Why this Nobel Prize winner is WRONG about crypto
3rd February 2022 |
Paul Krugman is one of the most widely respected economists of our time.
He holds a Nobel Prize in economics and is a regular writer for the New York Times.
He carries a fair amount of clout, and his views are listened to with open ears by many investors.
In particular, his latest view on the crypto market is one of great pessimism.
In a piece written for the New York Times on 27 January 2022, Krugman compared the latest downturn in the crypto market to the crash in sub-prime mortgages that occurred in the United States from 2007.
This is following the sharp decline in the valuation of crypto assets over the preceding two months or so. For example, bitcoin’s price has fallen from its all-time high of $67,582.60 set on 8 November to $37,849 at the time of writing – a fall of 44%.
Of course, the sub-prime mortgage crash happened when large numbers of US homeowners defaulted on their loans, having being offered abundant high-risk mortgages despite their poor credit ratings.
The sub-prime mortgage crash was the proximate cause of the global financial crisis of 2008-9.
In essence, Krugman is suggesting that the crypto market is in a bubble, akin to the bubble in mortgage-backed securities (MBS) immediately prior to the sub-prime crisis.
However, we very much disagree with Krugman here, and wish to provide you with some reassurance.
The crypto world was not a bubble in early November. It is not a bubble now. In terms of the metaphor, there is no bursting.
Cryptos are merely experiencing an inevitable drop in prices.
The main reason for the slippage in prices is a fall in investor appetite for risk. This, in turn, is in part due to concerns over the economic and financial impact of the Omicron variant of Covid-19.
In addition, widespread comments about rising risks of inflation have pointed to a tightening in monetary policy (i.e. higher official interest rates and lower purchases of bonds by central banks) have pointed to a substantial change in the general financial environment.
The bursting of the sub-prime mortgage bubble had a dramatic impact because MBS were very widely held by institutional investors, including banks. Some investors actually or effectively had positions that were leveraged (i.e. involving borrowing). As particular financial institutions failed (or were allowed to fail), there appeared a real risk that the entire banking system in the United States and the UK (and some other countries) would collapse.
Exposures to crypto are emphatically not concentrated in the hands of major financial institutions, and they are generally not leveraged. This is something that we discussed here in September last year.
In fact, we go into greater depth on the goings-on in the crypto market in Sam Volkering’s Crypto Network, which is released every fortnight. You can access that here.
Nevertheless, given the widespread (and not necessarily helpful) commentary on the situation in the crypto world, we have dedicated this edition of Frontier Tech Investor to those companies in the portfolio which are most involved with crypto. The share price changes which we cite have been calculated from 8 November 2021 (the date on which bitcoin reached its all-time-high of $67,582.60) through to the time of writing – unless stated otherwise.
Argo Blockchain (LSE: ARB) is a miner of bitcoin. Its share price has dropped by 45.4%, from 133GBp to 72.59GBp. The nature of Argo’s business is such that it is exposed directly to the price of bitcoin, and it is perceived as such. Despite market headwinds, Argo is seeking to establish itself in not only the crypto mining space, but also across other exciting areas of the crypto world. This includes decentralised finance (DeFi), non-fungible tokens (NFTs) and metaverse ecosystems. It’s shaping up to become a multi-faceted company within the rapidly evolving crypto world.
Equals (LSE: EQLS) is an international payments platform, allowing for seamless cross border exchange of both fiat and cryptocurrencies. Its share price has actually risen by 18.5%, going from 65GBp to 77.10GBp. We think that this very strong performance is due to its transition away from being solely a travel cash company, to an international payments ecosystem that prioritises business to business (B2B) transactions. Whilst removing barriers to currency exchanges for businesses, the company has also dipped its hand into the crypto market by offering crypto liquidity to its customers. We are eager for the company to announce further developments on this front.
HANetf ETC Group Digital Assets and Blockchain Equity UCITS ETF (KOIP) is an exchange-traded fund (ETF) that tracks the Solactive ETC Group Digital Assets and Blockchain Index, comprised of 30 blockchain-centric stocks. Its share price has fallen from 585.10GBp on 16 November 2021 to 286.8GBp – a drop of 50.9%. We can attribute this to the recent “risk off” sentiment in the markets, which has been weighing heavily on the valuations of crypto-related stocks. However, the index continues to evolve with the crypto industry as it accommodates some of the leading players in the space as it sees fit, including Coinbase and Riot Blockchain. As these companies begin to shake off the crypto market downturn, KOIP’s value should once again return to an upward trajectory.
IOTA ($MIOTA) is a crypto seeking to provide seamless exchange amongst the Internet of Things (IoT) including smart electric vehicle (EV) charging and car wallet capabilities. Its price has fallen 39.4% from $1.37 to $0.83. We attribute the decline to delays in the migration to its new Firefly wallet, coupled with waning investor risk sentiment towards crypto. However, the migration to the new wallet is now complete. IOTA is now, in our view, making excellent progress. For example, as of November 2021, it has added staking capabilities in which IOTA holders can earn MIOTA tokens through rolling airdrops. This shows IOTA’s commitment to growing its community and providing value to the IoT.
Mode (LSE: MODE) is a payments ecosystem that allows users to pay with and manage digital currencies such as bitcoin. Its share price has fallen from 31.20GBp to 14.40GBp, a fall of 53.8%. Mode is still at a nascent stage in commercialisation. In our view, this is why it has felt the strain of crypto downturn the most out of all of our stocks. However, it does have an ongoing contract with e-commerce giant The Hut Group (THG), in which Mode is providing crypto payment services to 30 of THG’s brands. Heading into 2022, we believe that Mode has the capabilities to expand its commercial activities.
Despite current headwinds, we believe that each of our crypto plays has the strength to weather the storm and play a key part in bringing crypto further into the mainstream.
As a reminder, please ensure you stick to the buy limits as indicated in the buy list. If a stock is trading over the buy limit is automatically moves to a HOLD. If it’s trading below the buy limit, unless otherwise stated it automatically moves to a BUY.
Buy list update
Surface Transforms (LSE: SCE)
Surface Transforms is a developer of carbon ceramic brake discs for supercars.
The company’s latest trading update is cause for excitement.
For the year ended 31 December 2021, revenue grew 20% to £2.4 million (up from £2 million recorded over the same period in the previous year).
The company also has a healthy cash position, holding £13 million in cash as of 31 December 2021.
Most importantly, the company has put to bed any lingering worries regarding its Knowsley production facility.
If you recall, in our 23 December 2021 update, we notified you of a production mishap at the facility.
It concerned a problematic furnace, which was stalling production, and which threatened to reduce revenues. However, the company is now back on track to reach its targets.
The company is now looking to build its base of super car customers, which already includes McLaren and Lamborghini.
We reiterate our BUY recommendation on the stock. You can find the original recommendation here.
The Frontier Tech Investor “Top Three”
Sometimes it’s hard to decide on which stocks to invest in from our buy list.
Below is our Frontier Tech Investor “Top Three” section showing three stocks in open BUY positions. If you’re trying to figure out what to invest in next, these are three that we think are a great place to start.
This doesn’t mean our other stocks are no good: this is just a tool to help you spot the next Frontier Tech Investor stock that could be worthy of your consideration.
Ilika (LSE: IKA) – Ilika is emerging as a pioneer in solid state battery technology. In particular, it is shaking up the EV battery market. Its battery interiors are solid state rather than liquified, providing a charging rate and capacity that its conventional competitors cannot rival. Further, its batteries are used in wind turbine generators. As such, the company has two routes into the green energy sector, which is at the forefront of investors’ minds following the successful COP26 climate change summit. You can find the original recommendation here.
EQTEC (LSE: EQT) – EQTEC is a unique, green energy company that is setting the standard for sustainable energy production. Its innovative gasification technology can convert up to 50 feedstocks into sustainable energy sources. It plays a pivotal role in reducing methane emissions from rotting waste at landfill sites. This matters because methane can be up to 86 times more potent than carbon dioxide at trapping heat in the atmosphere. As a result, we believe that the company has a key role to play in helping policymakers achieve stringent emissions targets in the face of COP26. You can find the original recommendation here.
MPAC Group (LSE: MPAC) – MPAC is a leading provider of packaging solutions. The company is helping to deliver efficiency gains to customers through its automated processes that harness some of the most powerful technologies of the modern day. This includes augmented reality (AR) and the use of “smart” machinery. With MPAC, it’s the machines telling the human what to do, rather than the other way round, with the result that human error is eradicated and that manufacturing lines are smoother than ever before. You can find the original recommendation here.
Sam Volkering
Editor, Frontier Tech Investor
Elliott Playle
Junior Analyst, Frontier Tech Investor
