Ruth Saldanha: The cryptocurrency market had a rough ride in 2022, and it only got worse with the crypto exchange FTX's bankruptcy. And FTX isn't the only one. There have been several bankruptcies in the space over the past couple of months. But is the pain over and is now a buying opportunity? Madeline Hume is the NEXT Research Analyst for Morningstar Research Services. She is here with us today to tell us what she thinks.
Madeline, thank you so much for being here today.
Madeline Hume: Ruth, thank you for having me.
What’s With the Volatility in Crypto?
Saldanha: So, what are some of the reasons for the bankruptcies that we've been seeing recently in the crypto space?
Hume: There's one word that describes all of the bankruptcies that have been going on in crypto lately, and that's interconnectivity. There are many connective threads between the largest players in crypto assets, and we've seen how dangerous those connections can be when risk management starts to fail. Take for example the instance of Genesis, which is a lender that had connections to both FTX and several other companies within the crypto industry. Genesis was caught up when FTX declared bankruptcy, because they had actually developed a product that lent out customer funds to Alameda, which is FTX's sister hedge fund. Funny story about that.
The only reason we found out about it in the first place is because a publication called CoinDesk debuted a story that explains the insolvency problem happening at Alameda. And CoinDesk was actually a sister firm of Genesis Trading. So, when Genesis had to disclose its connections with Alameda, the parent company that owns both of them actually had to start exploring the sale of CoinDesk.
Companies Find Merger Targets Amidst the Uncertainty
Saldanha: Well, you mentioned this interconnectedness. But at the same time, people right now are considering, at least some of them are considering now a time to buy or even merge. Do you think that's a wise move in this environment?
Hume: If you're a company looking to make an acquisition in the crypto space, now is absolutely a wonderful time to start exploring those opportunities. As we mentioned, CoinDesk has been shopping itself out to various other companies that may want to buy it. But the problem with crypto and companies that have arisen around this industry is always going to be due diligence. I mean, we all remember what happened with the pension funds in Canada investing in FTX. So, that will continue to be a risk, and it's a reason that a lot of firms that otherwise might see a value opportunity have been staying away from crypto altogether.
What Should You Do with Your Crypto Holdings?
Saldanha: Let's talk about retail investors for a bit now. What should investors who already own crypto do at this point?
Hume: For investors that already own cryptocurrencies at the moment, we've all learned a lot of lessons over the past couple of months. But one to keep in mind is that unless you hold the token yourself in a private wallet, there is no guarantee that you have recourse in the event of a bankruptcy or a cybercrime or anything similar. And so, the best way to ensure that you have ownership of those assets is through private wallets by taking your tokens off the exchange.
Is Now the Time to Buy Cryptocurrencies?
Saldanha: And what about people who want to get into crypto? You said it's a good time for companies to consider merging or acquiring, but what about people who want to buy cryptocurrencies right now?
Hume: So, it's certainly true that prices are a lot more measured than they were back in 2021. But the thing with crypto that we always come back to as a valuation-sensitive research shop is that there are no fundamental valuations for cryptocurrencies as an asset class. We're filming this video in February and a common gift to give other people during Valentine's Day is a box of chocolates. And so, you can think of crypto as kind of like a box of chocolates. You never know what you're going to get.
Saldanha: Thank you so much for joining us with your perspectives, Madeline.
Hume: Thanks so much for having me, Ruth.
Saldanha: For Morningstar, I'm Ruth Saldanha.
