It's been a stress-filled month for cryptocurrency investors. Major sell-offs started after Tesla CEO Elon Musk stated that the company would no longer accept Bitcoin (CRYPTO: BTC) as payment for its vehicles, citing environmental concerns about the energy needed to mine tokens. News that China would take steps to discourage mining and prevent businesses in the country from adopting cryptocurrencies triggered additional sell-offs across the space.
With crypto prices recently seeing a substantial pullback, we put together a panel of three Motley Fool contributors and asked each member if now looks like the right time to buy. Read on for their takes on whether the recent crypto crash has presented a big buying opportunity.
What's prompting the big crypto swings, again?
Keith Noonan: Elon Musk is clearly an influential figure and has some incredible successes to his name, and it's possible his involvement in the cryptocurrency space provides indicators about long-term adoption trends. However, in my opinion, the market-moving power of Musk's tweets reflects a lack of soundness in crypto as an asset class.
While most cryptocurrencies are decentralized in terms of who controls the individual coin, Musk's comments have apparently been enough to trigger big swings for Bitcoin and the overall crypto market. Many coins are also more “centralized” than some investors think. As Musk himself noted, flooding in China's Xinjiang region resulted in a dramatic reduction of the Bitcoin hash rate. As another example, roughly 100 accounts control the large majority of Dogecoin‘s (CRYPTO: DOGE) total coin supply.
There are already thousands of cryptocurrencies on the market, and new ones are entering the fray all the time. Many of these tokens are essentially indistinguishable in terms of utility, and there's not much to stop even the more specialized cryptocurrencies from being disrupted by new entrants in the space.
Here's another issue: While the recent sell-offs are significant and surely painful for some investors, they're also not that big in the scheme of things. Ethereum‘s (CRYPTO: ETH) price has climbed 1,150% over the last year, while Dogecoin has exploded 13,310% across the same stretch. Bitcoin is still up roughly 300% over the last year and stands as the single-best performing asset of the last decade.
On the most basic level, value is subjective. If enough people believe in something and continue to attract new adherents to their way of thinking, that can drive the value of almost anything higher. However, when identifying potential investment candidates, I usually try to look for more objective metrics and trend indicators that paint a picture of why people will be likely to ascribe increasing value to an asset or equity. I struggle to find those characteristics in most cryptocurrencies, and dramatic volatility in the space stemming from seemingly minor catalysts makes me concerned that the overall asset class is still due for a much bigger pullback.
Currencies can't trade like growth investments forever
James Brumley: I understand the logic. Cryptocurrencies like Bitcoin and Dogecoin have dished out incredible gains. Just when it looked like they couldn't go any higher, they went higher. Their recent sell-offs seem out of the ordinary.
The problem is, nobody can actually explain why these sell-offs took shape. They just happened without explanation, much the same way cryptos climbed for so long without explanation.
This unexplained volatility underscores the gaping, philosophical flaw of cryptos. That is, although they're being touted as an alternative to fiat (government-issued) currency, they're being treated — and traded — like growth investments. It's a recipe for the market turning into a proverbial Wild West, which it has.
Sure, non-fiat currencies are appealing in an environment where governments appear to be losing control of their piece of the global economy. I also recognize physical money is the past while secure, digital money is the future. But at least the world's central banks are able to maintain some semblance of price stability for their respective currencies. Nobody's attempting to hold the prices of cryptos steady; nobody's even in a position to do so. That's why they're not reliable stores of value, which is the whole point of holding a particular currency.
So, buy on this dip if you must; I'd certainly never say you can't make money with them. Just recognize you're only speculating on how other people will arbitrarily feel about cryptocurrencies at some point in the future. That's little more than a coin toss.
No safety in these numbers
Eric Volkman: I don't feel cryptocurrencies are attractive at current rates, no matter how many bargain hunters claim they're oversold (for the record, the crypto of all cryptos — Bitcoin — is down a queasy 34% from its mid-May peak; others have also plummeted).
One very good reason to continue staying away is a concern that continues to dog cryptocurrencies: safety and security. Take good old-fashioned hacking. While it's nearly impossible for a team of cyber pirates to raid the ever-lengthening distributed blockchain that undergirds any serious cryptocurrency, other facets of the system are vulnerable to attack.
Remember Mt. Gox? That was the Bitcoin exchange that hackers penetrated in 2014, stealing 850,000 Bitcoins. If the heist were to occur today, that pile would be worth a dizzying $33.5 billion. And at the time, Mt. Gox was the king of the world's Bitcoin exchanges, but that hack made it a future trivia question. Less than four years after its launch, Mt. Gox was a goner.
While security has advanced since then, the crypto exchanges remain vulnerable. Last August, researchers at the Black Hat security conference found not one, not two, but three methods through which hackers could make effective attacks against such platforms. This, despite the billions of dollars and immense brainpower and resources plowed into securing these sites.
Another classic means of separating assets from their owners, phishing, was responsible for the theft of roughly $200 million worth of crypto assets from various exchanges. That scam had been running for two years when it hit the headlines in mid-2020.
While any financial asset is vulnerable to a phishing attempt, the volatility and sky-high dollar prices for certain cryptos make their holders particularly juicy targets these days.
(Phishing, for those unfamiliar, is the method by which a scammer impersonates a person in a position of authority to ask for sensitive information from a victim. Once obtained, that information is used to access valuable property for theft.)
Another security concern is the decentralized nature of cryptocurrencies. This is a key selling point for such assets, as governments, central banks, and other important policy makers can't tinker with them for political or economic advancement.
But the flip side of that is they are subject to worryingly little regulation. The U.S. banking system, for instance, has a clutch of regulatory agencies watching and protecting it, from the federal level on down. To name one, traditional banking accounts held by an individual are automatically insured for up to $250,000 by the Federal Insurance Deposit Corporation (FDIC).
There's no U.S. public agency that insures $250,000 worth of Bitcoin.
So no, I don't think cryptos are a buy on weakness right now. In fact I'm not convinced they're a buy, period.
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Eric Volkman has no position in any of the stocks or cryptocurrencies mentioned. James Brumley has no position in any of the stocks or cryptocurrencies mentioned. Keith Noonan has no position in any of the stocks or cryptocurrencies mentioned. The Motley Fool owns shares of and recommends Bitcoin and Tesla. The Motley Fool has a disclosure policy.