Are you (still) a crypto-bull?

One of the oft-quoted failed predictions from the start of the technological age is attributed to Ken Olsen in 1977: "there is no reason anyone would want a computer in their home".

Olsen went on to build Digital Equipment Corporation (DEC) from the ground up, contributing a legacy to the computing world beyond the lifespan of that company. He was proclaimed “America’s most successful entrepreneur” in the 1980s. But he is perhaps best remembered for the fallacy of predicting technological growth.

So, what does this have to do with crypto? Well, there's potential in the technology.  

Depending on who you talk to, cryptocurrencies are a Ponzi scheme or it's the future of money. It's been pumped up by social media investors (think: Dogecoin or StopElon coin), hyped up by news headlines and severely under-researched, in part because who on earth can keep up with this Lernaean Hydra of an investment. As soon as one tanks, another two sprout to take its place.

But for the not-so-cynical, crypto is analogous to the dot-com era -- that is, there were plenty of losers, but the winners really nailed the technology wave that followed. 

And so, perhaps foolishly, I'm diving into the muck to see if underneath all the hype there is something worth investing in. One thing is clear, this is increasingly becoming an asset class that cannot be ignored.

Read part one of this series here: Know your crypto

Crypto bulls vs 'it's all bull'

I'm curious to know if, like Olsen, we are dismissing something too soon, misunderstanding the trend and the potential. So I've asked three people to help better understand the lay of the land:

#1 Jordan Eliseo, manager for Listed Products and Investment Research at The Perth Mint is a long-time investor in precious metals. He also has considerable expertise in macro trends and the history of money. 

#2 Michael Frazis managing director of Frazis Capital Partners and an investor who believes in investing in assets with explosive growth potential, including cryptocurrencies. He's an investor who likes to look at the data and let that decide what makes a good investment. 

#3 Sergei Sergeinko, CEO of Chrono.tech and LaborX is a big believer that crypto is the future. He founded Chronobank in 2016, which launched Australia's first initial coin offering (ICO). 

Here are their responses: 

As a store of wealth, Bitcoin is lacking

It's hard to be a definitive bull or bear, said Eliseo. There are just too many varieties within the asset class to have a unified case. 

"Given how many cryptocurrencies there are now, and the fact so many tout different ‘use cases’, it’s hard to give a definitive answer on this," he said. 

But Eliseo questions the 'digital gold' narrative in which cryptocurrency markets "aggressively" to convince investors of a pro-Bitcoin story. 

As an investor in precious metals, Eliseo well understands the argument of having a viable store of wealth. 

"Broadly speaking, a good case can be made that in the decade ahead, the monetary and market environment investors will have to navigate will be supportive of alternative stores of wealth, from gold, to fine art, to pink diamonds and the like," he said. 

So, a demand for an alternative to traditional stores of wealth could push prices up, especially in a frothy market, said Eliseo. But equally "a repeat of the kind of drawdown we saw in 2018 should not be unexpected," he said. 

"While its current market capitalization is near US$2 trillion, it could easily give up 50% or more of that in the next correction, if history is any guide," said Eliseo.

Eliseo has previously written for Livewire Markets that the volatility of Bitcoin is 12 times that of gold, while the liquidity of gold is much greater than its digital counterpart:

"The gold market is substantially more liquid, averaging approximately 90 times the daily turnover of the Bitcoin market in 2020," he wrote.

While the logic behind the digital gold narrative makes sense to Eliseo, he believes the asset class is just too new and too small to have any guarantee of stability. 

"Indeed, just over a year ago, even Bitcoin was so small that the SMSF industry alone in Australia could have bought the entire network 4-5 times over," he said. 

Follow the money: venture capital

Frazis approach to investing is to follow the data to capitalise on explosive growth. 

"There are genuine use cases," he said.

"Most people live in unstable countries. If you're in big parts of Asia, big parts of Africa, or South America, with changing politics - you can lose everything. If you live in those places it makes heaps of sense to have some value, something independent of monetary systems that can't be taken away from you," he said. 

"My favourite crypto irony is that, inverse to what many seem to think, dollars are anonymous, but Bitcoin is not. The whole point is to have a public ledger where (every) transaction can be inspected!" he wrote in a recent note to investors. 

One of Frazis' many thoughts on cryptocurrencies is how they can be used for venture capital and fund raising. He argues VC investments are usually untradeable for the investor and force founders into diluting their equity and control for financing. It's a Faustian bargain and cryptocurrencies could be the solution. 

"In three month period earlier this year, over $860 million was raised in ICOs. The idea here is simple: instead of (raising) equity or debt to build a product, you can pre-sell tokens and use that to fund the idea. No dilution, no debt. Quite an innovative approach to finance, with immense benefits for founders that can generate demand for their product before it exists," he wrote. 

DeFi is the future of money

"You need cryptocurrency to participate in DeFi," said Sergei Sergienko, referring to the Decentralised Finance (DeFi) movement. 

"First of all, and it's a very basic one, (the reason) why I love cryptocurrency is that for the first time in human history it's something that cannot be taken away from you," he said.

"It's amazing what banks have been doing and finally people have access to the instruments of banking," he said. With banks, says Sergienko, you always have to ask permission. 

He draws parallels between crypto wallets and pirates with their hidden treasure chest, an analogy that is perhaps jarring against a conversation of who currently uses cryptocurrencies. No doubt you have heard the same news about scammers and dark web entrepreneurs using crypto for illegal activities. 

Sergienko firmly disputes crypto's reputation in that space.

"Crypto is one of the least anonymous things on the planet," he said. "It's a ledger of transactions that's always on the blockchain … it's actually much easier to trace than any form of cash."

"The best currency for illicit activities always has been and always will be the United States Dollar," he said.

"The amount of crypto that's being used in that marketplace, in the Dark Web, is actually falling over time," he said. Even in cryptos infancy, it was used more often by "geeks stuffing around with liberal economic policies" than people trying to buy drugs off the internet.

His second point relates to central banks, monetary policy and inflation hedges.

The "bad economic policies of certain nations" are a key factor in the future growth of crypto, he said.  

"(Central banks have) been printing money, a lot of money. And if you hold any type of fiat currency, you've been diluted." Fiat currency is also diminished by inflation, even though inflation is "hiding at the moment", said Sergienko. 

The idea of crypto as an inflation hedge is linked to its "Gold-like" qualities. 

Thirdly, is the ease of access to the system.

"Anyone can wake up today and create a crypto wallet right now. I can deposit crypto into it, right now. I can do transactions without lifting my bum off the seat," said Sergienko. 

"When you show things like that to people, for example, in India, who have never seen a bank… well that is something staggering. And that's what we're working on," he said.

This third argument is more akin to emerging markets strategies and suggests that in the developing world there is a specific problem to be solved by the nascent technology in cryptocurrencies. 

Conclusion

There has been some debate about whether cryptocurrencies are an inflation hedge. As we mentioned in Part 1 of this crypto series, Bitcoin is a crypto with only a finite number of coins. So, in theory, crypto should behave like Gold and be a safe haven in times of inflation. However, as we saw in the US recently, it appears it behaved more like a tech stock. So perhaps the jury is still out on this one.

Outside of pure speculative plays, when an investor wants to invest in a product they need to know what it is, who is going to use it (and how they're going to monetise it). So now, our experts have given an outline of what cryptos are expected to do. It's really just the tip of the iceberg.

But, suppose it does all (or even one) of these things, is it possible to assign value to it? In the next part of the series, we ask our experts how do you value a cryptocurrency? Is there a way to assess and compare the use cases for cryptocurrencies?

Remember this is the long vision, not necessarily the present reality. The potential for crypto, just like the potential for the internet pre-dot-com era, could fall vastly short of where the market is pricing it. 

If, in fact, the market currently cares about its utility at all. 

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