Why gold wins in the bitcoin, Elon Musk tussle: Robert Gottliebsen

Bitcoin and the cryptocurrency market are facing yet another severe test. Prices slumped last night amid rumours that major players in the market are in danger of collapsing under the weight of undisclosed, heavy debt.

Tesla boss Elon Musk would have been on the edge of his seat watching the bitcoin drama unfold while at Goldman Sachs, where faces were already red, there was another round of embarrassed head shaking.

Cryptocurrencies, led by bitcoin, have been rivalling gold as a store of value for those who are nervous about the value of paper currencies led by the US dollar. The latest fall in bitcoin triggered enthusiastic buying of the yellow metal. It may have won.

But for Musk, the big fall in bitcoin couldn’t have come at a worse time because last week he was unrestrained in his enthusiasm for bitcoin, and it was an important part of his ambitious plans for Twitter. Musk not only secured a handy $US500m ($769m) loan from the crypto exchange Binance to finance his Twitter acquisition, but hired crypto investor Andreesen Horowitz and other cyrpto enthusiasts to join Twitter.

Musk has been a long-term enthusiast for bitcoin and – given his role in Tesla – this encouraged many young people to buy bitcoin and the other currencies via deals based on high borrowing. Many of them were sold out in the last 24 hours as the cryptocurrencies slumped, which added to the fall.

The decline also impacts many older conservative investors.

One of the world’s leading investment banks, Goldman Sachs, at the start of the 2022, predicted that bitcoin would rise to about $US100,000 in the next five years and supported a special bitcoin investment vehicle called the Grayscale Bitcoin Trust, which attracted traditional investors.

Grayscale has been a complete disaster, falling from $US55 to not much more than $US10.

In previous crypto crises, the institutions have come to the rescue, and they will be again needed if bitcoin and the other currencies are to recover from this scare.

What makes the drama that unfolded during the last 24 hours so frightening for those holding bitcoin is that the financial position of the major exchanges is simply not known, and it appears that there maybe large debts endangering their structures.

I suspect much of that lending comes from respectable institutions who were seeking high returns in the era of low interest rates. The prospect of big losses in the institutional lending market may encourage the institutions to support the cryptocurrencies once again, but throwing good money after what might be bad can be a very dangerous strategy.

According to the reports, the crisis started with rumours of financial problems in the FTX crypto exchange so a massive set of withdrawals – akin to a bank run – took place. Suddenly, Sam Bankman-Fried of FTX announced on Twitter that his company has agreed to a sale for an undisclosed sum to Binance – the exchange that is backing Musk. Minutes later, Binance CEO Changpeng Zhao confirmed the announcement, again on Twitter.

There appeared to be almost panic in the way the announcements were made and so while they rallied the market for an hour or so, the cryptocurrencies then began to fall again. Hurried takeovers are often not consummated. And of course, companies linked to FTX such as Alameda also came under pressure.

The underlying problem of the crypto markets is that centralised exchanges like if FTX and Binance are not publicly listed, so nobody knows what their reserve position is. If the cryptocurrency market is to become a real rival to gold, then it will need to become a great deal more transparent. Of course, everyone fears that the lack of transparency is caused by the fact that there is a lot to hide.

The base crypto buyers in recent years have been young people who saw bitcoin and others as a way of gaining the wealth that they believe they had been deprived of in the asset boom.

They supported crypto with almost religious zeal that encompassed liberty-seeking anti-authoritarianism. Some believed they would eventually destroy existing financial structures.

They were also joined by the Chinese, who saw trading in bitcoin and cryptocurrencies as a way of becoming less dependent on the government. Xi Jinping recognised the danger to his rule and greatly restricted their ability to speculate on cryptocurrency. With hindsight, Xi did them a favour. Russia also clamped down on cryptocurrency trading.

This means that this round of cryptocurrency losses is concentrated in Western countries.