TPP Crypto Musings

TPP Crypto Musings:

Despite crypto being considered last year’s worst-performing asset class, the overall amount of global investors owning crypto rose from 36% to 39% on a quarter-on-quarter basis.

There is a bitter irony in the turmoil currently gripping the crypto universe.

Crypto was born in the depths of the great financial crisis of 2008 as a backlash against the failings of the conventional financial system, with its overleveraged shadow banks and daisy chain of leverage and maturity mismatch.

The original Bitcoin white paper published that same year sold a vision in which money was refashioned as a self-sustaining system of peer-to-peer transfer without the need for intermediaries.

However, today’s upheaval bears all the hallmarks of precisely the failings that the industry’s early proponents railed against. As firms collapse and coin prices crash, the unravelling of this new daisy chain of over-leveraged shadow crypto banks is now in full flow.

While we survey the wreckage and plot a course for the policy response to rein in the sector, we need to keep in mind some key facts. Crypto operates under the banner of decentralisation, but it is highly centralised in two crucial respects.

First, many supposedly decentralised protocols turn out to be highly concentrated in terms of who actually governs and controls things. Often, it is the founder and a small number of venture capital backers that are in charge — as evidenced by the implosion of the Terra stablecoin in May. In most instances, crypto is decentralised in name only.

Second, centralised intermediaries, such as Sam Bankman-Fried’s FTX, play a pivotal role as the gateway into the crypto world from the conventional financial system. They channel the flow of new investors, which is the oxygen that keeps these speculative dynamics alive.

BIS research in this area has highlighted how crypto only really works when this is happening. To the extent that recruiting new investors is key to the survival of crypto, centralised intermediaries are crucial to propping up the edifice.

It is just me or is this not the basis for a Ponzi Scheme?

Now we hear that Cryptocurrency lender Genesis Global Holdco LLC has also filed for bankruptcy, the latest firm to collapse in the aftermath of the FTX exchange’s swift downfall and last year’s rout in digital assets.

The company, plus subsidiaries Genesis Global Capital LLC and Genesis Asia Pacific Pte, filed for Chapter 11 protection on Thursday in the Southern District of New York, court documents show. Genesis Global Capital listed the same range, $1 billion to $10 billion, for both assets and liabilities as well as over 100,000 creditors — the top 50 unsecured claims amount to about $3.4 billion.

So What’s Next?

Crypto is largely self-referential; its activities deal with trading other types of crypto and have little reference to tangible economic activity. Ultimately, any public policy response needs to start with a realistic assessment of the economic value that flows from blockchain technology.

Blockchain’s returns have been remarkably meagre considering the early hype.

One after the other, projects that have explored its potential benefits have come up empty-handed. A more promising approach is through central bank digital currencies that operate within the broader digital monetary system. This is an approach that builds on the trust embedded in central bank money, and could serve public interest in a future monetary system.

The technology benefits flow to real world economic activities rather than just other types of crypto. The economic benefits of decentralisation should also be scrutinised more effectively. We are now seeing what happens when an industry rests simply on an article of faith.

We understand why investors look towards the crypto arena. Most are in search of better returns than their wealth managers and IFA's provide for them. However, there are better ways.

If you have an underperforming portfolio, and are frustrated with your wealth manager, contact our team.

Find out how to build a portfolio that aims to beat the market benchmark by at least 2 x per annum.

Don't just hear about the investment revolution:

Join it.

‍