Investor losses in cryptos are enormous and will only worsen

Investor losses in cryptocurrencies — both locked-in and unrealized or paper losses — are enormous, and will only worsen as cryptocurrency prices continue to plunge. 

According to data from www.coinmarketcap.com, the estimated market value of all cryptocurrencies, as of noon Monday, Eastern Standard Time, was $258 billion, a drop of 69 percent from a peak of $830 billion, just three months ago, on Jan. 7.

Bitcoin, the dominant cryptocurrency, suffered $177 billion of that loss as its market value dropped 60 percent over that same time period.

Crypto investors who have not sold any of their cryptocurrencies since the price of their particular cryptocurrency peaked still have experienced substantial paper losses. They still have unrealized gains, though, if they purchased their cryptocurrency for less than its current selling price.

For example, at noon Monday, bitcoin’s price was $6,747, a price it first reached on Nov. 1 of last year. Therefore, anyone who purchased bitcoin before that date still has an unrealized gain.

The same is true for investors who purchased bitcoin at those times since Nov. 1 when the price dipped below Monday’s price: After Nov. 1, it traded as low as $6,048.

However, crypto investors are underwater on their investment if it currently sells for less than what they paid for it. This is likely the case for many crypto investors today given the enormous amount of trading activity in crypto currencies in recent months.

From Nov. 1 to Monday, bitcoin’s trading volume totaled $1.43 trillion, more than 12 times bitcoin’s current market value. In recent months, total monthly bitcoin trading volume has approached the total market value of all bitcoins, indicating an average holding period for a bitcoin investment of approximately one month.

Although some early bitcoin investors may have sold for a gain in recent months even as bitcoin’s price has declined from its Dec.17 peak of $20,089, it is highly likely that far more investors have suffered real cash losses as they have sold their coins during all this bitcoin churning. 

These locked-in losses are in the tens of billions of dollars, if not much more. They are spread across the globe, but may be concentrated in Asia, where there has been extensive speculation in cryptocurrencies.

The heavy trading of bitcoins as its price has declined parallels the experience of other cryptocurrencies, perhaps most of them.

Ether, the second-most valuable cryptocurrency, currently accounting for 11 percent of the market value of all cryptocurrencies, has exhibited price and trading activity comparable to bitcoin.

Ether’s price at noon Monday of $396.42 is down 72 percent from the peak it reached on Jan. 13, less than three months ago, with its market value dropping by almost $100 billion.

Ether ownership is turning over almost as rapidly as bitcoin, which means that many ether investors are locking in substantial losses as ether continues its downhill slide. Since Jan. 13, ether trading has totaled $229 billion; six times ether’s current market value of $38 billion.

Ripple’s XRP, the third-most valuable cryptocurrency, has been an even worse performer, with its price declining 87 percent from peak of $3.84 on Jan. 4 of this year to 48.5 cents at noon Monday. XRP has lost 85 percent of its market value, from its high of $130 billion, to just $19 billion. Trading volume of $128 billion since ERP hit its peak price is almost seven times its current market value.

Although all three of these leading cryptocurrencies have exhibited tremendous trading activity, that activity has declined in recent weeks, as measured by daily trading volume relative to total market value. 

That decline may indicate that crypto investors are tiring of making losing bets on cryptocurrencies that will continue to lose market value, reflecting the fact that these “currencies” have no substantive or intrinsic value — there is no “there” there, as I have explained in earlier op-eds.

Investors who have made leveraged bets on cryptocurrencies — essentially buying on margin by charging their crypto investments on their credit cards or borrowing against the equity in their homes — may have no choice but to quit their crypto gambling, especially as credit-card issuers have begun to bar the charging of crypto purchases. That pullback from crypto trading will accelerate as crypto prices continue to dive.

A year ago Monday, bitcoin was priced at $1,188, ether at $43.27 and XRP at 3.4 cents. Even then there was no rational justification for prices that high, nor is there today. 

The cryptocurrency events of the last year, and especially extremes in price volatility, have convincingly demonstrated that cryptocurrencies fail to meet the key attributes of a viable currency — a good measure of value, a reliable store of value and an effective medium of exchange.

Consequently, today’s much higher crypto prices are bound to continue their downward slide toward cryptocurrency oblivion. The only questions are how fast and who will suffer those future losses.

Bert Ely is the principal of Ely & Company, Inc., where he monitors conditions in the banking industry, monetary policy, the payments system, and the growing federalization of credit risk.  Prior articles by Ely on banking issues and cryptocurrencies can be found here.  Follow Bert on Twitter: @BertEly.