Mark Vitner, senior economist for Wells Fargo, sees similarities between today's cryptocurrency collapse and the dot-com bust of more than 20 years ago.
By Mark Calvey – Senior Reporter, San Francisco Business Times
Jun 17, 2022
The collapse in bitcoin and other cryptocurrencies is raising the specter of a replay of the dot-com bust of more than two decades ago. That was an era of widespread pain, which could be playing out again.
As crypto lenders, hedge funds and individual investors face falling prices and margin calls, the pain could be felt in other parts of the financial universe, including the broader stock and real estate markets.
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“I liken what we’re seeing in crypto to both the dot-com crash and to an economic term called Gresham’s Law that says bad money chases out the good,” Mark Vitner, senior economist at Wells Fargo (NYSE: WFC), told me in a wide-ranging interview Friday morning.
“If you borrowed money to invest in crypto, or you borrowed money because you thought you were a lot richer than you were because crypto had appreciated, then you may be in a position where you have to sell something good to pay for something that now is bad,” Vitner said. “All the way up, people borrow against their best assets, so they tend to take on more and more risk.”
Crypto enthusiasts like to consider bitcoin to be a countercyclical store of value, much like gold. But Vitner isn’t buying it.
“I’m afraid that when it comes to crypto, we’re probably gonna see some carryover into the real estate market,” Vitner said. “We’re probably seeing some carryover to the stock market.”
It’s been an ugly week for crypto. Bitcoin and other cryptocurrencies have plunged, triggering margin calls. Some crypto "coins" have become essentially worthless. Celsius Network LLC, a large crypto lending platform, told customers it was pausing withdrawals, swaps and transfers due to extreme market conditions. Coinbase, once based in San Francisco before embracing a no-HQ strategy, will lay off 18% of its workforce, or about 1,100 workers.
On Friday, crypto hedge fund Three Arrows Capital hired advisers to consider its options after suffering heavy losses, the Wall Street Journal reported. The same day, Hong Kong-based crypto lender Babel Finance said it was suspending redemptions for all of its products, citing “unusual liquidity pressures.”
All that doesn’t bode well for crypto’s outlook, but it does provide more fodder for bitcoin’s critics.
"Currency has three purposes: to facilitate transactions, a store of value and a speculative component,” Vitner said. “Really, the only thing that bitcoin fulfills out of those three is the speculative component.
“Gold is probably a better store of value. It’s boring, but that’s what a store of value is,” Vitner added.
“I don’t know how much of a threat it is to the economy, but the parallels between crypto and the dot-com bust are kind of eerie,” Vitner said, pointing to the millions of dollars that dot-com startups paid in 2000 for Super Bowl ads, a move several crypto companies made this year.
In the dot-com bust that began after the stock market peaked in March 2000, dozens of startups met their demise. After the bust, no one wanted to be called a dot-com.
“I think the term 'cryptocurrency' will be retired," Vitner said.
Today’s speculation has been fueled in part by low interest rates that forced many investors to take on greater risk to achieve satisfactory returns. Those low rates are now just a memory as today’s startups in crypto, fintech and other sectors reconsider their spending.
In the wake of the dot-com bust, Bay Area venture capitalist John Doerr said, “Money that is priced irrationally, will be spent irrationally.”
Longtime Bay Area economist Ken Rosen, chairman of the Fisher Center for Real Estate and Urban Economics at U.C. Berkeley’s Haas School of Business, doesn’t share Vitner’s concern that crypto's collapse will spill into the real estate market. But asked whether crypto is a replay of the dot-com era, Rosen said: “There’s echoes of it. Cryptocurrency has the same feel to me personally.
“I thought it was not a sustainable boom,” Rosen said. "Cryptocurrency, honestly, felt like a Ponzi scheme to me. There is no inherent value in it whatsoever."
Ken Rosen, chairman of the Fisher Center for Real Estate and Urban Economics at UC Berkeley
Federal Reserve Board: Recent Market Turmoil Shows ‘Structural Fragilities’ of Crypto
Amitoj Singh
Fri, June 17, 2022
The Federal Reserve Board has released its twice-yearly monetary policy report, noting that "recent strains experienced in markets for stablecoins…and other digital assets have highlighted the structural fragilities in that rapidly growing sector."
The report is a preview of Fed Chair Jerome Powell's testimony in Congress next week. Powell is expected to outline the Fed's plans to combat inflation. This week, Powell announced a 75-basis point rise in short-term interest rates, the largest increase in 28 years.
The report, which is submitted to the President of the Senate and the Speaker of the House of Representatives, elaborated on how "generally, stablecoins that are not backed by safe and sufficiently liquid assets and are not subject to appropriate regulatory standards create risks to investors and potentially to the financial system, including susceptibility to potentially destabilizing runs."
The TerraUSD stablecoin collapsed in dramatic fashion last month, functionally losing all of its value. The report pointed to the "concentrated nature" of the stablecoin sector in which Tether, USD Coin and Binance USD constituted more than 80 percent of the total market value, growing rapidly over the past year to more than $180 billion in March 2022.
According to the report, "these vulnerabilities may be exacerbated by a lack of transparency regarding the riskiness and liquidity of assets backing stablecoins."
The report added that the President’s Working Group on Financial Markets, the Federal Deposit Insurance Corporation and the Office of the Comptroller of the Currency have all made recommendations to address prudential risks posed by stablecoins.
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