Investors often watch the Nasdaq100 Stock market index as a measure of the performance of the technology sector. After plummeting 33% last year, it’s starting 2023 on a more positive note, up 17% so far.
Cryptocurrencies followed a similar trajectory in 2022, with the total value of all tokens plummeting from $2.2 trillion in value to just $800 billion. But cryptocurrencies have also ticked higher this year. Investors are starting to buy riskier assets as they speculate that the pressure on the economy caused by high inflation and rising interest rates may finally be easing.
Bitcoin (BTC -4.24%)the industry’s leading token, is up more than 60% in 2023. And the popular meme token Shiba Inu (SHIB -2.79%) — which delivered one of the biggest returns in financial markets history in 2021 — is up 30%. Both Destroying The Nasdaq 100’s Return, But Are These Runs Likely To Continue?
Inflation, interest rates and the shortcomings of cryptocurrencies
Precious metals such as gold and silver have been a medium of exchange for thousands of years. Until 1971, the value of the US dollar was pegged to the price of gold, but metals have served a different purpose since the global transition to fiat currencies. Gold is often used today as a hedge against inflation; Investors believe it will always have value. So as inflation ticks higher and the value of the dollar falls, gold in general can be expected to appreciate in dollar terms.
Bitcoin has increasingly emerged as a mainstream financial asset in recent years and has always been the subject of heated debate as investors struggle to value the token. It has no real use case. Bitcoin does nothing. It brings no income, and it has not been widely adopted as a currency. (Only 8,015 companies around the world accept it as a form of payment.)
Gold shares many of the same flaws, but Bitcoin doesn’t have a millennial track record as a store of value. It also cannot be physically redeemed, so in the event of an apocalyptic event, Bitcoin could disappear along with the digital economy.
Still, some investors liken Bitcoin to a digital, modern hedge against inflation. It’s quick and easy to buy and sell, and its blockchain technology serves as transparent yet secure proof of ownership.
But there is a problem. When the US CPI (an important gauge of inflation) hit a 40-year high in June 2022, Bitcoin’s price was 50% below its all-time high. In fact, despite blistering inflation, it continued to plummet for the rest of the year. Gold, on the other hand, was basically flat in 2022 — not a bad performance at a time when markets were entering bearish territory.
Speculation might be the only real use for cryptocurrencies
Now let’s take a look at Shiba Inu, the most famous meme coin. Anyone who bought the token on January 1st, 2021 and sold it at the end of this year would tell you that the cryptocurrency changed their lives. They would have returned 43,800,000% over that 12-month period — in other words, if they had invested just $2.30, they would have put over $1 million in the bank.
Today, the Shiba Inu is 88% below its all-time high, despite its 30% gain in 2023. As a payment currency, it’s even less useful than Bitcoin: only 736 merchants worldwide accept it.
Unlike precious metals, Bitcoin and Shibu Inu have been behaving just like risky assets of late. They rallied from their 52-week lows almost in step with the stock market, bottoming out between October and December of last year, giving credence to the idea that investors are using the tokens to predict loosening financial conditions — or risk rely on the investment environment.
The fact that these tokens do not generate income or add value organically will eventually catch up with them. As a result, they’re unlikely to outperform indices like the Nasdaq 100 — which are filled with quality, revenue-generating companies — over the long term.
Investors learned a very valuable lesson this year
There will likely be a place for digital currencies in the future. After all, the rest of the economy is certainly trending further online. But will tokens like Bitcoin or Shiba Inu be the answer, or will more government-backed tokens take center stage in this space? The latter outcome seems more likely, and that’s a great thing. Why? Because of the collapse of SVB Financethe parent company of Silicon Valley Bank.
You see, thanks to the robust regulatory framework for banking, a bank holding more than $175 billion in customer funds collapsed this month without a single depositor losing money. Silicon Valley Bank, which served many startups and tech-focused companies, mismanaged its portfolio of high-quality and government bonds.
It is estimated that the value of these assets will still be large enough to cover all deposits. Nonetheless, the Federal Deposit Insurance Corp. and the federal government and guaranteed customer funds, restoring confidence and ensuring account holders had full access to their funds the very next business day.
This is in stark contrast to the recent collapses of cryptocurrency projects and exchanges like FTX or the Terra USD Stablecoin that wiped out tens of billions of dollars in customer and investor funds.
It serves as a wake-up call for all cryptocurrency holders. Decentralization is not necessarily better, especially when conditions deteriorate. That’s not to say that leading tokens like bitcoin won’t appreciate over time, but the case for bitcoin’s long-term success as anything but a vehicle for speculation seems fundamentally flawed.
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