It’s January 2022 and a lot of cryptocurrencies are crashing. The stock market is also fading [September 2023 update: this scenario is happening again!]. Since cryptos are a risk asset, when the stock market falls cryptos usually fall as well. The Federal Reserve has noted that they plan to raise interest rates given the high rate of inflation. As money becomes more expensive, cryptos should fall in price. As they should.
Free Money, Free Problems
Cryptos have risen in price so quickly because money was free due to the pandemic stimulus. It seems everyone was caught up in the frenzy. There was no ceiling for price. But what are cryptos, essentially? They are intrinsically worthless promises.
As worthless promises, great care should be taken by those promoting them. So many young people are placing a lot of their money in cryptos when the reality is that they need that money for real assets like housing.
I see a lot of crypto pumpers like Kevin Rose and Gary Vaynerchuk leveraging their following and fame to foist cryptos on unseasoned investors and the young while they are left holding the virtual bag when the air comes out of the bubble. Remember, there is an unlimited amount of digital assets. Also, a seemingly unlimited amount of cryptocurrencies that can be created. Tight supply is an illusion. We aren’t yet at a tipping point where cryptos are used everywhere in our lives. It’s ok to pump to the future promise of digital money, but we aren’t in the future yet.
I’m not saying digital money or NFT smart contracts aren’t the future, but individual cryptos priced at stratospheric levels are not sustainable in the short term. Ask yourself, during the 2008 financial crisis, would purchasing imaginary money or jpegs of gorillas seem like a smart idea? If money was scarce, would you think cryptos would be a good investment? Or if others are struggling to pay bills, they would skip meals to buy crypto?
There seems to be so much money in the financial system that we don’t have real problems anymore. No more real struggles. We accept the imaginary as real.
Cryptos are fair-weather assets. Buy accordingly.