Bitcoin is up over $2500 from its anxious lows ahead of yesterday’s US regulatory hearing…
As Mike Krieger noted last night, the Chairman of the U.S. Commodity Futures Trading Commission (CFTC), Christopher Giancarlo, said at today’s hearing with the Congressional Committee on Banking, Housing, and Urban Affairs.
In case you missed it, here’s his opening statement:
With your permission, I’d like to begin briefly with a slightly different perspective, and that is, as a dad. I’m the father of three college age children, a senior, a junior and a freshman. During their high school years, we tried to interest them in financial markets. My wife and I set up small brokerage accounts with a few hundred dollars that they could use to buy stocks, yet other than my youngest son who owned shares in a video game company, we haven’t been able to pique their interest in the stock market. I guess they’re not much different than most kids their age.
Well something changed in the last year. Suddenly they were all talking about Bitcoin. They were asking me what I thought, and should they buy it. One of their older cousins, who owns Bitcoin, was telling them about it, and they got all excited, and I imagine that maybe members of this committee may have had similar experiences in your own families of late.
It strikes me that we owe it to this new generation to respect their enthusiasm about virtual currencies with a thoughtful and balanced response, not a dismissive one, and yet we must crack down hard on those who try to abuse their enthusiasm with fraud and manipulation.
That’s just about as good as you’re gonna get from a government regulator.
And the entire crypto universe is notably higher on the relief…
And the extended gains appear to be shrugging off a widely distributed report from Goldman Sachs questioning the existential viability of cryptocurrencies.
Steve Strongin, Head of Global Investment Research, argues that that the current generation of cryptocurrencies is unlikely to survive even if blockchain technology endures.
Whether any of today’s cryptocurrencies will survive over the long run seems unlikely to me, although parts of them may evolve and survive…. To my eye, they still seem too primitive to be the long-term answer.
Is the market accurately pricing the likelihood that several–if not most–of the current cryptocurrencies will ultimately fail?
I don’t believe it is. People seem to be trading cryptocurrencies as though they’re all going to survive, or at least maintain their value. The high correlation between the different cryptocurrencies worries me. Contrary to what one would expect in a rational market, new currencies don’t seem to reduce the value of old currencies; they all seem to move as a single asset class. But if you believe this is a “few-winnerstake-most” situation, then the potential for retirement depreciation should be taken into account. And because of the lack of intrinsic value, the currencies that don’t survive will most likely trade to zero.
Is there a useful role for cryptocurrencies in financial markets today?
As it relates to the underlying technology, there is clearly a role for improving the ledgers that underlie financial transactions. Substantial investment is being made in leveraging blockchain technology to more efficiently and quickly settle contracts, confirmations, and related transactions. But the current technology does not yet offer the speed that will be required for market transactions. Now, if the question is whether there is a fundamental need for a currency that is not tied to a central bank, the answer in my opinion is “no” in most cases, at least within the regulated markets. Even if transaction times improved, the notion that people would prefer cryptocurrencies for everyday transactions seems like a stretch. There is perhaps a slightly more compelling case for their use as a store of a value.
Cryptocurrencies are well-suited in particular for the many documented use cases in dark markets. They are cheap to store, easy to conceal and hard to trace. So it is plausible that cryptocurrencies may have a long-term role to play in these markets, but even that is not assured. And the possibility of cryptocurrencies catching on in the dark markets has little to no implication for their applications elsewhere; it is very difficult to turn an asset that was optimized for dark markets into one suitable for lit markets. Is it possible? Yes. But in my view, it is unlikely.
However, Goldman does attempt some ‘fair and balanced’ reporting by interviewing Dan Morehead, founder and CEO of Pantera Capital, an investment firm focused exclusively on cryptocurrencies and one of the largest institutional investors in crypto to date.
Not surprisingly, Morehead is a diehard crypto aficionado who believes that cryptocurrencies have enormous disruptive potential across financial services and money transmission.
My passionate belief is that most of the largest blockchains today will survive. That doesn’t mean that 90% of the altcoins and ICOs being issued right now won’t go to zero; I believe they will. But blockchains like bitcoin and Ethereum and Ripple will almost certainly still be very important in 10 or 20 years.
He sees cryptos as competitors to correspondent banks, credit card companies, conventional stores of wealth like gold, and fiat currencies. Assuming bitcoin captures some market share from each of these incumbents, he estimates its fair value could be roughly $500,000.
If I had to take a really big-picture view of the terminal value of bitcoin, I think it’s roughly a half a million dollars per bitcoin. How do I calculate that? By taking into account some of the markets that bitcoin will disrupt.
In Morehead’s view, it is therefore difficult to call recent cryptocurrency price action a bubble. And the potential for new market entrants in the form of institutional investors – which are essentially non-existent in the space today – gives him confidence that the price of cryptos will be substantially higher a year from now.
I do not believe this is a bubble. Cryptocurrencies are clearly very volatile. And anything that can go up 10 times in six months can easily go down 50% in a week. So I have no idea where it’s going to be in the short run.
But it’s very difficult for me to believe that we are in the midst of a bubble given that almost all institutional investors have zero exposure to it. That said, I do expect a substantial wave of institutional investor flows into the space over the next 18 months.
What could quash his enthusiasm? Adverse regulatory action.
I think the main risk is that regulatory bodies around the world issue rulings that are excessively harsh in their treatment of cryptocurrencies. This risk is particularly high for ICOs, which are very speculative–like early-stage venture capital–but are also a very important way to fund new projects. That said, overall, US regulatory bodies have been reasonable in allowing the cryptocurrency market to develop while coming down on bad actors like the Silk Road. And it has been a long time now since I’ve worried about the long-term future of blockchain. I think that has to do with the general population really embracing this new technology, learning how it works, and getting used to it. I have no doubt that blockchain will be important 20 years from now.
And judging by yesterday’s hearings, that is less of a problem now (though definitely still a worry).
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