Crypto meltdown
A total of RM3.51 trillion in market value wiped out
THE cryptocurrency market crash has begun, with close to Us$800bil (RM3.51 trillion) in market value wiped out in the last 30 days.
The total value of cryptocurrencies, at US$1.12 trillion (RM4.92 trillion), are now only a third of what they were six months ago.
On Thursday, over Us$200bil (Rm878.5bil) was erased from the cryptocurrency market within 24 hours amid a broader flight from risk assets.
On the same day, the most popular cryptocurrency, bitcoin, plummeted to a 16-month low, falling below the US$26,000 (RM114,335) mark, losing over 60% of its value from an all-time high of US$69,000 (RM303,427) in November last year.
Although bitcoin made a small rebound yesterday to around US$30,000 (RM131,925), it remains to be seen if it is a bear trap for investors.
Some of the investors in cryptocurrencies reckon that the worse is yet to come.
Raja Daniel Matiin Raja Nordin of the Centre of Digital Assets Malaysia reckons that investors should not be buying cryptocurrencies now because prices have yet hit market bottom.
He cautions that should bitcoin’s price fall below US$26,000 (RM114,335), it is a signal for a free-fall of the digital currency .
Coingecko co-founder and chief operating officer Bobby Ong anticipates the adverse conditions to continue, which will wreak havoc across all asset classes.
“The crypto market is certainly not detached from this challenging environment, and while the market has dipped significantly in the last six months, investors should make sure that if they’re planning to take a long position that they have also taken the necessary risk management measures such as diversification and hedging,” he opines.
Should wider geopolitical and macro-economic conditions recover, Ong is confident
“The ability to differentiate between fundamentals and memes will separate the men from the boys.”
Edmund Yong
that the crypto market would return stronger, with more progress being made towards building an open and decentralised future.
Nevertheless, cryptocurrencies remain highly speculative in nature.
That has not stopped mostly younger investors from getting into cryptocurrencies.
The Securities Commission (SC) estimates that about Rm21bil was traded across the four licensed digital asset exchanges in the country last year.
In its annual report 2021, the regulator says the total number of investment accounts jumped by nearly 300% to about 760,000 last year from 190,000 in 2020.
And the majority of the investors were aged below 35 years, accounting to 62% and holding more than 470,000 accounts, the SC adds.
It has also been reported that some Employee Provident Fund (EPF) contributors who had made withdrawals from their account one under the i-sinar programme may have used the money to invest in cryptocurrencies, given the uptrend and rally of cryptocurrencies last year.
If so, what are the consequences? According to fund manager Danny Wong, using retirement savings to invest in crypto is not a wise move, unless it is a very small portion of one’s wealth.
“Alternative investments may form a small portion of a big portfolio,” says Wong, who is the chief executive officer of Areca Capital.
Former-fund manager Scott Lim, who had managed Rm2bil previously, says crypto investors, which are mostly the younger generation, would need to “bear the pain” of the crash.
Lim says people who have opted to invest more into digital currencies than equities would be hurt.
He notes that seasoned investors would not be impacted significantly by the crash because they do not put most of their investments into cryptocurrencies compared with the millennials.
Lim says cryptocurrencies should be used for trading purposes and not wealth preservation.
“Cryptocurrencies are not a store of value, their valuation is subjected to a lot of volatility,” he quips.
Although it may appear that the impact of the crypto market meltdown to Malaysians may not be significant as opposed to the capital market, Celebrus Advisory managing partner Edmund Yong says the trading volumes reported by the registered platforms in Malaysia are only a “sliver of the true picture.”
“Most crypto investments, including those from peer-to-peer and over-the-counter transactions between private parties, those conducted on foreign-based exchange venues, and the entire non-fungible tokens sector are not reported at all,” he adds.
Yong points out that young investors are more keen on cryptocurrencies compared with the equities market, due to the former’s “high risk-high return” nature.
However, Yong says the crypto markets are largely sentiment-driven and highly leveraged which means that the volatility can get extreme.
“The rookie investors are also competing against high frequency trading bots that execute trades in split-seconds. Even though our local exchanges have restrictions in place, investors are not protected from the price shocks of digital assets which are traded globally.
“The young investors were probably oversold on the pitch that crypto is ‘digital gold’ but gold doesn’t behave like that. The ability to differentiate between fundamentals and memes will separate the men from the boys,” he quips.
One sound advice during a “gold rush”, Yong says is to follow the “picks-and-shovels” strategy.
This means investing in suppliers to a booming industry.
“Instead of being greedy and rushing for the gold like everyone else, you can invest in building the tools and infrastructure that help people dig the gold, which could be more profitable in the long run.
“In other words, if you believe in the potential of blockchain as part of the sunrise Industry 4.0 and build towards it, then all these market swings are just noise.
“These are tech stocks for all intent and purposes, and tech will power up the future,” he says.