Crypto is the Solution, not the Problem

Those who have been wondering what crypto is useful for are getting a real-time explanation. The collapse of Silicon Valley Bank (SVB) is a live demonstration that money is at risk in the hands of a third party. Companies and individuals are pre-conditioned to suppose that a bank deposit is necessarily safe and well curated. It is not. Crypto and Decentralised Finance offer an alternative banking construct where individuals and institutions control their own money and are not reliant on third parties.

The clue is in the word. Crypto comes from the Greek meaning hidden, or secret. In a digital age, crypto and blockchain technology enable digital scarcity and privacy, where crypto assets can be held in private wallets and transferred peer to peer. We can now have money for the internet in the shape of bitcoin. It is why there has been such excitement about Non-Fungible Tokens and Smart Contracts, because they both represent what might be called computational truth. There is no argument about who owns what, and who gets what when a transaction happens.

It is ironic that while the SEC is working hard to close down fiat access to digital assets in the USA, it won’t be lost on businesses with SVB accounts that if had they stored their cash in bitcoin or stablecoins they wouldn’t be in such a mess. They would be able to make the next payroll. Indeed, even the stablecoin that is exposed to SVB (USDC, which has around $3.3bn deposited at the bank) has now only been de-pegged to the tune of 5%.

The popular media interpretation for the collapse of FTX, Celsius, Silvergate and now Silicon Valley Bank is that it shows how risky crypto is, reinforcing the argument for ostracising it. It’s a convenient scapegoat, but the key point is that it is not the technology that it at fault, but the old world financial constructs that have exploited it. But now that non-crypto businesses are being impacted by central bank policy and bank mismanagement, the narrative will turn full circle. Crypto presents itself as the solution, not the problem.

It has become clear that many of crypto’s problems have been overwhelmingly caused by fragility in the traditional financial system rather than the other way around. For all the money lost in crypto over the years, it has been self-contained. There have been no central bank bailouts. The system licks its wounds, learns from its mistakes and moves on, the epitome of anti-fragility. With every iteration it gets stronger. This is the complete opposite of the traditional financial system. As soon as a bank goes down that impacts a wider array of businesses, there are cries for taxpayers to come to the rescue, and they usually do. The Times Online this morning, by way of example:

Source: The Sunday Times https://www.thetimes.co.uk/article/svb-victims-we-need-a-bailout-w3r3cfzfl

The importance of diversifying into liquid alternative assets

Companies and institutional investors have historically been castigated for holding alternative assets on their balance sheet, but as the traditional finance world becomes more interconnected and inherently unstable, it must surely be a fiduciary responsibility for boardrooms to diversify their Treasury risk. The liquid alternative asset role has historically been filled by gold, but bitcoin is now a genuine alternative, and from a custodial perspective has important advantages in terms of storage and transferability*. As a manager of a crypto fund, I feel far more comfortable holding crypto assets in cold storage than US dollars in a bank.

The traditional financial world has been creaking for a long time. It is populated by entities that are too-big-to-fail and that sing to the tune of an unelected group of economists in Washington, while paying themselves astronomical wages and their depositors nothing. They will fight tooth and claw to retain their pre-eminence, and for the time being have the regulator in their pocket.

However, the technology will not stop. There is a better vision that is being built, and crypto will relentlessly move forward, with or without the SEC’s permission. Of course it is volatile - new things always are - and doubtless stuff will continue to go wrong. But it aims to transfer control of wealth away from middle-men and faceless bureaucracy and put it back in the hands of its owners. That’s a good thing. Do not underestimate it.

*At ByteTree we have developed an elegant bitcoin/gold rebalancing strategy for precisely this purpose. Visit the website https://bytetreeam.com/bold/ or contact us at [email protected] for detail.