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Crypto shake-out shows boredom is back

When Coinbase first listed on public exchanges last year, it was quite the moment for the crypto exchange itself and for the digital asset industry in general – the moment when crypto was allowed behind the velvet rope and into the Wall Street establishment.

It doesn’t matter that the company’s own regulatory documents said it was dependent on a small number of customers, or that it said employees “generally don’t follow the same customs and compliance rules that companies in financial services”. It was effectively a case of “shut up and take my money.” The listing provided Coinbase with a market capitalization of $65 billion, at the time on par with the value of Intercontinental Exchange, the owner of the New York Stock Exchange itself.

The stock has been a misfire from the start. Investors who entered on day one were already down 25% at the start of this year. But after a truly dismal week marked by lackluster first-quarter results and a disclosure error that forced chief executive Brian Armstrong to apologize and denying that the company was on the verge of bankruptcy, the shares are now down 80% from their opening price in their 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 drive up interest rates. The new, more demanding mantra is “a cool story, mate. Prove it. It’s a recurring theme in financial markets. Stories without substance don’t sell anymore.

This is perhaps most clearly illustrated in the crypto asset market on which Coinbase depends. Bitcoin, ethereum, and a small handful of other coins are attracting attention in this space, along with joke coins that tend to be named after Elon Musk’s pets. (Not really.)

For years, the larger of these tokens have attracted buyers, usually retail investors, but also the odd libertarian billionaire and certain hedge funds and pools of private wealth.

The stories supporting these purchases have been varied. Some true believers say crypto is a new global currency. Give it time, they say. Well, it’s had time now, over a decade in fact, and I still can’t use it to buy a white Americano, or any everyday item for that matter. Others have claimed that bitcoin’s strict limit on the number of coins in circulation makes it a hedge against inflation. Well, again, inflation is hitting 40-year highs in the US, and the price of crypto has fallen again. It is a purely speculative asset, and so much the better, as long as speculation is in fashion. This is no longer the case.

However, perhaps the biggest storytellers in crypto are the operators of so-called stablecoins, which are supposedly pegged one-to-one to the dollar. Typically, this is done by amassing reserves to match the value of the tokens in circulation. But details on the composition of these reserves have been lacking, especially from Tether, the biggest player in this space. We asked tether this week for details on how it handles what it says is tens of billions of dollars in US government bonds. He declined to give further details, saying the information is his “secret sauce”. Tether’s $1 peg has already been hit hard in recent days. This kind of hand signal is unlikely to convince skeptics.

But the new, more cynical and more compelling tone in the markets is not limited to the Wild West of crypto. Shares in the trending futuristic technology sector were also particularly hard hit. “It seems like disruptive stocks that burn money are dragging the market down,” said Charles Cara of Absolute Strategy Research.

The new mood among investors means companies face greater urgency to move from big disruption projects to old-fashioned cash generation.

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

The game has simply changed, driven by rising US government bond yields – the flip side of falling prices as inflation remains sticky and central banks raise benchmark interest rates.

“With higher rates, investors are less inclined to finance companies with negative cash flows,” said David Older, head of equities at Carmignac. The yield on 10-year US government bonds, which has risen from 1.5% at the end of last year to 2.9% now, is the key metric he’s watching here, he says.

“How much of the multiple expansion was sustainable and worthwhile, and how much was due to low interest rates and people staying home to trade stocks? There is a lot of pain in the market, he added.

Promising foreclosure-era stocks, especially those of companies that failed to notice they were riding a short-term wave, no longer work. Instead, Older is looking for opportunities in industries like cybersecurity and software — companies that can point to real, steady cash flow.

That can be less exciting than jumping into a disruptive stock early or picking the next Amazon. But there are reasons why oil major Saudi Aramco eclipse Apple as the world’s most valuable company this week. While high energy prices drive its stock price, the boring one also sells.

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