The beginning of the year is an apt time to consider where we are in terms of the most revolutionary rogue in our global financial system: crypto currencies.
Like the classic Spaghetti Western, The Good, The Bad and The Ugly, there’s been myriad moves made in an uncomfortable and competitive alliance.
The film, which made major buckaroos and rode Clint Eastwood’s career to new heights, is predicated upon three gunslingers each searching for a big booty of buried gold. In it, Eastwood’s character has an uneasy partnership during the U.S. Civil War, one being a Mexican outlaw. Similarly, crypto currencies—and especially Bitcoin—have had an uneasy partnership with the established financial sector. From Russian President Vladimir Putin to JP Morgan Chases’ Jamie Dimon, detractors have called cryptos everything from a pyramid scheme to financial fraud and fluke. That said, even having taken some seemingly terminal shots from some of the most powerful and influential people on the planet, from the left, right and everywhere in between, cryptos are still standing after a decade.
The crypto ecosystem continues to ride down the difficult and tumultuous trail to greater acceptance and use. For example, it’s been more than a year since the Chicago Board Options Exchange (CBOE) and the Chicago Mercantile Exchange Group (CME) began trading Bitcoin futures. Interestingly, even though the trading began around the time prices were nearly $20,000 per Bitcoin, as the price has gone into a downward spiral, the volume—the number of contracts traded—at CBOE and CME has increased! The average daily volume (ADV) at CME has been around 3,500 to 7,000 contracts, although they reached a high back in November of nearly 14,500 contracts traded.
And others are setting their sights on crypto trading. NASDAQ, for example, is expected to do so in the first six months of the year, as is the InterContinental Exchange (which owns ICE Futures US and the New York Stock Exchange).
These developments mean a few things:
1—The acceptance of Bitcoin as a fulsome financial futures product has been accompanied by increased institutional investment by some of the largest global financial traders.
2—Trading on regulated exchanges like CBOE and CME platforms is by nature more righteous in that it’s regulated, and therefore enjoys considerable consumer protections and reduced risks from things like computer hacks and fraud.
3—When individuals or businesses have a place to offset their risk, like financial markets (be they futures or equity markets), it allows for more thoughtful investing of—and freeing up of—capital, and thus helps to fuel-inject the economic engine of our democracy in the US, with definite dividends for other markets and economies around the world.
In addition to increased regulation and exchange trading, there’s a more mature mode of those involved in the crypto space in that some of the less serious and more fly-by-night crypto start-up players—which were abundant during the 2017-18 boom—have since bought the farm and are now pushing up daisies.
At the North American Bitcoin Conference in Miami last week, the organizer (Moe Levin of Keynote) told me he wasn’t sure if the event was going to be a party or a funeral for cryptos. It was a party, boosting more than 5,000 attendees (greater than even 2018). Of the businesses which purchased space in the exhibition hall, 70 percent were return exhibitors. From innovative start-ups which offer loans for consumer crypto; to a Hollywood television producer seeking money and partnerships to develop an Entourage-like television series titled: Cryptos; to an artist (Vesa) who sells crypto-related works for $50,000, the place was not just eccentric, but electric and entrepreneurial in the best way possible.
The Bad—Unfortunately, it’s not all a bed of roses. Most might argue the price moving so steeply down from around $11,000 in January of 2018 to around $3,600 this January is neatly negative. I disagree.
Bitcoin’s fist-full-of-dollars prices in 2017 and early 2018 were bubblicious. They’ve come back down to earth and appear (at least for now) to have some relative stability, which is good!
Some economist (like Boris Richard at FTI Consulting) are now seeing the price of Bitcoin increasingly correlated to other accepted measures, like the Fear Gauge (the Volatility Index or VIX) traded at CBOE. This was not true in the past as Bitcoin was too divergent from, for example, equity indexes. But now, with weakening economies and/or economies increasingly vulnerable to macro-economic risks, having Bitcoin correlated may make its use more appealing to institutional investors and others.
So, the 80 percent price plummet we saw from December of 2017 until now, I think, is a generally good thing. (Although I feel for for those who lost money!)
And when we talk volatility, I recall commenting back in October when prices in equities started to move with great gyrations, how interesting it was a that crypto prices were the stable space in the financial sector.
Also bad is the lessened attention of financial regulators, due to the reduced action in the crypto space. Back in 2018, there was enormous pressure upon regulators to promulgate crypto rules. However, with the crypto Wild West being a little more on-the-hook and civilized, and prices coming down, has come a sort of regulatory deep breath. Will regulators move forward? Yes, for sure, just at a slower pace. (Some would argue that’s also good, although I disagree.)
Like the outlaws of the Old West, desperate folks have stooped lower than snake bellies by hacking exchanges and scamming crypto investors. Frauds are frequent and black hat cyber-cowboys continue.
Back-in-the-day bandits robbed banks because….that’s where the money was. Same is true for the crypto cowboys today as they target exchanges holding billions of dollars of crypto. Plus, its ugly that the hacks are getting increasingly sophisticated.
We just witnesses the first such major break-in of 2019 as bandits stole a reported $16 million in Ethereum from New Zealand’s Cryptopia.
I visited the Museum of Bitcoin (in Miami at the North American Bitcoin Conference) and Japan’s infamous Mt. Gox hack attack from 2014 where $475 million was stolen is highlighted. That’s an unfortunate, but prominent part of the crypto history. Exchanges and regulators need to cowboy-up and do all they can to put that in the past if investors are going to feel comfortable with crypto exchange trading. As they said in the Old West: Just ’cause trouble comes visiting doesn’t mean you have to offer it a place to sit down.
Like the pioneers who went West, those involved in the forefront of the crypto frontier are seeking new opportunities, adventure—and for many: freedom. Freedom from real, or perceived, persecution from a fundamentally flawed global financial system which increasingly separates the rich from poor as the inequality gap gets greater and greater. Cryptos hold out the hope for a way to change some of that.
The crypto anarchist will say the existing systems are on their way out. They will perish. My view, that’s nutty talk. I’m in the camp of working within existing systems to make meaningful progress. The old adage, if you aren’t part of the solution, you’re part of the problem, comes to mind.
As we begin 2019, the future is bright, we just need to get cryptos right. I’ve got considerable confidence we are on the correct trail and will do so.