CRYPTO REFLECTION

Introduction

The good thing of being on platforms like Facebook, Twitter, VKontakte etc. as professional investor - with a reasonably-sized portfolio as UHNW private investor on the side - is that you get a sense of what really makes the masses tick these days.

It is amazing to see to what extent 'Crypto' has created a polemic between 'protagonists' and 'antagonists'. The old discussions and papers about the value of gold as store of wealth are peanuts compared to what is going on here. Earlier today I got caught in such a discussion as interested listener. The protagonists of Crypto where furious about Charlie Munger's (see picture below) remarks in Fortune that he believes that bitcoin is 'Stupid and Evil' , basically translating it into 'that old boomer is losing it'! The antagonists pointed to the fact that the other guys and girls were just chasing Tulipomania-style dreams and jealous of guys like Charlie who with Berkshire Hathaway achieved real-time what the protagonists were just dreaming about...

As an older guy (lol, yep, me too) who sees crypto as an 'alternative asset class' (but that is true for so many other exotic investment opportunities from Art to Pools of Footballers to Third-Party Life Insurance etc), I feel that the truth lies somewhere in the middle. Let me explain (with upfront apologies for the amount of words needed for this reflection).

Is Crypto 'Currency'?

If we use the famous monetary equation of exchange - M times V = P times y - the crypto folks want to see crypto as M (money) already NOW with the old folks saying: 'Nope! It is not yet and technically that is true. With exception of a few odd countries where it is accepted as fiat or almost fiat currency.

But when it is not yet M, it is technically only a good, i.e. part of P (price level) x y (real goods traded). A kind of 'consumption' if you like. Where people are so excited that increased prices translate into more demand. That translates into guys like Charlie Munger saying it is totally stupid and evil.

However, there is a subtle element here. In Emerging Countries, we often see either:

A) That investors and consumers don't trust their own currency (and often rightly so) in which case they look for alternative means of value storage. If they feel that crypto is an alternative to gold and comparable alternatives, then so be it. And when that group of people is growing, the likelihood of the thing becoming a kind of pseudo-money goes up. And

B) There are also Emerging Countries doing so well, that money is a bit tight vis-a-vis the size of the economy. When governments suppress interest rates so as to continue the economic growth story, while at the same time forbidding their people to go for foreign fiat currency, automatically the people will look for alternatives. Be it gold or something else. A true capital flight. Yep, that explains also why we see crypto being so popular in countries like China!

Size (and Regulation) Matter

At the moment the crypto market is still very small. Even when adding up all the crypto in the world, it is still nowhere compared to the size of stock markets, economies etc. However, when major fiat currencies are Western (USD, Euro, Swiss Franc etc) with those economies not growing that much anymore, and with the world not open to accept EM alternatives (only Russia seems very happy about the Yuan Renminbi these days) - and EM countries like China already fighting crypto - then we have an issue.

And that issue is exaggerated even further because of all those stories where crypto users/investors are fooled into frauduleus structures. I am sure you all know people in your environment who tell you proudly that they invest in 'BTC' (bitcoin). With you knowing that they have probably a portfolio size of USD 1,000 or 10,000 max. In other words: they are not investing technically in BTC but in some kind of BTC partial holding, via one or the other hopefully honest and sincere intermediary. If not, they have a huge problem in what is basically an unregulated market out there. Take for instance the two recent big frauds in Turkey, a typical country of the type A) above, where people started to mistrust the own currency.

Interpol Notice Regarding One of the Turkish Crypto Frauds - Thodex Case

But... when fooled by frauds, what they will do is .. yep! Ask for the government to protect them and generate regulation. In as much as crypto is indicative of people in a globalizing world needing less government and more international freedom (the main reason of Western governments crushing good and bad international tax structures is not so much fairness, but the simple fact that with less economic growth they need a bigger tax base), at the same it will - to become truly a success - need some kind of regulation to get to Gold or even accepted fiat money status.

And that can only happen when truly big parties - as opposed to small fish - start to embrace it. We are not even close to that point! The total crypto market - all 'currencies' combined (excusez le mot) - is of a size similar as some large cap companies on the stock market!

Where do we go from here?

I agree with the youngsters that we can at the moment not exclude that it will grow into that status, but neither can we disagree completely with the older guys that the odds are still not very clear. As relatively small family office investor we do - together with some partnering families - at the moment hold a double digit amount of bitcoin 'long' within a long-short pairs trading sub-portfolio which in and of itself is just a small fraction of our total portfolio (net exposure less than 1-2 percent). That already makes us relatively big and active! And as long as the market doesn't grow much, we will probably leave it like this.

So: I am definitely open to the potential. But: also prepared to accept that without one or the other major development in countries with less strong currencies and/or the Western world continuing its refusal to accept that China and in due time India are here to stay as international giants, that the whole development might translate into a panicky sale-off after an unclear period of nervousness. Something we did see long ago already in the Tulipomania.

As long as it is NOT M in the above equation, no one can exclude that from happening. In the meantime no one can either exclude that the extreme volatility can translate into neat rides for active traders. I recall that in the good old days the IMF came up with Special Drawing Rights (SDRs) as a kind of international currency to avoid the battle of currencies. That didn't really happen and the USD became the global reserve currency. With Western nations struggling with growth rates, the world needs alternatives. Will crypto develop into the next generation SDR? That is an open question. To get there, one still needs embrace by large players (governments, institutional investors, multinationals etc). As long as guys like us are considered 'big' in this market, we won't get there any time soon. And the battle between protagonists and antagonists will continue, with volatility remaining sky-high.

Is this the future? Or are the crypto protagonists forgetting that there is - still not in the picture - a donkey or another monkey walking in front of the BTC guy?