The base cryptocurrency buyers in recent years have been young people who saw bitcoin and others as a way of gaining the wealth that they believe they had been deprived of in the current asset boom. They were often politically correct, and saw their role in supporting crypto with almost religious zeal that encompassed liberty-seeking anti-authoritarianism. Some believed cryptocurrencies would eventually destroy existing financial structures. They were also joined by the Chinese, who saw trading in bitcoin and cryptocurrencies as a way of becoming less dependent on the communist party government.
Xi Jinping recognised the danger to his rule and last year greatly restricted their ability to speculate on cryptocurrency. With hindsight, Xi did them a favour. Russia also clamped down on cryptocurrency trading.
This means that this round of cryptocurrency losses is concentrated in Western countries.
Many of the young buyers had no secret agenda but were sucked in by celebrities extolling the virtues of this new asset class. Some of those celebrities appear to have received a fee. Other buyers were attracted by the support of billionaire Tesla founder Elon Musk.
But the young people had no knowledge of history and often entered the crypto markets with highly leveraged margin deals. Their equity was geared up to 10 times. That meant that they made huge fortunes on the rise but were savaged on the fall.
The margin lenders, knowing they were dealing with young people with limited capital, sold them out as soon as the cryptocurrencies fell to the trigger levels. This cascaded into a massive vicious circle because every fall triggered more sell-outs.
There is no doubt that the big fall on Friday was caused by massive selling of young people’s bitcoin and other cryptocurrency by their lenders. And the big traders also shorted bitcoin. …
In my view, the simple truth is that bitcoin and the cryptocurrencies can’t be a serious asset class for ordinary investors when the security is being traded on the basis of 90 per cent borrowing. That leaves the asset class open to huge falls which normal investors only expect in a global crisis. …
There is little doubt that the world is looking for digital currencies to help co-ordinate the increasing amount of digital services trading. Unless the major institutions are prepared to support bitcoin when there is a selling rush, then bitcoin is not that currency.
Also, watch out for high levels of fraud.
The world needs a currency outside the ability of the world’s governments to print more. Gold and crypto are your current choices.