There’s a Lot of Bull in Crypto. Why That Just Might Be Bullish.

Crypto disruption is gathering speed, I’m told. Just look at the signs. OK, let me get my glasses.



There’s the executive order that President Biden just signed on crypto regulation. The White House put out a fact sheet packed with action verbs like “assess,” “identify,” and “support.” “Framework” is used three times. I have to admit, that’s a lot of framework, but wake me when the assessment turns into a full-blown report.

Streetwise

Bitcoin Doesn't Fix This. Plus, Pets and Profits.

Jack hears from a crypto skepti-bull, and catches up with Kristin Peck, CEO of Zoetis.

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The government of Ukraine, you might have heard, put out a call for crypto donations to fund its defense against Russia’s invasion. It has raised an undoubtedly helpful $63 million. But crypto scammers have bilked Ukraine supporters out of a similar amount. Donations in traditional currencies, meanwhile, are pouring in just fine. And Ukraine must convert its crypto to fiat to spend it on useful things. Keep the crypto flowing, by all means, but let’s not call this a pivotal moment in monetary history.

What about El Salvador? It’s president, Nayib Bukele, made Bitcoin legal tender in September—a first for a country. Businesses must now accept it as payment, but few of them have. The International Monetary Fund says the costs and risks to the country’s banks and consumers outweigh the benefits. Bukele has made large Bitcoin purchases with public funds, which sit at a loss in dollar terms. So far, the experiment is looking as innovative as adding a rocket emoji to El Salvador’s flag, but we’ll see.

It has been 13 years since an unknown software developer or developers birthed crypto by mining the Bitcoin genesis block. Some 40 million Americans have owned crypto, but I have yet to personally see it used at a store, and I don’t know anyone with a crypto mortgage.

It’s unfair to say that crypto is only for speculation. There’s also crime. Russian hackers made $400 million in crypto last year from ransomware attacks, and control three-quarters of the market, according to a research group called Chainalysis. Worldwide, $25 billion is held by “criminal whales,” or addresses with at least $1 million in crypto that can be traced to illicit sources.

“The idea of cryptocurrencies disrupting traditional finance—it’s a meme. It’s a thing to get people to buy,” says Alex Pickard.

He’s a former coin miner and current holder, and vice president of research at Research Affiliates, which has $169 billion in assets linked to its strategies. The firm is best known for stock indexes with a value tilt.

Blockchain technology is innovative, but not necessarily disruptive, and there are major barriers to crypto displacing traditional finance, Pickard says.

The first is what he calls the profitability problem. The value of crypto can be broken down into components, including utility value, which is minimal, and speculative value, which is large. The speculation is based on crypto’s claimed disruptive power. But if that disruption occurs, any gain in the utility value of crypto is likely to be more than offset by lost speculative value.

“The proverbial dog chasing its tail will have caught it,” as Pickard puts it.

If prices went into a prolonged slump, crypto might lose fans. This is part of what Pickard calls the community problem. Crypto has passionate supporters, but they’ve shifted over the years from working toward everyday adoption to simply sharing disruption memes, while holding out for price gains. “I AM HODLING,” wrote one whiskey-drinking Bitcoin trader at the start of a colorful rant during a 2013 price crash.

Since then, the misspelling has become a rallying cry for speculators. But if everyone is hodling, it’s difficult for a currency to become a medium of exchange.

Then there’s the power problem. The Federal Reserve is more than 100 years old, and America’s longest-lived bank, more than 230 years. It’s easy to view institutions like these as vulnerable to young insurgents, but the statistician and writer Nassim Taleb has proposed the opposite: that the life expectancy of ideas and technologies is proportional to their current age. Behold, the zipper. Disruption is hard.

Pickard once quit his job and went all-in on Bitcoin mining with high-speed computers. He moved to Washington state for its cheap hydroelectric power, which he says cost him $3,000 to $4,000 a month. A 2018 price crash convinced him to change careers again, but he held some coins. No superyacht, but he has done well, he says.

I asked what crypto will look like in 10 years. “I think we’ll be hodling,” he says.

I’m not much of a crypto strategist. My main tactic is to fake a sneezing fit when someone tries to talk to me about decentralized finance.

For those who have asked me how best to speculate on coins, I’ve recommended what I call the hot garbage approach. Spend only entertainment money, not investment capital. Don’t try to buy quality—from what I can tell, there’s no such thing as a crypto blue chip.

Instead, buy something trashy and cheap, with a rising price. That last part is important. You want as much price momentum as you can find—think gasoline and beef, but for meme coins.

But I’m a non-practitioner. I asked Pickard what buyers should look for, and he favors coins that have an active community talking about them on social media. He says that traditional assets like stocks make up most of his portfolio today, but that he still holds all of the top cryptos in roughly equal proportion, which he calls the “best tools for speculation that have ever been created.”

If that seems at odds with his disruption doubts, it’s not. Prices can continue to rise, he predicts, “as long as disruption remains a plausible eventuality, never a reality.”

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