Lofty prices for parody coins. Celebrity-driven commercials for trading platforms. A frenzy over non-fungible tokens that has enticed famous names including former first lady Melania Trump. Even after a pullback in the past month, the cryptocurrency market remains full of frothy behavior.
Yet lately, signs are mounting that crypto could be headed for a pronounced selloff. And the Federal Reserve’s hawkish pivot on Wednesday may just accelerate the process.
One telling signal is that trading volumes for both crypto and NFTs are declining after parabolic surges. In their latest reported quarters, crypto-focused Block Inc., formerly known as Square, and Coinbase Global Inc. both reported digital currency trading revenue significantly below market expectations as transactions on their platforms slowed. Meanwhile, the aggregate value of NFTs traded on marketplaces has fallen since its August highs.
“Greater fool” theory suggests that it’s fine to buy overvalued assets as long as it will be possible to sell them for an even higher price. But diminishing trading activity suggests crypto markets are running out of greater fools. Since the vast majority of cryptocurrencies and NFTs have no real-world utility and are used primarily for speculative trading, a loss of confidence among investors could quickly gather steam.
The US government and the Fed have pumped trillions of dollars into the economy during the Covid-19 pandemic through monetary and fiscal policy stimulus. Some of that money ultimately flowed into risky alternative assets like crypto and NFTs. But as the Fed tapers its stimulus, crypto assets are likely to be some of the first to fade.
US consumer prices have registered their largest monthly gains in decades recently. Inflation data for October, released Nov. 10, triggered a sell-off in Bitcoin as traders began anticipating the Fed turning off the spigot to slow inflation. The original cryptocurrency has now fallen roughly 30% from its early November peak. Bitcoin continued its decline Thursday after the Fed announced a day earlier that it would end its asset-purchase program sooner than anticipated and expects to raise interest rates next year.
There might not be a better sign of problems around the corner than when companies pay huge sums for stadium-naming rights.
More than two decades ago, Enron announced a 30-year, $100 million deal to have its name attached to the Houston Astros park. Soon thereafter, internet conglomerate CMGI signed a $114 million deal to name the New England Patriots’ stadium. Both companies soon imploded.
Yet here we are again: Last month Crypto.com, a 5-year-old trading platform, signed a 20-year deal to have its name adorn the Staples Center in Los Angeles for a reported $700 million. Earlier this year, FTX, another young, fast-growing crypto company, acquired the naming rights to the Miami Heat’s arena.
The current mania over crypto and NFTs will likely look as bizarre in hindsight as those stadium deals of the earlier era. Some people are tempted to view the crypto marketplace as an amusement, but it is no laughing matter. When the music stops, a select few will have made a lot of money, while many other investors will see the value of their crypto holdings wiped out. Consider yourself warned.
Bloomberg
