How low can crypto go?

If we’re going to talk about cryptocurrencies, let’s start with how many of them exist.

And that’s not easy to answer. In the often murky world of digital assets, even establishing the number of currencies is problematic. Depending on the source, in June 2022, somewhere between 2,800 and 19,000 had been created.

To keep things simple, we’re going to stick to the original (and best-known) digital currency, Bitcoin.

Bitcoin has been around since 2009, and for a few years was seen as little more than a novelty. Only in 2017 when the price surged from $1,000 to $20,000 did the mainstream market really take it seriously (Bitcoin first traded at US$0.08 in 2010).

We know what happened next. Fuelled by a combination of investor euphoria, shameless spruiking by promoters and questionable claims by backers about the future of both crypto and blockchain technology, Bitcoin’s price took off.

The contagion spread to other currencies, like Ethereum, as well as a growing range of new products supposedly pegged to the value of the US dollar.

Even Dogecoin, created as a joke by a couple of software engineers, increased a staggering 20,000 per cent in a single year.

The world volatile hardly begins to describe Bitcoin’s rocky ride. After hitting a high of $78,000 in April 2021, it fell 45 per cent in a matter of weeks.

After another rally, the currency peaked at nearly $88,000 in November 2021. Since then, it’s been on a downward slide, dropping more than 50 per cent in the last six months. Most other digital currencies have performed far worse.

From some perspective, the Australian share market dropped 8 per cent in one week recently, triggering media headlines like “investor bloodbath”.

Bitcoin evangelists – of which there are many – argue that volatility should be expected with a new asset class. Others claim the current deflated prices represent a rare buying opportunity, and Bitcoin could even bounce back to $200,000 or more.

But the problem with Bitcoin – and all cryptocurrencies – has always been this; how do you know what they are really worth? How can you be sure you’re paying a fair price?

Of course, in a liquid and transparent market, any asset is worth what someone is prepared to pay.

That argument stands up if we’re talking about shares, real estate or used cars. But it collapses when we’re dealing with an unregulated asset that’s commonly used for black market transactions, has a history of trading irregularities, and continues to be a honeypot for scammers and swindlers.

Even if the value of the Australian share market fell by 50%, (which it has done before and always recovered), the underlying assets still exist. Companies listed on the stock exchange still employ people, buy supplies, pay tax, and reward shareholders with dividends. They’re a critical part of our economy. If those businesses are growing, eventually their value – hence share price – should rise.

It's hard to apply that argument to Bitcoin. Does a single Bitcoin have any more real value if priced at $80,000 than $20,000? Does it have a more important function than it did back when the price was zero?

Who knows?

The appeal of cryptocurrencies to most people has never been their value. It’s their history of price appreciation.

To someone without much knowledge of investment markets, seeing a single investment rise 1,000-fold in a year makes the prospect of spending a life working as a wage slave unappealing. Becoming a digital entrepreneur seems like a far better option.

It’s worth mentioning that not everybody’s jumped on the crypto bandwagon.

Supporters of crypto claim that many big investors and institutions are on board. That’s not strictly correct.

Yes, some of the biggest names in finance have engaged with digital currencies. But in most cases, they’ve invested their money in currency exchanges or managing crypto funds. In other words, they’re hoping to make money out of other people, not from the assets themselves.

We don’t really know how many Australians are believers either. Research by Roy Morgan in 2021 suggests around one million holding crypto assets worth a total of $20 billion.

Others say the number is far higher, with crypto exchange Gemini claiming one in five Australians invested in digital assets in 2021 alone.

Older and wealthier Australians seem to be staying away. According to tax office data, fewer than one per cent of Self-Managed Super Funds have dabbled in digital. The total value of that investment in cryptocurrencies is around $225 million, a tiny fraction of the trillion-dollar SMSF pool

Getting back to the original question – how low can crypto go?

Most of them will become worthless. Even crypto supporters acknowledge that.

But Bitcoin? The King of Crypto? How low can it go?

It could easily go back to where it began – worth nothing. And that’s because other than its popularity as a gambling chip, nobody’s yet been able to demonstrate that it has a single useful widespread application or any intrinsic value.

Buyer beware.

This article contains factual information only and is not intended to be general or personal financial advice, and is for educational purposes only.