Uncertainty is rocking the cryptocurrency market and crypto firms across the industry are on the move. Digital currencies like Bitcoin made a comeback in the market last week, but fears of a “crypto winter” lingered. Bitcoin, the world’s most popular cryptocurrency, has lost more than half of its value this year.
Overall, market values for digital assets such as cryptocurrencies and non-fungible tokens have plummeted since late 2021. Some big lenders like Celsius Network and Three Arrows Capital have filed for bankruptcy protection over allegations of poor risk management, while some of the biggest players like Coinbase are laying off employees.
Despite turbulence in the market and falling values, some are optimistic about the future of crypto. William Cai, co-founder and managing partner at financial services firm Wilshire Phoenix, founded in 2018, said the recent crash doesn’t necessarily indicate the demise of crypto.
“The biggest takeaway we have is that this time it’s different than previous so-called crypto winters,” Cai told David Brancaccio, moderator of the Marketplace Morning Report. “I think one thing that crypto investors and all investors should keep in mind is that the crypto market has received a lot of signals from overall markets, economic conditions and stocks.”
The following is an edited transcript of their conversation.
David Brancaccio: Things go up, things go down. But what happened to cryptocurrencies in the last eight months – what happened? Would you say it cracked the basics?
William Cai: No, definitely not. It was interesting. The biggest takeaway we have is that this time it’s different than previous so-called crypto winters. I think one thing that crypto investors and all investors should keep in mind is that the crypto market has received many signals from overall markets, economic conditions and stocks.
Brancaccio: So the economy as a whole. Look, the worries about inflation, the central bank raising interest rates, the money coming out of the stock market, do you think crypto is partially caught up in these flows?
Cai: Yes absolutely. If you look at the price correlation between the crypto markets and the S&P 500 for the past six months or less, [or even] better, NASDAQ, was super high. I think if you anonymize the data, take out the ticker or bitcoin or any of the tech stocks if you just combine the time series it would be hard to tell if if you can figure out if it’s bitcoin or against some of the tech stocks. So the interesting thing is, even if we are in, say, crypto winter, we will not emerge from crypto winter unless macro activity improves or the stock market starts to improve. It’s really taking signals from the general market instead – and we’ve had some pretty big events, bankruptcies and events in the crypto space, but it really didn’t have what you said, [been] create the foundation. It has shown a lot of resilience. And I think it’s waiting for the overall market to improve.
Brancaccio: Ah, the power of metaphor, you refer to it as the “Crypto Winter” meaning there will be a “Crypto Spring” and so perhaps I understand your point that it is not Crypto Armageddon that is not what i hear.
Cai: Absolutely not. Absolutely not. I think similar to the past so-called crypto winters, the underlying foundation, development, technology and adoption [of crypto] was continued. And yes, I think we here at Wilshire are very optimistic about the future of crypto.
Brancaccio: But it must be worrying. When you see companies like Celsius, that lender in crypto, are now under bankruptcy protection or a stablecoin turns out to be unstable.
Cai: Absolutely. [For] In each of these events, our opinion is, “Does it matter? Yes. But at the same time, they’re not.” And let me explain what we, what we think. It’s new technology. And new technologies sometimes fail, but better and newer technologies will come and replace them. I actually want to mention because you mentioned Celsius, we think that’s not so much what’s wrong with the crypto space itself. This is sort of a recap of all, I would say, new asset classes and speculation. That comes from greed and a certain lack of risk management. So that’s kind of a shaking of those who are over-leveraged. That’s exaggerated. And I think that’s a good thing overall for the crypto space so we can get on a better footing.
Brancaccio: Certainly some of it was mania, wasn’t it? Yet bitcoin, which was at $65,000 each last November, is now down, you know, speaking of the low $20,000s. You know, is it like a tulip in the 18th century? I mean, tulips are still useful, you can put them in your garden, but they are not a big investment, or is it another kind of mania do you think?
Cai: A few thoughts come to mind. So bitcoin itself, I would be worried if the entire crypto space is just bitcoin, right? But bitcoin has proven its resilience and technology, but it has also laid the foundation for blockchain technology and it has really expanded so that you have these ecosystem blockchains like Ethereum or Solana and people building decentralized finance applications and products on top of them. And that’s where we think the very exciting growth of the crypto space is headed. As for your kind of crash or asset bubble examples, I think NFTs are an interesting example that might be comparable to the tulips in some ways.
Brancaccio: Yes, non-fungible tokens, a way of verifying the authenticity of you, for example, an artwork that you can essentially use with this digital device.
Cai: I think the NFT has certainly seen quite a bit of madness over the last few months and now along with the other assets in terms of pricing it is definitely down in terms of prices and interest rates. But yes, at the same time I think that even in the NFT these non-fungible tokens, their representation of art, are not completely worthless for me. It brings joy to people. And it’s like art, it’s art, and to me there is value in such tools, particularly in relation to blockchain terms of decentralized ownership and fractional ownership. It is good that there is also consolidation and emptying of the bladder. But I think it’s NFTs, just like other assets, it’s here to stay.
Brancaccio: You know, I’m hearing from you that crypto could still play a role in a portfolio held by a seasoned investor, an institutional investor. But you know this has to happen to you, this has happened to me, I mean nieces and nephews say, you know, should I put everything in crypto? And you know, it’s one thing when a person worth $100 million invests 2% in crypto, you flip yourself, but when a newbie invests five grand or 10 grand, and that’s half of everything he does owns. I mean that’s a different story.
Cai: No, you are absolutely right. There is a risk in crypto investing but I think you kind of alluded to it, it’s about understanding the risk and more importantly the size, how does crypto work or any risky investment, how does it fit in Your portfolio that you? Are you comfortable with the risk? It definitely shouldn’t be, I think for 99% of investors, shouldn’t be 50% or more of your total investment portfolio. And I think what should help, and I think one thing while we’re working with regulators is a strong and protective regulatory framework that encompasses crypto assets that will help educate investors and provide some level of protection , z Investor education and what they are really putting into their investment portfolio.
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