The crypto shake-out shows boring is back

When Coinbase first listed on public stock markets last year, it was quite the moment for the crypto exchange itself and for the digital assets industry more broadly — the moment crypto was allowed behind the velvet rope and into the Wall Street establishment.

No matter that the company’s own regulatory filings said it was reliant on a small number of customers, nor that it said employees “generally do not maintain the same compliance customs and rules as financial services firms”. It was effectively a case of “shut up and take my money”. The listing delivered Coinbase a market capitalisation of $65bn, at the time on a par with the value of Intercontinental Exchange, the owner of the New York Stock Exchange itself.

The stock has been a dud from the start. Investors who got in on day one were already down 25 per cent by the time this year began. But after a truly grim week marked by drab first-quarter earnings and a disclosure flub that forced chief executive Brian Armstrong to apologise and deny the company was about to go bankrupt, shares are now down 80 per cent from their opening price on debut.

The “shut up and take my money” approach is dead, killed by the US Federal Reserve’s decision to withdraw the punch bowl and push up interest rates. The new, more discerning mantra is “cool story, bro. Prove it.” This is a theme running throughout financial markets. Stories without substance don’t sell any more.

This is illustrated perhaps most starkly in the crypto asset market that Coinbase depends on. Bitcoin, ethereum and a small clutch of other coins grab most of the attention in this space, along with joke coins that tend to be named after Elon Musk’s pets. (No, really.)

For years, the biggest of those tokens have drawn in buyers, generally retail investors but also the odd libertarian billionaire and some hedge funds and stashes of private wealth.

The stories backing these purchases have been varied. Some true believers say crypto is a new global currency. Give it time, they say. Well, it has had time now, more than a decade in fact, and I still can’t use it to buy a white Americano, or any other daily items for that matter. Others have claimed that bitcoin’s hard limit on the number of coins in circulation makes it an inflation hedge. Well, again, inflation is running at 40-year highs in the US, and still crypto has plunged in price. This is a purely speculative asset, and that’s fine, as long as speculation is in vogue. It no longer is.

Perhaps the biggest storytellers in crypto, though, are operators of so-called stablecoins, which are meant to be pegged one-to-one to the dollar. Generally, this is done by amassing reserves to match the value of tokens in circulation. But details on what those reserves consist of have been lacking, especially from tether, the biggest player in this space. We asked tether this week for some nitty-gritty on how it manages what it says are tens of billions of dollars’ worth of US government bond holdings. It declined to elaborate, saying that information represents its “secret sauce”. Tether’s $1 peg has already taken a severe hit in recent days. That kind of handwaving is unlikely to convince the doubters.

But the new, more cynical and probing tone in markets is not confined to the Wild West of crypto. Equities in the whizz-bang futuristic technology sector have been hit particularly hard, too. “It looks like disruptive cash-burner stocks are leading the market down,” said Charles Cara at Absolute Strategy Research.

The new mood among investors means that companies face greater urgency to shift from grand plans for disruption to old-fashioned cash generation.

“The stocks that don’t manage this have zero value, while those that do will have lower growth (albeit more profits) which argues for lower valuations,” he said. “Either way, it does not point to a long-term rebound in these high valuation stocks.”

The game has, quite simply, changed, led by the jump in US government bond yields — the flip side of a drop in price as inflation stays sticky and central banks crank up benchmark interest rates.

“With higher rates, there’s less willingness by investors to finance companies that are cash flow negative,” said David Older, head of equities at Carmignac. The 10-year US government bond yield, which has swept up from 1.5 per cent at the end of last year to 2.9 per cent now, is the key metric he watches here, he says.

“How much of the expansion of multiples was sustainable and valid, and how much was down to low interest rates and to people staying at home trading stocks? There’s a lot of pain in the market,” he added.

Favoured up-and-coming stocks of the lockdown era, particularly from companies that failed to spot they were riding a short-term wave, are no longer working. Instead, Older is looking for opportunities in sectors such as cyber security and software — companies that can point to real and steady cash flows.

It may be less exciting than getting in early on a disruptive stock or picking the next Amazon. But there are reasons why oil major Saudi Aramco eclipsed Apple as the most valuable company in the world this week. While high energy prices drive its share price, boring also sells.

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https://www.ft.com/content/2929aef3-2caf-4530-8672-9c057ae72c21

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