Wind of Change — Cryptos Are Here to Stay
Crypto naysayers are still around as are the Flat Earthers. But like Elvis sightings, they are quickly dwindling as corporations, financiers, tradition finance institutions, and nation states are all jumping in. While the battle is over there is still a lot going on.
Cassie tossed a double — a pair of 4’s which meant she finally gets out of jail which was a place she felt much safer than being outside. She reluctantly counted the 8 spaces from jail but she knew it wasn’t going to be good. Tennessee Avenue. “How much?” she asked.
Gerald replied: $950. Gerald owned all the railroads, all the utilities, all the properties, and all the hotels. He could own the Jail too if it was up for sale.
With disgust, Cassie threw the last of her money at Gerald, which was still not enough to cover the rent. That leaves Jerry as the last remaining player besides Gerald. Even the bank was bankrupt, or officially illiquid, as it had run out of money earlier.
With almost all the money in Gerald’s possession and without any provision or governance to be able to print more money in the official rules, Cassie and Jerry struck Gerald in the head with a claw hammer killing him. The pair then fled Salt Lake City, but not before taking $594 in US fiat from Gerald’s Veteran’s Administration check.
Shortly thereafter they were arrested in Fresno, CA and extradited back to Salt Lake City where they were eventually tried and convicted for Gerald ‘s murder. This was known as the Monopoly Murder, (not to be confused with the novel of the same name), although it was not the first murder over a game of Monopoly. Excessive alcohol is not a good mix for playing Monopoly, although in their defense, they did not take any of Gerald’s Monopoly money.
“Play” money killed Gerald. And now crypto money is real money at a current valuation of about $2T and its price surge is actually accelerating. Although there has been no known incident of someone being murdered for their cryptos, it is only a matter of time before it happens, not to give anyone ideas.
The Forces of Money and Finance Are Coming Together
The last two weeks there has been a lot of activity from the traditional side of finance crossing over into cryptos. First Visa announced that they will start accepting stablecoin USDC to settle transactions. USDC’s are pegged to the USD in a 1-to-1 parity and are similar to other popular USD-back stablecoins such as USDT, TUSD, BUSD, and PAX, just to name a few. A PayPal customer can seamlessly use their PayPal Visa, issued by partner Crypto, like any other credit card.
When the customer pays off their Visa bill, they can pay Crypto either with traditional fiat, or USDC through PayPal. How Crypto settles with the merchants is then at the discretion of the merchant.
A word of caution: if you buy Bitcoins via PayPal, you will NOT be able to withdraw it directly. Instead, it can only be stored in your PayPal account and used to pay off PayPal bills. Maybe that is not an issue to some customers or PayPal will eventually change that policy, but it is significant enough to thwart some crypto users onto the PayPal platform.
Meanwhile Tesla announced that they will begin accepting Bitcoin. But that begs the question: will their vehicles be denominated in USD or Bitcoin? Let’s say you go online to the Tesla website and can purchase a Model 3 for $60,000, or exactly 1 Bitcoin, as for the sake of this example, 1 Bitcoin is trading at $60,000. You come back next week to place your order, but Bitcoin is now trading at $120,000. How much will the Model 3 cost at checkout? Will it be $60,000/0.5 Bitcoin, or $120,000 / 1 Bitcoin? I checked their site and contacted Tesla but could not conclude what the answer is although I am fairly certain that the vehicle will still be denominated in USD, at least for now.
If this seems more complex than it should be, you may begin to ask, what benefits does crypto really provide to the consumer as you could have done a with fiat anyway. First you must realize that modern banking much more complex than it seems. There are clearinghouses, cross-national remittance, regulatory oversight and jurisdiction, centralized control, retail and central banks, AML and KYC policies just to name a few. That’s because traditional banking has a few hundred years head start to make the complexity work seamlessly for the consumer. In cryptos, the paradigm has shifted significantly, that being the removal of the nation-state issuance and control, but the technology involved such as cryptography, digital wallets and the sheer immaturity, speed of innovation and misinformation of the crypto industry are a significant complicating matter to ease of adoption. But that’s is okay. One should not feel rushed in such important matters as investment, finance and wealth management.
Remember, whenever you are working with cryptos, you are essentially acting as your own bank and need to have a good understanding of your keys. There is a crypto anthem, “Not your keys, not your coins”. But it’s not enough to possess your own keys in order to be in control of your funds. You need to be exclusively in control of your keys. In other words, you can’t share your private key with anyone. And that creates another issue as I have written in an earlier article how cryptos are permanently lost if a person dies without proper preparation in case of death or incapacitation. Traditional firms like PayPal are making it easier in a hybrid fashion. But any crypto participant should still definitely take the time to educate themselves. Patience will be rewarded.
Your assets “safely” held in a crypto exchange account, e.g., Binance, Coinbase, although highly reputable, are still decoupled from your direct control. The risks are that these types of centralized exchanges can be a honeypot target for external hacking. Worse, some are downright fraud as in the recent Turkish exchange Thodex, which is being investigated for defrauding their customers of $2B in stolen assets. There is also potential for regulatory seizure.
While crypto companies are making great strides in improving their creditability record, traditional finance is not free from risks either. Not so long ago the risks were bank runs and insolvency. The US federal government came up with the Federal Reserve Act of 1913 and FDIC to counter those risk respectively, the former causing other systemic risks such as quantitative easing.
But how will governments deal with cryptos? Can they do anything? In the areas of KYC, AML, CTF, and taxation, sovereign jurisdiction can pass laws to regulate it. But can they execute the laws? That is not such as easy answer, and governments may have to find indirect ways to carry out their intentions.
Tribes tend to be extremist in either total decentralization of cryptos or pro-regulatory. But what usually happens will be a middle ground. Take for an example the Condriga CX case where the CEO Gerald Cotten, allegedly died taking the password access of all his Bitcoin clients with him to the grave. I don’t know if there will be an eventual resolution, but one way would be to identify the wallets connected to the case along with the custodial wallet that the exchange that contains all the irretrievably lost coins. A consensus by the Bitcoin body could then possibly eliminate those coins in question and then redistribute newly minted replacement coins. This would throw a big stink in the Bitcoin community, but solutions are there.
A case in point is the recent passing of Bernie Madoff who defrauded his clients of almost $65B using a traditional Ponzi scheme. Just a reminder that traditional finance is not free from frauds. What is important is that regulatory, technology, security, maturation, user experience and integration with traditional finance are starting to come together to make finance more efficient and safer for everyone. In fact, 70% of the defrauded money was eventually returned to clients.
Cryptos are Still a Work-in-Progress
For even the most basic user, such as managing a wallet, or understanding blockchain, a significant time investment is required which should serve as a cautionary tale to any new crypto participant. Yet it is difficult from all the speculative news to not be in a state of FOMO.
Many ask, should I wait or should jump in? I can’t answer that. Not only are each person’s financial goals uniquely their own, but in all honesty, I don’t have a crystal ball but my basic understanding of economics and finance is that fiat is under tremendous inflationary pressure, exacerbated by the Covid pandemic. The recent rise in crypto valuation is at least partially due to the devaluation of fiat vis-a-vis with cryptos. Divesting into crypto is not the only avenue for combating inflation, but it is one the cleanest and most efficient way. Additionally, price pressure is on the side of the cryptos, which still represent only about 1% of the total global wealth.
I also believe that cryptos, in addition to mere greater efficiencies, will create new paradigms of wealth creation. Recently we went through a super hype of NFT’s. Again, on a smaller scale, we haven’t yet realized the full potential of NFT’s, however another hype-upped bubble like the 2017 ICO event would could undermine the strides that crypto has undertaken since.
If you are interested in cryptos, and I encourage EVERYONE to learn more about it irrespective of whether or not you want to participate. It is fine if you do not, but the crypto disruption is significant enough for almost everyone to learn more about it. Why are cryptos created in the first place? How does money really work? Then as you take the time to learn you can better gauge how much participation you want to partake. And remember it doesn’t have to be all or nothing. You can start slowly, and adjust your investment portfolio accordingly. Also, you do not have to be an expert in order to start, although again I stress, that one must acquire a basic understanding of it. If you feel that want to participate and yet feel hesitant or anxious due to the complexity, then there are firms from the traditional finance side that can assist, in a hand holding manner. Basically, we are seeing trusted, traditional firms moving into cryptos while the newly established firms are making vast improvements on usability and convenience. This is not to say that crypto-based firms are not trustworthy but the traditional firms are also leveraging their huge client base.
Finally, from time-to-time, every hour actually, I get asked: Are cryptos for real or is this a Ponzi-scheme? My answer is that at my cat Smokey’s bat mitzvah party last month, I met a Noam Ehtereumberg, Herb Bitcoinstein, , and Yael Gweiman. I call that a done deal.