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Crypto Bubble

Crypto Bubble

It's over?

Since late November, some of the world’s savviest cryptocurrency investors have been hooked on a game that has cartoon sheep, cartoon wolves, a digital currency called $wool — and the potential to make real money.

Graham Friedman, a self-described crypto evangelist, is among them. Mr. Friedman put up more than $20,000 of his own money to buy one wolf and one sheep — or, rather, unique digital images of them called nonfungible tokens.

“I’m like, dude, the narrative is so cool,” said Mr. Friedman, a director at Republic Crypto, a digital asset strategy company. “I’m here for the waltz.”

Wolf Game, as it is called, applies some familiar financial principles to a mysterious digital world. Players can buy sheep from the creator of the game, identified only as “the Shepherd,” and lend them back to “the barn” — essentially a storehouse — to earn interest. The payments are in $wool, a digital token that can be used as a form of payment anywhere on the Ethereum blockchain, on which the game is built. To get a sheep back from the barn, players must pay a 20 percent tax in $wool to those who bought digital images of cartoon wolves.Crypto prices are highly volatile, as this week’s sell-off showed. But die-hard enthusiasts believe prices will keep soaring in a world where traditional notions of value don’t apply.

When Wolf Game’s creator discovered that the game was vulnerable to hackers and shut it down temporarily to fix its code, freezing everyone’s assets, players had little recourse. They simply had to wait and hope that the game would come back online and that they would be able to retrieve their holdings. This spooked some participants, who got out as fast as they could once the game was running again. But others, including Mr. Friedman, kept playing.

“Getting in there when it looked sort of damaged and reputationally unsure turned out to be very smart,” Mr. Friedman said. By essentially buying the dip, he had tripled his investment to $60,000 as of January.

So it goes in the world of cryptocurrency — a market full of faceless users with nonsensical names who are just as likely to post animated pictures of dogs doing backflips on the moon as they are to buy or sell something of enduring value. There’s big money to be made, but a billionaire investor can get swindled just as easily as a newbie buying a tiny sliver of a single Bitcoin.

Got an idea? Issue a digital coin to fund it — all you need are believers.

And it’s getting wilder.

As stocks were sold off early this week, crypto prices also plunged. Bitcoin dropped nearly 13 percent before rebounding along with stocks. Ethereum’s own coin, Ether, was briefly down 15 percent. Their price declines have dragged down other digital asset prices, too. Analysts attribute the decline to investors who are pulling their money out of higher-growth, risky assets — including technology stocks — as interest rates are set to rise. That has put a dent in the argument, promoted by crypto boosters, that digital assets offer a hedge against losses in other markets.

So how does a new investor make sense of crypto and its constantly changing landscape?

The short answer: It’s impossible.

There are so few reliable measures of value that it’s hard to tell whether the excitement around a particular cryptocurrency is justified — or a bubble about to burst. Traditional financial analysis doesn’t apply here. A stock analyst, for instance, determines whether a company’s shares are expensive or cheap by assessing its business model, future prospects and leadership. But few, if any, of those metrics translate to cryptocurrency valuation. Belief alone can drive value.

It’s hard to even know what counts as a “cryptocurrency.” Bitcoin and Ether are widely regarded as currencies because, like the dollar or the pound, they are used to buy and sell many goods and services. Another 11,000 or more digital coins and tokens also exist, many of them vying to gain enough acceptance to become the next Bitcoin or Ether.

(Coins operate on their own digital backbones, called blockchains. Tokens rely on other blockchains to get around in cyberspace. Coins, tokens and other assets are stored in wallets, which are comparable to online bank accounts except that their holdings are visible to all.)

By standard measures of value, the prices of Bitcoin and Ether are understandable. They are priced highly — with market capitalizations on Wednesday of nearly $690 billion and $290 billion — because they are well established and liquid, with broad user bases. Bitcoin is held in nearly nine million wallets, according to Chainalysis, a data provider.

But there are many other coins and tokens whose prices are skyrocketing, giving them market caps above $1 billion even though they have only 100,000 or so users.

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