Old Mate Krugman Bullish for Cryptos

Wednesday, 26 May 2021
Wollongong, Australia
By Greg Canavan

[4 min read]

I wasn’t meant to write to you today.

The plan was to head to the airport and fly to Melbourne. We had a company day planned for tomorrow. Everything was booked…but no…

The latest ‘outbreak’ in Melbourne put paid to that.

Flights, accommodation, venue, catering…all cancelled.

That’s just one small company. I wonder if these clowns have any idea of the economic damage they are doing?

I doubt it.

But this is the world we live in when our health bureaucrats decide on a zero tolerance policy. A few cases mean restrictions. A few more and Melbourne will be in lockdown again.

Luckily, those who have been vaccinated are spared, free to go about their business…

Aren’t they?

No?

Right…

Let’s move on, before I blow a gasket.

There have been a lot of opinions about the latest volatility in the world of crypto. The Financial Review has published many sneering, ill-informed ones, with a few much closer to the money.

I don’t know why the Fin imports dribble from The New York Times, but it is a left leaning publication, so I shouldn’t be too surprised.

None other than Paul Krugman weighed in on crypto this week. Apparently, he says, ‘a number of readers asked me to weigh in on bitcoin and other cryptocurrencies, whose fluctuations have dominated a lot of market news. Would I please comment on what it’s all about, and what’s going on?

So, what does the all-knowing Krugman think?

The story so far: bitcoin, the first and biggest cryptocurrency, was introduced in 2009. It uses an encryption key, similar to those used in hard-to-break codes — hence the “crypto” — to establish chains of ownership in tokens that entitle their current holders to … well, ownership of those tokens. And nowadays we use bitcoin to buy houses and cars, pay our bills, make business investments, and more.

Oh, wait. We don’t do any of those things. Twelve years on, cryptocurrencies play almost no role in normal economic activity. Almost the only time we hear about them being used as a means of payment — as opposed to speculative trading — is in association with illegal activity, like money laundering or the ransom Colonial Pipeline paid to hackers who shut it down.

And then there’s this classic:

I’ve been in numerous meetings with enthusiasts for cryptocurrency and/or blockchain, the concept that underlies it. In such meetings I and others always ask, as politely as we can: “What problem does this technology solve? What does it do that other, much cheaper and easier-to-use technologies can’t do just as well or better?” I still haven’t heard a clear answer.

Old mate Krugman clearly isn’t listening. Maybe he nodded off during the meeting?

I could go on. But this ignorant view by an establishment economist should be music to a crypto bull’s ear.

Now that bitcoin has crashed, it’s respectable for the bears to have an opinion again. Yesterday, the Financial Review gave blue chip financial establishment Vanguard a mouthpiece. They have made the decision not to pursue a bitcoin ETF.

“A long-term portfolio should be comprised of stocks, bonds and cash,” Balaji Gopal, head of Vanguard Australia’s Personal Investor platform, told The Australian Financial Review. “We are quite happy to sit this one out, and we urge investors to be very wary of the risks of cryptocurrencies.”

Bitcoin and other cryptocurrencies fall short of Vanguard’s house definition for an asset class, commodity or even currency, Mr Gopal said, because they do not generate income or cash flow. Nor are they a store of wealth, unit of account or medium of exchange, he added, rejecting popular conceptions.

Cryptos don’t generate an income or cash flow because you don’t lend them out. I mean, you CAN lend them out and earn interest. And a lot of people do that in the crypto space. Ryan Dinse and I talked about that in our first discussion for New Money Investor readers. And the interest rates you get are a lot better than in the ‘real world’.

But my guess is this is harder for a company like Vanguard to do. You see, many ETF providers use the assets in their funds (by lending them for a fee) to generate additional income, unbeknownst to the investor. If something goes wrong, there is a central bank to provide liquidity and bail them out.

But there is no central bank in the world of crypto. So my view here is that it’s an economic decision for Vanguard, rather than one of moral concern about their clients.

The lack of a bailout mechanism in crypto is a good thing. The market will stand on its own two feet, and become more resilient as a result.

Which is exactly the point that Ryan Dinse made to his Crypto Flip Trader readers after last week’s volatility:

One of the positives to come out of this week’s extreme moves is just how well the infrastructure behind DeFi actually held up.

With no regulator or government body in sight, this new world of decentralised finance processed record volumes of trades.

Of course, there were some hiccups and problems.

For example, gas fees (the network cost to transact on the Ethereum blockchain paid to Ethereum miners) to trade on the Ethereum network were ridiculous at one point.

And we did have a few centralised exchanges go down for limited amounts of time under the sheer weight of numbers.

But on the whole, it all held up pretty well. Something I’m sure a lot of professional investors will have keenly noticed.

That’s the thing about a tech-led disruption. Whatever doesn’t kill it, just makes it stronger. And rest assured the lessons of this week will result in even better results ahead.

I’ll leave the last word to financial markets veteran and venture capitalist Mark Carnegie. Partly because I agree with him. But more so because I think this opinion is much better informed than an academic/establishment economist or anyone else who makes a living from the status quo financial system.

Again, from the Financial Review:

The amount of entrepreneurial talent being invested in redesigning a new architecture for the financial system will put the major banks under real pressure over the coming decade, he suggested.

Pointing to ethereum founder Vitalik Buterin and, outside of blockchain, Stripe founders Patrick and John Collison, Mr Carnegie said: “These guys are absolutely world-class, Jesse Owens-quality businessmen” and, comparing them to the “board of directors and guys running the existing four banks in Australia, it is kick-a-cripple day”.

“The existing banking system, the ability for them to stop the dam burst, is finished,” he added. “These guys are absolutely going to clean the floor with the existing banking system … The world financial system is changing unbelievably fast.”

Crypto today was like the internet in the late 1990s, where “it was established it is not going to go away, it was just not clear what was coming at you”. He said its promise beyond bitcoin is to “take the speed of all financial transactions to instantaneous and the security to nearly perfect … at zero marginal cost”.

Cheers,
Greg