficult product to sell. Besides, the market is too small. The report notes that global equities and global bond markets are both worth around $125 trillion, more than 100 times the size of crypto.

But there are other questions to which we are still utterly unable to give any sensible answer. Top of that list must be: where is the floor for bitcoin? Scott Minerd, chief investment officer for Guggenheim, told CNBC at the Davos meeting last month that he could see it falling to $8,000. That was a prescient bear call as it was trading around $30,000 at the time, so hats off to him. But we don’t know. He also said that most crypto is “junk” but that bitcoin and ethereum would survive.

That is another brave call. It may be right, but I am troubled by the environmental costs of running bitcoin in particular. Is it sustainable to have an asset that uses as much energy as Argentina? Gold needs some energy to mine, but none to put in a safe. Fiat currencies – dollars, euros, pounds etc – need relatively little energy to run. It has been calculated that one bitcoin transaction needs more than 2,000 kilowatt-hours of electricity, whereas 100,000 Visa transactions consume less than 150 kilowatt-hours.

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So while it is perfectly possible that the main cryptocurrencies will have some long-term role, it is equally possible that high energy costs will kill them. We cannot possibly know.

There is an argument that the technologies behind crypto will be useful even if the current uses of those technologies are not. It is a seductive argument, reinforced by distrust of fiat currencies in a world of high inflation. But if you look at markets this week, what do people want when they are scared? It is dollars. The Federal Reserve is widely expected to increase interest rates when it meets on Wednesday, despite fears that this might tip the US economy into recession.

The Bank of England is similarly expected to raise rates on Thursday. So the central banks are starting to fight back, raising the question for all investors: why hold assets that produce no return when you can get interest on bonds and dividends from equities? You can justify holding some gold as a hedge, but there is not much case for holding some crypto.

Hamish McRae’s new book, The World in 2050, has just been published by Bloomsbury