Crypto markets tumble and investors get their fingers burned

People who put their hard-earned cash into a tumbling cryptocurrency unit that is at the heart of the latest sharp decline in digital coins may be regretting they did not read a recent paper by Canadian financial technology scholar Ryan Clements demonstrating why it was bound to fail.

In fact, all investors who have piled into any crypto assets since the end of 2020 and have not already sold may be feeling remorse for failing to take Clements's comments in my last column on cryptocurrency as a word to the wise. Most will be deeply under water: In other words, their investments will be worth a lot less than they paid for them.

"I'm not sure ... that people knew what they were getting themselves into," Clements said on Thursday as he surveyed the damage on his computer screen.

Now, other financial commentators are echoing his warning that this time, the loss of more than a trillion U.S. dollars in asset value from world cryptocurrency markets will have an impact well beyond the "crypto bros" who put in their own money.

Clements, a securities lawyer who now teaches at the University of Calgary and advises Canadian securities regulators, said that does not mean the most popular crypto assets may not rise again. They have done it before.

But as Canadians who still hold a stake wait to see what Friday the 13th will do for asset values, Clements said the past week's crypto sell-off has settled a few questions. One is whether, like gold, the limited supply of the most important cryptocurrencies means they are a hedge against inflation or against the decline of other risk assets. We now know they are not.

As inflation has climbed and markets have declined, even the best-known crypto token, bitcoin, was trading down nearly two-thirds from its peak of $69,000 in November of last year.

"Crypto assets are risk assets, they're not stable assets, they're not stores of value," Clements said. "And so that's why we're seeing a general market sell-off."

Anyone who took the advice of film star Matt Damon last October — "Fortune favours the brave" — in his promotional video for Singapore-based Crypto.com may be lamenting their courage.

Perhaps ironically, one of the destabilizing features of the current crypto decline this time is related to what are known as "stablecoins," which despite their name have put the entire market on edge.

As London's Financial Times warned on Thursday, another difference this time is that traditional markets could suffer from the crypto meltdown.

"Unfortunately, even those fund managers in normal markets like stocks and bonds who have studiously avoided focusing on this freewheeling asset class need to pay attention," wrote the paper's markets editor, Katie Martin.

There were reports on Thursday that El Salvador, which has accepted bitcoin as legal tender, had lost $40 billion US — enough for the cash-strapped Central American country to cover its next bond payment — and credit rating agencies warn of an increased risk of default.

Already, on Thursday, conventional market shares of the company Coinbase, which runs a platform for trading digital tokens, had lost half their value on the week. And as Canadians tally up their bitcoin losses or sell to escape further losses, they don't feel so rich anymore.