The collapse of FTX shows how easily crypto is manipulated and the “crypto ecosystem” is fundamentally driven by centralized players and not any true form of decentralized or digital assets. Cryptocurrency is a sideshow and benefits no one other than speculators hoping for a greater fool. However, the combination of digital asset regulation, central-bank cooperation, and distributed assets via decentralized platforms still represents one of the most intriguing opportunities, and, with the potential disruption of global finance, one of the most exciting investment areas today.
Financial markets are imbalanced and lack liquidity in crucial sectors, even historically stable and predictable markets such as the global bond and currency markets. Investments are slanted in one direction more frequently and the markets are vulnerable to big price swings as a result. These large global markets are not immune to ever more lopsided trades creating extreme volatility. This occurs even when a small change occurs in positions, sentiment, or news. Even the world’s most liquid markets, US dollar currency trades and US Treasuries, are seeing skewed positioning resulting in surprisingly large shifts in prices and Treasury bond yields.
The market now leans too far one way or the other, and that imbalance will be forced to reverse more powerfully and unpredictably.
“Being Digital,” the groundbreaking book by Nicholas Negroponte described what happens to a global economy when all assets can be digitized. Presciently predicting the impact on music, film, retailing, and commerce in general, Negroponte intuitively understood the disruption and the creative/destruction that would be unleashed when a globalized infrastructure could deliver all products and services, including assets and intellectual property, instantly via a worldwide digital infrastructure and network.
The same “digital” effect is impacting global finance today. Now, all financial assets are “being digitized” and can be delivered instantly on a global infrastructure, fundamentally upsetting the world’s largest industry with unprecedented creativity and destruction.
Crypto assets are the manifestation of that digital form. While there is debate about whether or not an asset can truly be “digital,” the market has spoken. While there will be continued volatility, speculation, creation, and destruction, a digital platform for financial transactions ranging from the simple transfer of funds to complex financial transactions, investment, and lending are here, disrupting a multiple trillion-dollar industry.
Coinbase, Bitcoin, Ethereum, and Dogecoin
Everything you don’t understand about money combined with everything you don’t understand about computers.
Bitcoin and other digital currencies are going mainstream, and along with that, increased volatility. Last week, cryptocurrencies jumped in value as Coinbase, a cryptocurrency exchange, became a publicly traded company worth approximately $100 billion. In other words, trading in digital currencies, with all the expected volatility and unpredictable nature such securities bring, is here to stay.
We are rapidly approaching a zero-interest rate world. In the face of the dramatic negative impact of the pandemic, as well as existing and lingering economic fallout, central banks’ interest rate toolbox will be empty soon. The only remaining weapon will be fiscal policy. Among other things, fiscal policy and domestic financial markets will have an overwhelming influence on global currencies.