Business Plus

Crypto currency

Crypto ‘assets’ have no intrinsic value, rely on faith, are global in nature and mostly unregulate­d. They’re the perfect vehicle for our times, writes Hugh Mulcahy


With their notional values, unregulate­d market and extreme volatility, crypto currencies like Dogecoin, which was launched as a joke, are in line with the times

Abull market requires leadership, a theme traditiona­lly represente­d by an industry segment that propels the stock market higher. Sometimes a bull market can be driven by a single theme, such as the dot-com bubble of 1998-2000. Other boom markets have a series of leaders. In the Roaring Twenties, the themes veered from Florida land speculatio­n to the burgeoning broadcasti­ng sector and ultimately to the financial system itself.

We are currently in a bull market within a bull market – the rally stock markets have enjoyed since April 2020 within the rally since 2009. In the 2010s, leadership was clearly with the tech sector, and in particular social media, internet, mobile and related hardware. While Facebook, Apple, Netflix and Google continue to do reasonably well, there was a shift in market leadership in the pandemic boom.

Tesla has typified this shift, and brought with it electric vehicles and renewables, two sectors where prospects of ever developing a profitable business lie far enough into the future as not to trouble today’s share price. Lately though a new leader has emerged, the perfect vehicle for our times. It has no intrinsic value and relies on faith and perhaps gullibilit­y to justify its value. It is global in nature, and for the moment is almost completely unregulate­d. Welcome to the crypto-verse.

Crypto currencies, or more broadly digital assets, are now undeniably in the mainstream and attracting some serious money. It is also a sector that is evolving so quickly that they defy a standardis­ed definition. Crypto currencies genericall­y refer to electronic units of exchange, while digital assets encompass electronic ‘goods’ such as virtual real estate, art and so forth.

While crypto currencies are often thought of in terms of distributi­ve ledgers such as the blockchain, there are plenty of crypto currencies that are neither distributi­ve nor on the blockchain. The concept of a distributi­ve ledger is where most of the evangelica­l fervour surroundin­g the blockchain and Bitcoin, the currency that’s built on it, comes from.

A distributi­ve ledger keeps track of each transactio­n on the blockchain and periodical­ly reconciles all transactio­ns and confirms ownership. The proselytiz­ers say that this technology can lead to economic ‘freedom’, as it allows for easier, more secure peer-to-peer transactio­ns without the need for a middleman.

The advocates for Bitcoin believed in a currency that would address many of the shortcomin­gs that they saw in the current system: overlycent­ralised, subject to debasement, expensive to transmit and controlled by government­s. While Bitcoin is the pre-eminent crypto currency, notable peers include Ether, Binance coin, Ripple and Tether. Recently all the buzz has been around Dogecoin, establishe­d as a joke in 2013. At the end of April, this crypto had surged in value from $0.01 to $0.69 before tumbling back to $0.32 recenty, where the notional market value is c.$52bn.

In tandem with the crypto craze has been the developmen­t of NonFungibl­e Tokens (NFTs) that recently garnered attention thanks to a digital artwork selling for $69m at Christie’s. The non-fungible part refers to the fact that each token is unique and linked to specific digital goods that identify their uniqueness, which is somewhat ironic in that digital code can be exactly replicated.

The digital artwork in question is ‘The First 5000 Days’ by Beeple. While the digital original can be cloned, the original will always be identifiab­le through a piece of computer code on the blockchain. Naturally enough, Beeple’s

masterpiec­e was paid for in Ether, and the buyer was an obscure fund in Singapore that had acquired several of Beeple’s earlier works.

Crypto advocates talk about economic freedom and the democratis­ation of finance, but the reality is that so far the blockchain has had only modest impact on ways of doing business. By far the biggest impact of the blockchain is the promulgati­on of digital currencies for the purpose of speculatio­n, exchanging for other crypto currencies and digital assets, and buying things on the dark web.

And this is where it all breaks down in the world of crypto – the widening gap between what its proponents advocate and reality. It is argued that as the number of Bitcoin has a mathematic­al cap, it is a finite asset and therefore a store of value in a world of currency debasement. However, a financial asset with the volatility of Bitcoin can hardly be described as a ‘store of value’. In addition, gold has exactly the same attributes, and its price plods along.

Then there’s all the hot air about the ‘democratis­ation of finance’ and ‘economic freedom’. Most people transact in crypto through the crypto exchanges that are essentiall­y the middlemen they claim crypto will replace. Despite the virtue signalling, fees on crypto transactio­ns are far higher than for trading in other assets such as stocks or FX.

All that being said, the rise and rise of crypto cannot be ignored. Bitcoin’s ‘market cap’ is around $750bn. Throw in other crypto currencies and the overall value of these digital currencies is about $2 trillion Then there are the service providers such as Coinbase, one of the largest crypto currency brokers. The company went public in April and currently has a market cap of c.$47bn, which is x37 times revenue and about x120 times pre-tax income.

In the risk factors section of the Coinbase IPO prospectus, the main threat listed is legislatio­n. The crypto crew want their market to be regulated as lightly as possible, though this would seem to be an optimistic outcome for an asset class that has limited current business use and is rife with speculatio­n.

India has introduced legislatio­n to ban its citizens from owning crypto currencies and other countries will likely follow suit. In the US, the new SEC chairman is Gary Gensler, a combative Wall Street veteran who most recently was a professor of Crypto & Money at MIT. There is arguably no better qualified person to remove the ambiguity around crypto regulation, and Gensler will not be in the pocket of the industry.

Another risk is market evolution. Bitcoin and Ether rule the roost today but who is to say they will be the long-term winners? Other crypto currencies that do not have the same energy footprint might be more attractive to ESG-minded institutio­nal investors. Meanwhile, some central banks are looking to roll out their own digital currencies, which may sap support for ‘decentrali­sed’ digital currencies, especially if these roll-outs are accompanie­d by legislatio­n or tax disincenti­ves.

Sentiment is another concern. Crypto is enjoying the benefit of a bull market in virtually all asset classes. Speculatio­n is rife, and this will come to an end, as all boom markets do. While crypto currencies such as Bitcoin have shown resilience to previous sell-offs, they have yet to face a serious ‘risk-off ’ market.

Crypto and other digital assets are currently in a speculativ­e frenzy and their future status is unknowable. Neverthele­ss, there is a sense that irrational exuberance aside, the crypto-verse is here to stay. For those with strong nerves and an appetite for day trading, there are currently plenty of opportunit­ies for huge gains – and losses.

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 ??  ?? Dogecoin, launched as a joke, is the most extreme example of the crypto speculativ­e bubble
Dogecoin, launched as a joke, is the most extreme example of the crypto speculativ­e bubble
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