The collapse of cryptocurrencies in five questions

Confidence seemed to return on Friday morning: the approximately 19,400 currencies in existence, according to CoinMarketCap, rose 10% to a total of nearly 1.3 trillion US dollars.

We asked Martin Lalonde, president of Investissements Rivemont, to explain the current situation and what it means for the future. This portfolio management firm offers not only traditional investment strategies, but also options such as cryptocurrencies.

How to qualify what we witnessed this week?

It was a collapse, what happened this week. This is not uncommon in the world of cryptocurrencies. It is a hyper volatile asset. It’s part of the game. If you decide to invest in it, you need to get past those moments that happen from time to time.

What happened?

The truth is we don’t yet know exactly. In other words, there is valuable stablecoin (stablecoin), TerraUSD or UST, which must be denominated in US dollars, i.e., 1 token for US $ 1. This is a project with an algorithm associated with a cryptocurrency called Luna. Each TerraUSD holder is promised an amount equivalent to one US dollar to Luna.

There have been big sellers of TerraUSD at the same time recently and the project has lost that one-to-one. People no longer trust the token, while the idea is to have security. Many people invested in the project, but lost all of Luna’s value. It cost US $ 120 in April and is now zero. We are talking about 40 billion US dollars of impairment.

The project was a failure. This has shaken confidence in the cryptocurrency market.

What awaits us in the coming days? Have we reached the bottom?

If I could answer you with certainty, I would be very rich. On the three to ten year horizon, I think this kind of volatility is normal. You can’t have an asset that makes 40,000% in 10 years without it being very volatile.

There was an interesting stabilization in the market on Friday. We saw a significant rebound. Recently, cryptocurrencies have been associated with the NASDAQ index [à forte composante technologique, NDLR]. I think enough has been lost on the NASDAQ. We also need to put things in perspective: all the other financial markets have not been doing well in recent weeks.

“I don’t characterize [les jetons stables] as a real threat to financial stability, but they are growing very fast and present the same kind of risks that we have seen for centuries in bank runs, ”said U.S. Treasury Secretary Janet Yellen.

Is there systematic risk, in your opinion? Is this another example to show that regulatory authorities should expedite the administration of virtual currencies?

When capital is lost, it can have an impact on other asset classes, as this money is not available. The fact remains, at present, the cryptocurrency market is not large enough to be a leader compared to the bond, stock or commodity markets.

People working with virtual currencies try to keep track as much as possible. On the other hand, if we want this asset class to be more serious, it is inevitable to have more oversight, specifically in the United States. A winning situation is for the authorities to leave enough rest for new projects while fighting money laundering and cybercrime.

It is said that cryptocurrencies can act as a safe haven like gold in an inflationary environment. What can we conclude from this, finally?

It doesn’t work, but it’s the same for other methods that we thought were financial hedges against inflation. Gold has also declined significantly. On the other hand, in the long run, I still think bitcoin is a great safe haven and a great way to have value in your portfolio, anywhere in the world.

Bitcoin has lost 80% of its value several times since it was born. The big winners were the ones who got through.

This lecture has been edited for brevity and clarity.