What is the value of a code? In this case, we are talking about a code that represents a rate of change. In its most literal sense, a cryptocurrency is nothing more than a series of numbers and letters in a database. Its intrinsic value is null because it lacks a concrete existence. After all, it is an abstraction. However, this code can set a price. That is, the code can have a monetary value and can be used as a means of exchange. Then, abstraction can be converted into material wealth. Everything will depend on the social support that the code in question manages to obtain.
In other words, It is not very easy to make an objective valuation of a cryptocurrency. Because the subjective is too intertwined with the objective. This notably increases the complexity of the investment. It is customary to refer to markets of this nature as “speculative markets”. The word “speculation” is not very popular in some circles. Because the term is frequently used in its most pejorative version. So the most sensitive ones are annoyed to hear the word very close to their favorite cryptocurrency. Well, let’s use, then, a more neutral phraseology so as not to offend anyone. Let’s talk about “earning assets” and “non-earning assets”.
Let’s think about a farm. Here we are talking about a company that produces goods and services. The whole business can have a price in the market. But this business is not code in a database. The operation has underlying assets and income. In other words, the farm produces. And that production generates income. So, in this case, we can make a valuation of the underlying assets and income independently of the price of the whole business in the market. This model allows for more objective assessments.
This is different in the case of non-productive assets. Let’s assume for a moment that the author decides to launch his own cryptocurrency: Supercoin. 10 million units are issued. And the founder decides to keep 9 million units for himself as a reward for his own genius. The income obtained from the first sales is spent on promotion. Thanks to all the promises made, let’s say we manage to sell a thousand units at $1 per unit. My rich uncle bought that lot for the benefit of his favorite nephew. Well, the market capitalization of Supercoin rose, overnight, to $10 million. Thus, can declare me as a millionaire. But I’m a millionaire in unrealized earnings. I mean, I’m a millionaire on paper.
My empire is obviously resting on very fragile foundations. Or rather, I need a constant stream of buyers to keep the Supercoin price high. The solution is to keep promoting the project. I must talk about my solvency. I must talk about the future. And I must make big promises. Okay, In the crypto space, there are many millionaires like the founder of the fictional Supercoin. This is a market full of titans of this style.
In this post-truth era, social networks are used to create digital tribes. Which means that anyone can find a devoted congregation. What is normally done is to use these “codes” as collateral to build companies. Properties are purchased. Staff is hired. And campaigns are carried out to obtain users. In effect, products and services are offered. TIt all looks like a success. On paper, assets outweigh liabilities. But what are assets? In many cases, it is a cryptocurrency (like my supercoin) created by the founders. And what happens if these projects lose their buyers? What happens if the users all decide to leave at the same time? Well, the house of cards collapses.
Words more, words less, this is how the collapse of Celsius, Terra/Luna, Three Arrows Capital, Voyager Digital and (more recently) FTX could be summed up. The case of FTX is particularly ironic. Because Sam Bankman-Fried, the brand new founder of FTX, from the beginning of the crisis, has presented himself as a savior in the style of a JP Morgan. This knight-errant offered, on more than one occasion, to rescue those affected. This publicity stunt served to create an illusion of “solvency” that it apparently never had. Now it turns out that the savior needs to be saved. So, that supposed solvency was not such. Sam was selling us air.
Bitcoin price was already outperforming the Terra/Luna crash, Celsius crash and the other debacles. The market was consolidating within a channel ($20.6K-$18.4K) with great psychological strength. The price was swinging flirting with the bulls and flirting with the bears in turn. And now this. Of course the collapse of FTX created a crisis of confidence. Consequently, the price breaks the support of the channel to record a new low. Panic spreads…
However, the bears now have more points in their favor. We have external factors and internal factors. The US Federal Reserve continues to raise credit costs in its fight against inflation. That means a reduction in liquidity. Furthermore, with a war in Europe, a zero covid policy in China and logistical problems in many places, supply problems persist. The latest corporate reporting season revealed a drop in spending. Which fuels fears about a possible recession. Or put another way, Due to the macroeconomic and geopolitical reality, at this time, the conditions are not ripe for a sustained bullish boom.
Due to so much volatility and so much uncertainty, investors are becoming more conservative. The fear of losing outweighs the greed to win. In other words, these are not good times for risky assets like Bitcoin. Investors, like it or not, accept it or not, are finding stability and predictability in the dollar and in the bond market. When it comes to the equity market, investors are indeed looking for opportunities. But they are starting with undervalued companies in the value sector.
The FTX crisis reminds us of our frailties. And, logically, a new crisis of confidence is created for Bitcoin and for the entire crypto space. Which is still a problem. Why? Because fear is dangerous. Fear can cause many problems. Due to fear, mass escapes can be generated. I mean, the market is very good at making its own prophecies. So a widespread withdrawal can cause more bankruptcies and collapses. In times like these, the most sensible thing is to seek refuge in stable and safe assets.
Disclaimer: The information and/or opinions expressed in this article do not necessarily represent the views or editorial line of Cointelegraph. The information set forth herein should not be taken as financial advice or investment recommendation. All investment and commercial movement involve risks and it is the responsibility of each person to do their due research before making an investment decision.
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