Not long ago we saw this opinion piece in the Australian Financial Review (AFR) from columnist Christopher Joye, who runs a credit/fixed income fund here in Sydney. You can read it here and it's well worth it to see what the popular opinion is on our industry from the long-standing critics like Chris ("The great crypto Ponzi scheme finally crashes").
Before we get into it, let's admit something first. Crypto has a problem. Now this may be shocking to hear as it’s coming from someone with DeFi advocate in their LinkedIn profile, but it’s true. Whilst I support blockchain technology and crypto, I am also pragmatic in its deployment. I don’t advocate for a crypto only world (given we need more safeguards in place) but equally I do not think it’s prudent to continue charting the path down traditional financial models where inefficiencies and slowness to adopt innovation have led to an imperfect balance amongst the haves and have nots across the globe.
Addressing Chris Joye's article, it’s fair to say he gets many things right. Crypto has been in the doghouse this past week and deservedly so. It may surprise many (again) to hear that much of the criticism about the version of stablecoin created by TerraLabs (yes there are different versions), came from within the crypto ecosystem itself.
Nuance is the reason why we can see one type of stablecoin able to be attacked like UST/Luna was whilst others are not. Not all crypto is made the same and the term cryptocurrency is, in fact, a misnomer. Not all crypto does the same thing and if we take away the phrases used to describe them like “currency”, “protocol” and “token”, we can simply view them as a bunch of different projects that utilise blockchain technology in some way or another, They are just like startups, scale ups and any other early stage company. Within this generalisation, we see 3 main types of projects:
Those which gain value purely from popularity. Some may be because of a meme, others a celebrity endorsement and others for more inexplicable reasons. These are often built on ponzinomics where the only reason the value goes up is from more people coming in to prop up those who got in earlier.
There are others which start off as growing from popularity and add the utility or attach themselves to more sustainable projects later on. Look at the various NFT projects which became wildly popular and then turned those funds into products such as the metaverse being created by Yugalabs (owner of the Bored Ape Yacht Club and CryptoPunks). Consider them like startups selling forward value.
Then, there is a 3rd type which is focused on utility/sustainability from the outset. These are projects aiming to utilise blockchain technology to improve current inefficiencies across different industries.
Of these, the first 2 types can be difficult to support because they lack sustainability but that’s not to say that they don’t work out, especially if the stories and art created here become popular. The 3rd is not a guarantee for success either but at least from the start, it is built to last. In terms of utility focused projects there are those which are focused on improving our payment networks, how we collaborate when transacting with one another and even more where they offer an ability to back various early stage ventures. There are more than a few projects out there with utility in mind.
Further on the lack of utility, BTC already proven its worth especially in how it has given those afflicted by the ravages of war some semblance of self-sovereignty. People fleeing Ukraine have been able to move Bitcoin funds out of the country whereas traditional savings were seized.
Addressing some of Chris’ other concerns next we look at correlation. From the above, it makes sense why many crypto projects are becoming more correlated with equities, especially technology stocks. Correlation and inflation hedges were fine when this was just Bitcoin and a few other projects but with many more entering the market, the make-up of crypto has changed. Correlation between these markets has not always been as strong as it is now and with interest rate pressure and global supply chains at risk, we have seen crypto and technology companies move closer in line with each other. Rather than a negative, this could in fact be considered a sign of a maturing market and how the world views these types of projects.
This is not to be dismissive of any of the critics. They are most certainly welcome in my book, even if folks like Terra/Luna founder Do Kwon and his team of Lunatics (their nickname) try to stamp them out. We need people like Chris, but it’s important to remember that he’s joined by a chorus of folks inside the crypto ecosystem that are just as, if not more critical.
Overall, we would certainly not say that this space is perfect, but when you look under the hood a bit more (and avoid the blood-soaked headlines), you’ll see there is more nuance to all of this than meets the eye. It would be incorrect to say that all equities, bonds or futures are bad or argue the same about active managers. It’s simply not true nor is it a fair assessment. Just as there is nuance in traditional markets, so too is there the same in crypto and by lumping all protocols, stablecoins and other projects together, we do more harm than good.
For now, the crypto space needs to do a reset and think about how it sorts out potential issues in the future but make no mistake, it will do so with both advocates and critics pushing it forwards.
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