Why bitcoin and crypto currency crashes aren’t a bad thing

Imagine for a minute the Aussie share market plunged more than 20 per cent in a single session.

Bitcoin is the most widely traded of the crypto currencies.

Imagine for a minute the Australian share benchmark the S&P/ASX 200 plunged more than 20 per cent in a single session and futures markets were pointing to similar losses.

Add to the mix a drop in currency values around the world and throw in the collapse of some second tier stock exchanges.

It’s gripping stuff.

In recent days more than $US500bn in has been wiped from crypto currency markets. The falls have been led by the widely traded bitcoin and was felt across others in the crypto universe. This includes ethereum, ripple and dogecoin (the cryptocurrency that features the Japanese dog breed the Shiba Inu as its logo).

For the most part we’d never know as most of this drama unfolding in the virtual world.

Any market drop on the scale of the weekend’s crypto collapse would be a significant event. It would even prompt calming words from politicians and central bankers about the fundamentals of the economy. These moves barely rated a mention from either.

But a fall in this magnitude is indeed shaping up to be a big deal with some real world implications.

Figures to be released this week by crypto exchange operator Independent Reserve will show nearly 29 per cent of adult Australians have invested or plan to invest in crypto currencies. The figures, which are current at November, are up sharply from 18.4 per cent this time a year ago.

Cryptocurrencies, led by bitcoin, fell as much as 20 per cent over the weekend. Picture: Getty Images

While the financial scale is much larger, the proportion of adult Australians directly holding shares outside their super fund is 35 per cent, according to ASX figures released in 2020.

The Reserve Bank, which is closely watching the evolution of crypto, has previously disputed ownership figures in the 20 per cent range saying it is hard to point to any firm evidence on domestic cryptocurrency holdings.

Crypto markets rarely confirm to the rules of physical markets which makes the implications of the weekend hit harder to work through.

There was single trigger for the fall – which has broadly been blamed on the rise of the Covid’s Omicron strain to a breakout of inflation in the US.

More likely a large volume of derivatives positions in bitcoin were unwound. Given there is no central bank that will back crypto markets, no financial backstops or market circuit breakers, and 24/7 trading schedule means long investors were caught out. Badly.

There is no doubt bitcoin has had a wild year, reaching a record high of more than $US67,600 in November, up from a low of $US29,000 in July. Late Monday it was trading at $US48,300 – this compares to nearly $US60,000 on Friday night.

But Martin Rogers of fund manager KTM Ventures – an investor in cryptocurrency and companies providing crypto infrastructure such as exchanges and miners – argues crashes like this are not a cause for panic.

“In one way it’s actually much healthier as we don’t have built up credit problems which can occur over a very long period of time,” says Rogers who also has a small personal exposure to bitcoin. Here he compares the big pressures building in conventional bond and equity markets.

Digital currency dogecoin was launched in 2013.

While long-term owners of cyber currencies are increasingly used to the volatility (Elon Musk can send the market into freefall through a single tweet), major swings still represent a potential hit to consumer confidence.

Crypto ownership starts to manifest other forms of digital ownership. It’s the Gen Z’s and Millennials that feel comfortable trading and owning more exotic named crypto and using it for investment or all kinds of spending inside computer games or exposure to art through ethereum-based non-fungible tokens (NFTs).

Remember, Millennials aren’t the kids they once were. At the top end their generation is pushing 40 years old and are becoming a big player in the economy.

Baby Boomers and Generation X’s, meanwhile, prefer bitcoin which has a global market capitalisation of $1.3 trillion – equivalent to the entire ASX and is arguably a finite asset.

Finite because 21 million bitcoins will only ever exist. So far nearly 19 million have been mined. Every 10 minutes the bitcoin software protocol releases 6.25 bitcoins by whomever finds them (effectively the mining of bitcoins). So time is running out.

Crypto is gradually finding a place in the mainstream – last month the nation’s biggest bank Commonwealth Bank gave its 6.4 million digital customers the ability to buy, sell and hold crypto assets directly through the CommBank app.

Others including Cryptospend have developed the technology to store crypto on Visa credit card and convert spending into local currency.

Commonwealth Bank has allowed its customers to trade in cybercurrencies. Picture: NCA NewsWire

The RBA for its part sees the technology backing cyber currencies as important in facilitating transactions but the currencies themselves as still too hot.

“Individuals will want to pay with, and receive, financial assets that have a high degree of stability of value. I expect that it will be rare that both parties to a transaction, especially a high-value one, will want the settlement to occur via payment in some cryptocurrency with high volatility,” the RBA’s head of payments policy Tony Richards told a recent conference.

In other words, crypto is not yet for the faint hearted.

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The Bunnings playbook

Could this time be different for Metcash?

The third player in Australian supermarket retailing Metcash has forever found itself in caught in a strategic pincer.

The wholesaler that sits behind the IGA supermarket brand and the Mitre 10 hardware chain doesn’t directly own its retail customers (they belong to the franchise operators) and for more than two decades has been squeezed on the shop floor by bigger rivals Woolworths and Wesfarmers (through Coles and hardware giant Bunnings) that have balance sheet heft to throw around.

In recent years it has seen its food market share slip to fourth place with the advent of Europe supermarket powerhouse Aldi.

For his part Metcash chief executive Jeff Adams has seen the turning point.

Speaking to The Australian on Monday he talks up the so-called pillars of the business: food, liquor and hardware.

Indeed Metcash has diversified to a point where higher margin non-food sales represent nearly half of overall sales. This is translating to serious earnings and share price gains.

Metcash chief executive Jeff Adams.

Metcash on Monday posted a 1.5 per cent increase in group wide first half sales to $8.2bn. But group pre-tax earnings were up 13.9 per cent to $231.2m. The retailer has increased its interim dividend by 31 per cent to 10.5c a share.

During the half profit margins in food came in at 2.1 per cent, while profit margins across hardware during the same period peaked at 6.7 per cent.

As it stands supermarkets (or food retailing) needs to work twice as hard to deliver the same return as Metcash’s hardware business. And this has helped shares in Metcash jump 7.3 per cent so far on Monday. Shares in the company are up 21 per cent so far this calendar year (compared to 8 per cent for the S&P/ASX 200 over the same time frame).

In the food retailing home delivery is emerging as the new battle ground, with Covid turbocharging growth.

Bigger rivals Coles and Woolies are spending hundreds of millions building out their last mile distribution network – chances are you have sat behind the increasing number of Coles or Woolworths-branded delivery trucks on the road. But Adams is adamant there is no need to build out another distribution network noting: “the last mile challenge” also comes with a massive price tag.

“What Covid has shown are new players are very good at building out delivery networks – that’s only going to continue to grow.”

The profit margins from hardware such as Metcash’s Total Tools business are higher.

Metcash’s IGA stores use distributors DoorDash or Uber for home delivery while there is the persistent suggestions that other offshore players including Germany’s Gorillas are eyeing the local market.

After taking on the top job in late 2017, Adams a former Tesco executive, is due to step down from the role following a transition period early next year but he says the heavy lifting has been done in getting Metcash’s back office and its supply chains humming. This sets it up for the next phase of growth.

Under his watch Metcash has doubled down in hardware through the increase in ownership the Total Tools franchise business at a time when the building and construction sector is red hot.

Metcash will move to full ownership of Total Tools towards the end of financial year 2024 with put and call arrangements in place.

Total Tools is the franchisor to the largest tool retail network in Australia with 90 stores nationwide. It targets tradies who rely on specialised (read expensive) tools as well as substantial aftermarket care of these tools.

For Metcash a quiet revolution is taking place inside the boardroom.

Well-regarded former boss of Super Retail Peter Birtles who is now a director is keeping a close look at Total Tools, likewise chair Rob Murray is also a veteran of Super Retail.

Elsewhere Metcash director Christine Holman sits on fast moving consumer goods board including Collins Food and Blackmores and has a tech background via Wisetech Global.

Metcash’s Adams who grew up in Louisiana and studied business as Louisiana State University, says the retailer passed the test of Covid over the past two years. His cites much needed streamlining to Metcash’s back office and strengthening the supply chain and distribution which had put the retailer on a footing to meet the intense pressure on the business panic buying across the nation through Covid. Despite some disruption at the peak of the crisis he was proud of the retailer’s performance.

“In a lot of the cases we are the only store in town so it’s all the more important to keep the supply chain open,” he says.

He cites Metcash’s 5-year “MFuture” turnaround strategy (which included major store upgrade and distribution expansion in Queensland and South Australia) and work in winning back trust of independent retailers that can make or break the business. At the same time he notes the customers who were flocking to local IGA’s rather than big box supermarkets during the height of the pandemic have stayed.

IGA staffer Maria Smith at Romeo's Foodland McLaren Vale, Adelaide. Picture: AAP

Incoming Metcash boss Doug Jones will move to Australia from Johannesburg, South Africa in the new year. There Jones has overseen the wholesale business of Massmart which is majority-owned by Walmart. Massmart ranks as one of South Africa’s biggest retailers with positions in wholesale food, liquor, home improvement and general merchandise. It is also one of the country’s biggest digital retailers.

Adams wouldn’t be drawn on the health of the broader economy but he is seeing pockets of strength across the key segments that Metcash operate in.

“You want to leave the business in better shape than when you found it” he tells The Australian, and for his part he believes this is where Metcash is today.

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Originally published as Why bitcoin and crypto currency crashes aren’t a bad thing