Bitcoin’s Plummet Exposes Crypto’s Flaws as ‘Safe Haven’

There’s an old maxim in investing and in markets in general: You only know who’s swimming naked when the tide goes out.

And so, for crypto, the tide’s decidedly out, and the view is less than flattering.

By Thursday evening, the price of bitcoin, that marquee name, the standard bearer for the industry, stood at $5,600. That’s a far cry from the roughly $8,000 price that had marked the beginning of the week, and a 30 percent drop is leagues worse than the mid-teens drop that has marked a broad equity index like the S&P 500.

Cointelegraph reported Thursday that just in the last day as much as 25 percent of the cryptocurrency market’s total market cap disappeared as traders fled the space. As for some examples: Ether slid by 27 percent, Bitcoin Cash lost 31 percent. The list goes on.

There may be any number of forces at work. Panic selling? Perhaps. And perhaps something else is afoot.  Earlier this week, the site coingape.com reported that one reason the price of bitcoin has plummeted has been due to “PlusToken scammers” liquidating their holdings across several exchanges. PlusToken has been an alleged Ponzi scheme, where a South Korean-based exchange offered investors high returns — and then made off with the $3 billion in funds given over to them in order to buy various cryptos.

Proponents of crypto have said that they exist as an alternative to fiat money, as an alternative to central bank policy, and against traditional stores of value. That argument seemingly got a thumbs down this week, as investors crowded not into the promise of the digital disruptors to the basic underpinnings of commerce, but into bonds. Gold, which has held a store of value for, well, thousands of years, has held up remarkably well in a miserable week, down a (relatively paltry) low single-digit percentage.

The outsized plummet in cryptos speaks to just how swiftly sentiment turns and speaks to the fact that there is no floor, really, to a panic such as has been seen in this space.

The fact remains, and the chaos in the age of the coronavirus serves as a reminder:  Say what you want about the tools central banks use in an effort to manage their various home countries’ economies. The banks, of course, set interest rates, guarantee liquidity, and step in, sometimes clumsily, to address imbalances in times of stress, acting as lenders of last resort. None of these things are evident in the peer-to-peer “promise” of bitcoin and other cryptos.

No safe haven here from the bad guys either, as CipherTrace last month said in its 4Q 2019 report that more than $4.5 billion was lost to crypto scams in 2019. Coinmap estimates show that as of this month, roughly 19,000 venues accepted cryptocurrency payments across the globe — not exactly massive inroads, and hardly enough to make the case that a retail revolution is on the horizon.

We started off this piece with a quote, and we’ll inject another one here, a paraphrase of a Churchill chestnut: Central banks (and traditional stores of value) offer the worst form of monetary policy and protections against investor panics … except for all the others, including cryptos.