Opinion – From Grain to Grain: Experts justify the collapse of crypto assets and explain when they should recover

This Saturday, Mercday took place, an annual event of the research company focused on the crypto market, Mercurius Crypto. The meeting involved a series of lectures by its analysts who explained questions from onlookers and investors. I’m still in the first category, so I’ve learned a lot. I comment below some highlights.

The simplest doubts are the most difficult to explain, for example: what is the fair value of a crypto asset?

This industry is still in a very embryonic stage. Therefore, there is still much to be done and one of the most urgent areas concerns regulation.

In the past, regulation was a dirty word for investors in this market. Today, they are begging for it to arrive faster. This prayer is not for nothing. Part of the existing problems in this market lies in its absence.

In his presentation, Orlando Telles, one of the founders and an analyst at Mercurius, listed the three main events that justified the collapse of crypto asset prices this year.

The evolution of Bitcoin in the chart below shows this relationship between events and the price of the instrument. From the peak reached at the end of 2021 until today, Bitcoin’s price devaluation has exceeded 75%.

In the first half of 2022, this asset suffered, as did American stock markets, with the start of interest rate hikes in the US. Over the past seven months, two other factors have seen crypto assets reach new lows.

The two events were the collapse of the sixth largest cryptocurrency, the Terra Luna project. This crash was the trigger of a domino effect on other companies.

The breaking of the Terra protocol triggered the collapse of three other major players: the Three Hedge Capital fund and the companies BlockFi and Celcius.

Now imagine who tried to save these from collapse? Exactly, the second largest crypto exchange in the world, FTX.

It is not by chance that the same brokerage filed for bankruptcy in early November.

Anyone who imagines that the domino effect has already run out is deluded.

The movement of high interest rates dried up the funds that injected resources into unprofitable projects and the crash of the FTX raised the flag of a reckless attitude that many adopted in the moment of bonanza.

But, according to Mercurius analysts, there is light at the end of this tunnel. The failure of the FTX brought the urgency of regulation. There are hopes that greater regulation will restore investor confidence in this market. Also, the end of the monetary tightening cycle by the FED and the main Central Banks around the world should reduce uncertainty and volatility.

In the recovery, analysts listed and justified some of their main bets. Telles’ biggest reassurance is that soon the second largest cryptocurrency by market cap, Ethereum, should overtake Bitcoin.

Today Ethereum’s market cap is about half that of Bitcoin. So, if they’re right, selling Bitcoin and buying Ethereum could yield a big payoff.

There is also a bet on the decentralized finance market, known as DeFi. For example, Lido Finance, Polygon and Uniswap projects.

Finally, the presentations were enriching and showed the great potential that this industry promises to transform.

What is my opinion about this market?

I started working in the financial market in 1998, before the Internet bubble.

From 1998 to 2002, internet companies were also up-and-comers. At that time, they did not generate any results.

The evaluation for the purchase decision was carried out using metrics that, at the very least, could be considered reckless. Absurd prices were paid for shares in those companies.

Most of them today no longer exist and some of the giants at that time, today, after two decades, are not worth a third of the peak they reached.

Cryptoassets are at a similar stage. Virtually all do not generate any results. Therefore, its assessment is still made in ways that go back to what was seen at the time of the internet boom. There is no talk of cash flow, nor the prospect of profits.

I believe that the crypto industry will conquer its space in the market, but just as you didn’t need to run the risk of making the wrong choice of company in the boom and bust of the internet bubble, you don’t need to take the risk now with crypto assets in this moment of uncertainty.

Michael Viriato is an investment advisor and founding partner of Investor House

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