The fall of cryptocurrencies in five questions

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

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 like cryptocurrencies.

How to qualify what we witnessed this week?

It’s a collapse, what happened this week. This is not unusual in the world of cryptocurrencies. It is an asset that is hyper volatile. It’s part of the game. If you decide to invest in it, you have to be able to get through those moments that happen occasionally.

What happened?

The reality is that we don’t know exactly yet. Simply put, there is an important stablecoin (stablecoin), the TerraUSD or UST, which is supposed to follow the US dollar, i.e. 1 token for US$1. It is a project with an algorithm associated with a cryptocurrency called Luna. Each TerraUSD holder was promised a value equal to one US dollar in Luna.

There have been big sellers of TerraUSD at the same time lately and the project has lost that one-to-one. People no longer trust the token, while the idea is to have security. Lots of people had invested in the project, but the Luna lost all its value. It was worth US$120 in April and is now worth zero. We are talking about 40 billion US dollars of value destruction.

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

What do the next few days have in store for us? Have we hit rock bottom?

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

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

“I would not characterize [les jetons stables] as a real threat to financial stability, but they grow very rapidly and present the same type of risks that we have seen for centuries in bank runs,” said US Treasury Secretary Janet Yellen.

Is there a systemic risk, in your opinion? Is this one more example to demonstrate that the regulatory authorities must accelerate the supervision of virtual currencies?

When there is a loss of capital, it can have an impact on other asset classes, because this money is not available. The fact remains that, currently, the cryptocurrency market is not big enough to be a leader compared to the bond, stock or commodity markets.

People who work in virtual currencies try to be supervised as little as possible. On the other hand, if we want this asset class to become more and more serious, it is inevitable that there will be additional supervision, particularly in the United States. A winning situation would be for the authorities to leave enough leeway for new projects while fighting money laundering and cybercrime.

It has been 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 means that we thought were financial hedges against inflation. Gold is down significantly too. On the other hand, in the long term, I still think that bitcoin is a great safe haven and a great way to have value in your portfolio, no matter where in the world.

Bitcoin has lost 80% of its value several times since its birth. Those who were the big winners are those who made it through.

This interview has been edited for brevity and clarity.

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