Keep Calm and Crypto On

Why I’m Not Worried by the Latest Market Slide

Crypto is having a moment—again.

As I write this, major cryptos like bitcoin and Ethereum are down more than 10% on the week.

This latest bout of crypto craziness came in response to the recently released Federal Reserve minutes, in which Fed governors said the risk from inflation is real. Maybe we can get Fed Chair Jerome Powell on the Field Notes mailing list…he would’ve read a year ago that this is where we’d be.

But I digress…

The “news” that inflation is suddenly news and that interest rates are (probably) going higher has freaked out stocks, bonds, and crypto.

I understand why, of course.

Higher interest rates are going to hurt American consumers and businesses, both of which are carrying record levels of debt. That’s going to hurt corporate profits and thus, stock prices.

Over on the bond side, higher rates mean newly issued corporate and government debt will carry higher interest payments, meaning existing bonds are less appealing.

And as for crypto…

Wait…there is no “as for crypto.”

What’s happening with bitcoin and Ethereum and many of the others is sympathy pain. They’re simply falling because the general markets are falling, and when investors go soft in the knees, they sell everything willy-nilly to hold cash.

But let’s deconstruct this for a moment.

Bitcoin and Ethereum don’t rely on debt. They don’t even really rely on consumer spending to generate profits, as do companies. Same goes for so much of the crypto space. I’ll use as my example a crypto known as Solana. It’s a crypto network like Ethereum—meaning other crypto projects can run on top of it. Only Solana is 270x faster and 99.99% less expensive than Ethereum. (Note: Ethereum is going to remain king of the hill, but successful competitors are going to spring up.)

I tell my friends that Solana reminds me a lot of Apple in that it has a distinct “fan-boy” appeal to it.

Because of its speed and cost advantages, SOL, as it’s known, is attracting a ton of non-fungible token, or NFT, projects—one-of-a-kind cryptos you see all over the art world these days. It’s also attracting decentralized finance applications—businesses and services that offer savings and loans but using cryptocurrencies.

In a world of inflation, savers are going to flock to where they can earn bigger returns on their cash. That’s decentralized finance, or DeFi. At one such DeFi site on Solana, I’m picking up a 168% annualized return on one of the crypto I own.

Investors, meanwhile, are going to look for places to put dollars to work in non-paper assets, such as art, even if that art is digital.

All of the transactions involved in those two processes require people to use Solana as the medium of exchange. They have to buy/own SOL to pursue their goals.

The same thing happens on Ethereum, and Polygon, and Avalanche, and all the other major crypto networks.

And then you have crypto projects that are serving a host of business and social needs. And crypto projects that operate as micro-payment systems on global gaming platforms. And crypto projects that allow cross-border payments in seconds and at fractions of the usual cost, destroying the traditional banking model that requires big payments and many days or even a week to move cash from one country to the other.

My point here is that a great swath of the crypto world really doesn’t sway to the beat of interest rates and the Federal Reserve. They’re global mediums of payment or value or network services.

Yes, the Fed’s moves can—and obviously do—have an impact because investors always react first to the news without really thinking. They want to be a first-mover before everyone else dumps.

But then they stop and think about it days later, and they realize, “Well, that was boneheaded.” And they wade back into crypto.

That’s what we’re going to see again this time.

Fundamentally, nothing has changed with crypto. Aside from serving as reactionary fuel, U.S. interest rates really don’t have much of a bearing on Solana…or bitcoin…or Ethereum, or most of the other major cryptos.

So, don’t let this moment cause you angst.

If anything, I’d be using the weakness to add to my crypto positions. Which is exactly what I’ve been doing by way of NFTs. More on that in another column.

In the meantime, keep calm…and crypto on.

Featured image: ©iStock/Benjamin Toth