Crypto Fanatics Don't Understand What Crypto Is
SEC Chairman Gary Gensler came on CNBC today and much of the discussion focused on cryptocurrency proponents’ accusations that he is overregulating it. He replied that he simply treats new crypto offerings as securities which, like all publicly offered securities, require registration and disclosure. Therefore, it is not enough to issue a coin and a white paper that says its purpose is, like the famous 1720 bubble offering, to fund “An undertaking of great advantage, no one to know what it is.”
In fact, far from being overly strict, the SEC has been quite tolerant toward crypto which, as Gensler noted, is a sector unusually rife with scammers. In 2023 they inflicted $5.6 billion of losses on Americans, according to the FBI, up 45% vs. 2022. Worried that this might cause regulators to crack down rather than deregulate as they want, the “crypto industry” has spent millions lobbying in Washington. They have contributed to Trump’s campaign and in exchange he spoke well of cryptocurrencies, though he seems not to understand them at all. While crypto people applauded Trump’s endorsement, they groaned when he and his sons launched a crypto business, given their past association with scams. (Kamala Harris has joined in, referring to crypto favorably.)
Crypto appears to confer zero benefit on American society, as no important use case has emerged despite a decade of promises; instead, it is often used for illicit transactions such as ransomware extortion.1 I specified “America” because I’m aware that Bitcoin is useful to people living in countries with unreliable currencies, e.g., Venezuela. Its mobility and relative stability also facilitate the legitimate transfer of money, for example between people in different African countries, in a way that gold never could. There are also externalities to be considered, like the environmental impact of power consumed in crypto mining.
So, despite the proliferating scams and Chairman Gensler’s unassailable logic, why does the crypto lobby keep complaining? Some are would-be scammers, whether they realize it or not, and some are honest folks who have built profitable businesses intermediating crypto. Many, however, seem to be fanatics who in my opinion don’t understand what crypto is. That question – what it is – was answered by hedge fund legend David Tepper, coincidentally in the CNBC segment following Gensler’s. When asked what he thought of crypto, Tepper said that it’s “like gold.” And did he have any? Well, he said, um, again, it’s like gold … and no, he doesn’t own any.2
Gold bugs would dispute that Bitcoin is gold, noting that it has a 15-year history vs. thousands of years for the metal. It is, however, the most gold-like digital asset, and the only one the SEC doesn’t regulate as a security. Let’s assume for purposes of the present analysis that it is. How do investors view gold?
Gold is seen by the vast majority who own it, like me, as a hedge. We take note when the price rises, as it has just done, but otherwise we don’t pay much attention. It’s comforting to know you have some, in case the markets crater and the financial system teeters; and those of us who are more paranoid – I’m the child of Holocaust survivors – might even keep some physical gold as a ticket to safety if something truly horrific happens.
When I have seen investors moving heavily into gold, not just as a hedge, they have done so as a bet against the global markets and therefore as a form of market timing. I have seen small investors do it and I have seen big investors, like two other hedge fund legends, John Paulson and David Einhorn, do it. And they have all been proven wrong. I am fundamentally opposed to timing the U.S. stock market, and a manager who makes a significant shift into gold ETFs or physical gold (miners might be different) would see me quickly withdraw from his fund.
Unlike the chill investors who own gold as a hedge, gold bugs are always checking the price, waiting for it to rise. And when it doesn’t for a long time, some of them start attributing that to conspiracies against it. Similarly, people who have most of their assets in Bitcoin are not satisfied by what some would say has been a spectacular run to its current level. They require that it keep appreciating and start blaming outside forces when it stops, maybe forgetting that there are still numerous Bitcoin “whales” who got in early and can and do sell some or all at any time. Gold too has whales – the world’s central banks – but they are among the most stolid “hodlers” imaginable (despite England’s having sold half its gold near the low prices in 1999-2002).3
The earliest crypto buyer I knew personally, my ex-partner, urged me to get some Ethereum at $70. I said I had enough risk in my life already, passed on it and have watched it appreciate over the years with amazement but little regret. None of the uses he said Ether would have does it have, but he was right that it would go up. It is possible that legitimate use cases for it will emerge as transfer costs decline, which would make me change my view.
My ex-partner who got into Ether on the ground floor was a libertarian, for whom crypto fit into an anti-establishment worldview that would’ve cheered abolition of the Federal Reserve. Many of the most passionate crypto advocates share this perspective and believe that “fiat currency” should be replaced by Bitcoin or some other coin.
What they are generally thought to be missing is that the fiat dollar pays for everything our government does and is backed by taxation power and an army. Smart observers believe that Bitcoin will be tolerated here and in the rest of the G7 but will never be allowed to replace fiat, if it ever threatened to. Trump’s reference to himself as the “Crypto President” should be seen as puffery for campaign contributions and votes, or maybe to hype his new venture. Trump would not replace the dollar, though he could weaken it.4 (Imagine a candidate calling themselves the “Gold President,” by the way.)
The evangelical branch of crypto can also explain anomalies like NFTs. During the NFT bubble in 2021, images of Bored Apes sold for theoretical millions of dollars. I had a personal experience that year at an art auction, when I bought Lot 2, an iconic photograph by Diane Arbus, while Lot 1 was an NFT by an artist named Beeple that went for 75x what I paid for the Arbus. I was mystified by this wild mispricing until I found out that the buyer was allowed to pay in Ether, not dollars.
I would bet that most NFTs have been purchased with appreciated crypto. Holders may view their crypto the way I think of frequent flyer miles – something to use while they have value. Given the lack of legitimate products and services accepting Bitcoin, a holder with huge gains may as well spend some on an NFT. One might ask, why don’t they convert back to dollars and buy something with those? Many do – Silicon Valley and the Caribbean are filled with early adopters who cashed out and live in luxury – but the fanatical likely want no part of the fiat currency world again. Beeple is no dummy, by the way: he immediately converted the crypto from his massive auction sale into dollars, adding that NFTs were “absolutely a bubble.”
Staying on the theme of Bitcoin as digital gold, what are its prospects in that case? I recently read Rabbit is Rich, a classic novel by John Updike. The book is set in 1980 during a period of high inflation, and the protagonist Rabbit Angstrom is pleased with himself for having bought gold in 1979, which has doubled in value over the year. I checked to see how Rabbit would’ve done if he’d continued to hold onto that gold until today and found that he’d be up over 4x. Pretty good! The S&P 500 is up almost 46x since then. Much better!
There’s another theory about why the U.S. government has been so tolerant, of Bitcoin in particular, which is that its digital trail makes it easier to track criminal activity than if payments were in cash. Some even claim that Bitcoin was a creation of the government and the mysterious “Satoshi” is actually the NSA. I 60% believe this, especially after I was shown an NSA white paper from the 1990’s on the feasibility of a “crypto-currency.” I note however that I am a bit of a conspiracy-monger.
Tepper does let his son fool around with crypto, as does famed hedge fund manager Howard Marks. Donald Jr. and Eric seem to be spearheading the Trump crypto effort. Seems it’s something for sons.
These sales are known as “Brown’s Bottom,” referring to Chancellor of the Exchequer Gordon Brown, who made the decision.
As discussed in my recent post.
