Money Rehab with Nicole Lapin - Crypto Crash

Episode Date: May 18, 2022

Crypto is crashing, but Nicole isn’t surprised. Tune in to get the scoop on why crypto is tanking, and how it may be the beginning of the crypto apocalypse. See omnystudio.com/listener for privacy information.

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Well, it doesn't. Charge for wasting our time. I will take a check. Like an old school check. You recognize her from anchoring on CNN, CNBC, and Bloomberg. The only financial expert you don't need a dictionary to understand. Nicole Lappin. Crypto is crashing.

At the time I'm recording this, the price of one Bitcoin is around $30,000. Now that's less than half of the peak value it reached less than a year ago. Can you imagine if the value in your bank account was cut in half with no warning? That's the reality for a lot of folks who have just gone overboard on their crypto investments with the idea that crypto will take them, and I'm quoting here, to the moon. If you've been in money rehab for a while, you'll know that I've been cautioning moderation around crypto since the beginning. OG money rehabbers, how many times have I told you to limit crypto investments to 1% of your net worth? Many, many times. Even when crypto was

peaking and Bitcoin investors were becoming gazillionaires on paper, I still advised caution. And people would tell me, Nicole, why aren't you going all in on crypto? The proof is in the numbers and you love numbers. The value of Bitcoin is skyrocketing. Why are you telling people to get in on the crypto trade? And even though, yes, I do love numbers, something with crypto wasn't quite adding up because cryptocurrency has some blatant conceptual issues I couldn't overlook. My main issue with crypto is that it isn't intrinsically valuable, meaning it's not backed by anything real that has inherent value. At no point did the U.S. Treasury say, yeah, sure, anytime someone wants to bring us a Bitcoin, we will gladly give them X number of dollar bills from our reserves.

No! Crypto's pricing comes just from how much people are willing to trade for it. In goods, in cryptocurrencies, or in dollars. Investing in something with no intrinsic value is a guaranteed way to introduce volatility into our portfolio. It means the investment's value isn't grounded, which makes its price extremely reactive to news, opinions, or even slight changes in investors' perceptions. For example, the Wall Street Journal has a fascinating graphic on the Musk effect, or the phenomenon of how strongly the value of Bitcoin is affected by Elon Musk's tweets. If it makes you nervous that one person's Twitter account has a huge influence over the value of your investments, good. It should. Having the value of your investments be at the whim of

one person's fickle opinion that you have no control over sounds like a huge risk to me. It's essentially like a hot air balloon ride. You might enjoy the view from the top, but once you realize that you are only suspended by hot air, you'll wish you could come off the ride without falling. But unfortunately, what goes up must come down. And I know what you're thinking. Fortunately, what goes up must come down. And I know what you're thinking. Stocks can be volatile too. And yes, individual stocks do absolutely jump around.

But the difference is that stocks are typically tied to something that has intrinsic value, like a company's earnings or revenue or even the product or service that the company offers. The value of crypto isn't tied to anything. It's fugazi, fugazi. And some people speculate that crypto is potentially a Ponzi scheme. To those people, I say the cryptocurrency model has kind of already been used for a Ponzi scheme. Remember OneCoin? Some hardcore crypto fans believe that crypto would take over and ultimately replace the U.S. dollar. And I think that is crazy talk. The dollar is the world's reserve currency, backed by the richest, most powerful nation on the globe. Does anyone really think that the U.S. is going to roll over and let some tech bros take over?

I don't think so. We will probably look back at this like we did the tulip craze, which, if you're not a nerd like me, was a period in the Netherlands in the 1600s where the price of tulip bulbs — tulip bulbs, yep — skyrocketed and collapsed in a span of four years. Many people consider the tulip craze as the first bubble. But with tulip mania, if you overspent on bowls, you at least have a beautiful garden. With this crypto mania, if and when the bubble pops, you'll have a whole lot of nothing. Now, to be fair, not all crypto fans are drawn to cryptocurrency as a potential currency,

but rather like crypto as an investment and specifically a hedge against inflation. Cryptocurrency was supposed to be a safe haven against inflation. So with inflation at 10%, now would be the perfect time to test that, right? So far, hasn't happened. Crypto is down more than the major indexes. This week in particular has been full of signs that crypto is starting to unravel. There's the Coinbase news, which I'll talk about on another episode soon because it's just so insane that I need an entire episode to talk about it. But another sign of the crypto apocalypse

is the fall of stablecoins. Stablecoins are a type of crypto that are designed to track the dollar and thus have been argued to be more stable. But those have gone in the shitter and have proven to not actually track the U.S. dollar. These stablecoins are tanking, but with all the Fed moves, the dollar has strengthened. The strength of the U.S. dollar is up 7% since January. But for example, TerraUSD, a stable coin that was designed to be pegged to the dollar, for the last two years TerraUSD has been impressively stable, with $1 being equal to 1 TerraUSD, give or take a cent in either direction. In that two-year period, the worst dip on record was when TerraUSD dipped down 6% to 94 cents. But that only lasted one day in 2021. This month,

TerraUSD dropped almost 90%, with coins trading at around 12 cents. Last week, the Terra blockchain halted and the coin is officially de-pegged from the U.S. dollar. The real value of Bitcoin, I think, is found in their transaction fees. So a better allegory is a company like Visa or Stripe, not the dollar. But you know what also tracks the dollar? The dollar itself, which you can invest in. Even though I've advised against going all in on crypto, there are some things I've liked about it. For starters, there are 2 billion people in the world who don't have access to banking, but do have smartphones. So I would have loved to see crypto become a tool for financial freedom,

So I would have loved to see crypto become a tool for financial freedom, especially in corrupt countries or ones overwhelmed with inflation. But to be realistic, and I am a realist, I don't see that happening. For today's tip, you can take straight to the bank. There's no such thing as a get-rich-quick scheme. If it sounds too good to be true, it probably is. And you're a smart person. You have figured out way harder things in life. If you don't understand something like this, it's probably not you. It's them.

Money Rehab is a production of iHeartRadio. I'm your host, Nicole Lappin. Our producers are Morgan Lavoie and Mike Coscarelli. Executive producers are Nikki Etor and Will Pearson. Our mascots are Penny and Mimsy. Huge thanks to OG Money Rehab team Michelle Lanz for her development work, Catherine Law for her production and writing magic, and Brandon Dickert for his editing, engineering, and sound design. And as always, thanks to you for finally investing in yourself so that you can get it together and get it all.