Bitcoin’s Bounce Doesn’t Settle the Biggest Worries About Crypto

(Bloomberg Markets) — Digital currencies are back, at least if you ask the crypto faithful. The US Securities and Exchange Commission has at last approved Bitcoin exchange-traded funds­— begrudgingly, with a hard nudge from the courts. Renewed investor enthusiasm in risky assets such as technology stocks seems to have rubbed off on tokens, too. If you bought Bitcoin in the depths of the crypto winter at the end of 2022, you’re up more than 180%. You’re entitled to brag.

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But for the rest of us, who might feel a shade of the old fear of missing out, a discussion of survivor bias is in order. The prices of a few big coins such as Bitcoin and Ether don’t provide a full picture of what crypto traders have been through. Imagine an investor who got into crypto in 2021: Sam Bankman-Fried’s FTX exchange could have seemed a reasonable place to keep those coins. And besides Bitcoin, there were 12,000 smaller “altcoins” to dabble in, many of them now dead or illiquid, specters of a rampant pump-and-dump trading trend that made tokens look more valuable than they really were.

A crypto enthusiast might also have followed famous investors such as Mike Novogratz of Galaxy Digital Holdings Ltd. into the then-hot Luna token or bought its linked stablecoin, TerraUSD—both of which have since imploded, with founder Do Kwon facing charges of fraud. Meanwhile, several now-bankrupt lending platforms offered ways to earn fat yields on digital assets. And nonfungible tokens—digital assets linked largely to virtual cartoon pictures—briefly seemed cool enough to trade for thousands or even millions of dollars. They’re still trading, but at a relative pittance. In short, there were countless ways to vaporize wealth.

Even buying and holding Bitcoin—HODLing, crypto lingo for holding on to an investment no matter the cost—would have been hard over the past two years. Since February 2022, the coin’s price has gone from around $44,000 to about $48,000 today. But the journey in between has been fraught—it fell as low as $15,500 when FTX collapsed. Crypto investors have weathered much more volatility than you’d see in stocks or bonds, reaffirming the narrative that digital tokens aren’t for the faint of heart. “If I had to sum it up in one word, it would be ‘stressful,’ ” says Craig Erlam, a senior market analyst at foreign exchange brokerage Oanda Corp. “We’re back to basically where we started, but the ride in between has been quite eventful.”

Nikita Fadeev, head of crypto hedge fund Fasanara Digital, says almost everyone he knows in the space has been affected by the industry’s woes, either by betting on assets that tanked or by lending money to trading firms such as Genesis, which went ­bankrupt after lending to another hedge fund exposed to TerraUSD and Luna. “Diversification is really, really key, because you never know who can go down, irrespective of how polished or how well-­financed they are,” Fadeev says, noting that both Luna and FTX looked “really solid” before their demise.

In hindsight, it’s unlikely diversification could have saved you if you were willing to overlook red flags on those projects, says Molly White, a crypto skeptic and author of the Citation Needed newsletter. TerraUSD and Luna promised buyers a 20% return, while FTX relied on a cozy relationship with its sister trading platform Alameda Research—issues that should have immediately rung alarm bells for anyone conducting basic due diligence. “People broadly speaking are willing to write off a lot of red flags in the industry by saying, ‘Well, this is just how it works in crypto,’ ” White says. “It’s harder to diversify than people think, because the level of intertwining between firms is huge.”

For all this drama, the real-world utility of digital assets is still unclear, and blockchain is largely absent from most payment systems. Crypto-native traders are usually attracted to the up-and-down drama of tokens, but a lack of fundamental value to lean on makes them a harder sell to those in traditional markets. Whether investing in them was an error may depend on your expectations. “We are still talking about an incredibly speculative instrument, so I wouldn’t even call them mistakes,” Erlam says. “The only mistake you can make with crypto is using money that you can’t afford to lose and expecting to make big wins.”

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