Welcome to Finance and Fury. This episode we will look at crypto markets as there is a fair amount of noise being generated in this space at the moment. Just a heads up that this will be a bit of a longer episode as there is a lot to unpack.

I have made my position on crypto markets fairly obvious in the past – if you haven’t listened to any of those episodes, I will provide a bit of a summary of where I stand in relation to cryptocurrencies – and whilst markets price dynamics has changed substantially over the past 3 years – my position hasn’t

  1. As an overview – I am not for or against them – many people have been able to create wealth through trading crypto – and all the power to them – this is great
    1. If people can successfully trade coins profitably, then this is fantastic – cryptos offer an alternative form of monetary conversion beyond traditional asset classes
  2. First – I have to explain my overall view when it comes to crypto – I like the concept of the blockchain – I also like the concept of cryptocurrencies like BTC –
    1. When it comes to the money supply and particularly the control of the money supply – I think they free market should be responsible for this – creating competition for money and with this interest rates changes based around demand and supply dynamics –
      1. Where we currently sit is a complete centrally planned money supply based around what a central authority deems as appropriate as not only the cost of money (being the interest rate) but also what the devaluation of this currency should be each year (which is the inflation rate)
    2. Put into this perspective – fiat cash is not a great medium of exchange for the population/economy –
      1. You are essentially guaranteed to lose money in real terms after record low interest rates minus inflation expectations – but it is great for those that provide the fiat
      2. but does this mean I am converting fiat money into these cryptocurrencies – well, no.
    3. If people do, then all the power to them – I hope the cryptocurrencies that people are buying can grow in prices at an accelerated pace – I personally have nothing against the crypto markets –
  3. But I haven’t bought any? Well – there are a number of reasons – but the major one is Legislative risk –
    1. As we will look at in this episode – there is a massive potential for crypto markets to accumulate additional money flows – in other words – additional funds are available to purchase cryptos like BTC, ETH, or one of the other 4,000 currencies
    2. Everything else being equal – where legislation stays the same, and the interest from the population still continues to rise at the same level as is the current trend – There is potential for cryptos to go in up in value – and go up in value by a large margin –
    3. Taking this view – it is a numbers game – if most people in the world don’t own any BTC but are interested in buying some, and convert AUD, USD, or other currencies for these cryptos, then the prices will go up – purely based around the numbers who don’t currently own crypto –

This is the potential major upside for markets – let assume that there are no governments, or central bank controlled fiats – and that these entities even if they did exist have no interest in controlling the money supply – crypto has a lot of upside to it and would probably be the new medium of exchange people would use

  1. recently released report on the State of the Crypto Marketfrom Gemini – they polled 3,000 U.S. adults, ages 18 to 65 with $40,000 or more in household income
    1. This survey included 921 current cryptocurrency owners and 1,697 consumers who were interested in learning more about cryptocurrency
    2. Now – this survey sample size is small – but they have extrapolated this data and estimated that roughly 14% of the U.S. population owns cryptocurrency
      1. This number is actually fairly consistent with other estimates from surveys conducted – This translates to 21.2 million U.S. adults who own cryptocurrency – but based around interest in this subject – This number is expected to double over 2021 – going to 42m US adults – let alone the rest of the global population
    3. There is currently a large demographic of the population who could be considered crypto-curious – these people would be those who do not currently own cryptocurrency but have indicated that they may wish to purchase some crypto soon
      1. This group is significant in size – based around the current market demographics – has the potential to include 63% of U.S. adult population
      2. This doesn’t mean that every person in this group will buy crypto – but let’s say that even 30% do, well this is still a large increase from the current ownership demographic- with this comes additional money flow – hence, more potential to increase the price of BTC
    4. If everyone who is curious about buying cryptos, this is fairly bullish – so assuming that everything else stays the same in sentiment – where these individuals are still bullish for crypto, hence why they are looking to purchase – then prices have the potential to rise – the more people buy over sell, the more prices rise
  2. Beyond these survey results – it is becoming clear that crypto awareness is spreading – and the hope for acceptance is becoming more and more mainstream – this is promising for the future of crypto’s growth
    1. general knowledge about cryptocurrency seems to mirror what we hear in the news – Bitcoin is almost synonymous with crypto – few people are familiar with other coins – almost everyone interested in crypto has heard of BTC – but only about one third has heard of ETC  
    2. Based around demographic trends – more than a quarter (26%) of current owners first acquired crypto in the last year – and 68% individuals have purchased crypto for the first time within the last two years
      1. shows crypto is starting to receive a widespread interest and it is growing fast – helping to push prices up
    3. While new cryptocurrencies emerge nearly every day, bitcoin still reigns supreme as not only the coin most people have heard of, but also the coin most crypto holders own
      1. Nearly 9 in 10 current crypto owners currently own or have owned bitcoin (87%)
      2. Compare this to bitcoin cash at 22% and litecoin at 21%
    4. The large majority of current crypto owners say they buy and hold crypto for its long-term investment potential. More than two-thirds (69%) buy and hold, compared to the 36% who actively buy and sell as a means to achieve profits and the 27% who actively use it to make purchases on the internet.
  3. All of this is very interesting – as prices for anything are determined by those looking to buy or sell – say a few million people with $100s of millions of dollars are looking to enter crypto markets – where the majority of these people are focusing on BTC – then this technically should mean that BTC prices are set to rise over the next few years – and they very may well –

But – the thing I am wary of is the legislative risk – this is the major thing that has made me personally avoid the crypto currency markets – again, I love myself a free market – and the blockchain with some particular cryptos are something that the libertarian inside of me really loves – but the libertarian inside of me also understands how governments act – in regards to their historical behaviours as well as the primary purpose of a monetary economy

  1. For those who aren’t familiar – we live in a monetary economy – i.e. we exchange a fait currency for a good or service – in the past, there have existed barter economies – when we exchange goods with one another directly – but then due to convenience – the market adapted to a monetary economy – where people started exchanging gold/silver or gold/silver backed IOUs as a medium of exchange – this was all conducted in a private manner and was working well
  2. why is this important for a government? A monetary economy is so much easier to collect taxes on – the government doesn’t want to collect 10 of your cows in annual income tax, they would prefer to take say 30% on average of your gross income – so the very early private monetary economies were taken over by state at the time – they effectively disallowed the use of privately minted coins with that which contained their own markings
    1. This can occur with any medium of exchange – in the modern era this has been the gold standard, then fiat currency – which is granted legislative power as being the only currency that can be accepted to pay taxes or debts – fiat currencies have a monopoly of force behind them
      1. if you sell BTC and make a capital gains, you have to pay this tax in AUD – not in BTC to the Gov –
      2. If you do not disclose this capital gain – and the government finds out about this through their reporting entities like AUSTRAC – then they have a monopoly of force to make you pay – ignore them for long enough, you can have an arrest warrant issued in your name and then police with guns are legally required to reprimand you until you pay what is owed
    2. When it comes to any monetary economy – under the prevailing thought – a centralised currency is required by the powers that be to accept taxes as well as the repayment of debts – it makes thing simple for them
      1. Think of your PAYG – you have a chunk of your fiat currency (AUD for most people listening) taken out of your pay cycle –
      2. Lets use a thought experiment – lets say that AUD is replaced with BTC – the reporting and control of this currency is outside of the governments hands – this is actually no good for governments under the current system for them to collect taxes or guarantee that they have a never ending supply of debt they can issue
  • They not only need complete oversight and visibility of the going on with this currency (so they get their taxes) – but control of the supply to fund never ending fiscal deficits
  1. But the bigger issue for them is the limited supply of certain cryptos – like BTC –
    1. Hard to continue to print, or increase the monetary supply of a currency –
    2. Technically this isn’t so much of an issue – as you just devalue the price mechanics – similar to how the price of gold was controlled by a central bank when this was the backing of money – you can artificially increase the money supply if you increase the price of gold from $15 an ounce to $35 – same amount of gold but now it is worth far more – even the romans devalued their coins by reducing the amount of silver in them
  2. But the major governments as it currently stands is not interested in adopting any existing cryptos – they are more interested in central bank issued digital currencies
    1. Some smaller governments around the world may chose to accept it – but the major governments won’t
    2. Digital coins – What form these take is anyone’s guess – China is currently looking at a gold backed stable coin – hence why they seem to be hoarding physical gold – and why they are starting to crack down on crypto access and miners
  • But when it comes to governments and the adoption of a particular medium exchange – they do not like competition – when gold was the backing for money the governments made this illegal for individuals to own – unless it was in jewellery or collectable form – so if central banks are looking at their own form of digital coins – and if cryptos are seen as competition – which are a destabilising factor to the monetary economy – what are governments likely to try and do to competing digital currencies/cryptos?
    1. Competing cryptos are considered deflationary by monetary officials – rather than AUD being spent in the economy for GDP it is being converted to BTC – creating a deflationary effect on the AUD – requiring more to be printed to try and boost GDP
  1. Can the government ban crypto? Can they outright ban BTC, or ETH or ripple – well no – due to the nature of the blockchain it is going to be very hard, if not possible for a single government to ban the existence of a crypto
  2. But let’s take a step back – what do governments control – regulation of fiat currencies – control over ADIs – i.e. banks – in the modern financial era they have a never before seen control over this sector of the financial markets – from not only the supply of money, but from what you can use your own cash for i.e. cash restriction bill – limiting how much cash a private business can accept as payment for their services – which is open ended with restrictions – it is simply up the government to change their mind
    1. Much of the bullish behaviour of BTC has come from the expectation, or hope that many large multinational companies will accept currencies like BTC as payment –
    2. Has created a major bullish sentiment in crypto – saw the price go from $20k AUD to $85K per BTC – many other major crypto currencies followed suit- expectation that major companies like TSLA would accept payment is good news – and it is good news – until they turned around and reneged on this
    3. Also, other companies like Mastercard and BPAY said they are going to accept transfers and payments in cryptos like BTC – but lets look at their business/profit motives for a minute – if their business model is to make a percentage split on money spent through their chain, wouldn’t it make sense to adopt as many different methods as possible to make as much money as possible?
      1. so this adoption from companies like Mastercard may not be because they see BTC taking over fiat currency, but simply another way to make additional revenues
    4. But negative news surrounding this space – such as tweets from Elon Musk and news from the Chinese Government have created a negative sentiment for cryptos like BTC – saw a 50% decline in prices
  3. This is where it is important to look at what governments have control over
    1. China cannot ban the existence of BTC – but they can ban any financial intermediary from accepting a conversion from BTC to RMB – effectively controlling the flow of currency into crypto or vice versa
      1. Say you have a wallet and you are looking to get your BTC out into RMB in your own bank account – well China as the monopoly controller of these financial institutions can decline this transaction –
        1. You are still left with options – P2P conversions for other crypto currencies – or set up a new bank account offshore and convert your coins into another currency – which can then be converted back to RMB
      2. But let’s say that the US follows suit, or Aus – and slowly as part of a G20 agenda – no financial institutions across this jurisdiction are willing to convert any funds from a crypto wallet into any major fiat currencies – well, this is a major risk – it may never happen – but this all depends on the willingness of governments, not their ability – they have the ability but are rather slow at getting anything done – which the major concern that I have when it comes to these markets in their current form
        1. The way I view it is that crypto markets are being allowed to exist by the powers that be, as in their current state they pose no risk – central bank and fiscal mandates are to ensure financial stability – if all of a sudden, they deem that say BTC is creating issues with financial stability, either through consumer protection excuses or through deflationary pressures where fiat currency is being converted to crypto rather than being spent within the economy – well, daddy government may start paying more attention to their methods of controlling/regulating these markets
      3. Plus – what makes the crypto markets great in the eyes of many, makes it a money-making playground for others – such as the billionaires or whales within the market
        1. As an example – say I am an eccentric billionaire – and I dump $5m into some alt coin – more or less a meme coin like poocoin (real thing) – then I promote it and get other people to buy it, saying that it is going to go up in price – many other people start you buy and the price goes up by 2,000% very quickly through a self-fulfilling prophecy – I then sell my position and take profits – then I reinvest into another coin – promote this via twitter telling people that it is the next big thing and to invest all of their money – then I make a further 2,000% on this coin – and repeat this behaviour – I can make a lot of money – especially if people respect my public profile and I can reach enough people
        2. Now – this type of behaviour is commonly referred to a pump and dump scheme – you promote something where others then invest into it and it push the price up – I as a smart person know that the prices the current asset that I am promoting is not worth what it is trading it, so I sell – and take my profits – this is technically illegal on markets that are regulated by entities such as the SEC or ASIC – goes against market integrity rules – But for unregulated markets – this is fully legal –
        3. The unregulated crypto market is rife with market manipulation – and technically I see nothing wrong with this – I prefer an environment of buyer beware – it helps to create a more aware population – but when most of the population is used to the concept that some arbitrary rule or regulation will save them from these schemes – it can lead to undesired outcomes – where people lose money –
        4. But this sort of pump and dump is the day-to-day occurrence within crypto markets – Whilst it is not good for anyone duped by these schemes – this is the smallest risk that these markets face and markets will adapt over time – people will start paying less attention to what Elon Musk has to say and no longer respond to his signals –
        5. But this sort of behaviour can also bring is a large risk from a legislative perspective – this is consumer protection – that governments need to get in involved and treat cryptos as securities, falling under their legislative branch

So in summary – if people are making money from Crypto – that is awesome –

  1. I would prefer some form of naturally adopted medium of exchange that it outside of government or central bank control – to help maintain purchasing power
  2. This is where the blockchain has a lot of promise – but I also know that the government and monetary authorities don’t like anyone else playing with their toys
  3. This is the same position I have had for the past 3 years when it comes to each any every single coin –
  4. The prices may go up and down – but what are those prices measured in? Aus, USD, – and when governments bring in their own digital currencies, competing coins may be deemed too much of a risk
  5. So for me personally –prices have the potential to go up of crypto as more and more people adopt this – through converting their fiat for crypto –
  6. But as a store of value for the very long term – and as something that can provide me value through an investment – it is something I am not interested in
  7. I may be wrong – governments may change their minds and completely ignore crypto markets – but I am not willing to take that chance

Thank you for listening to today’s episode. If you want to get in contact you can do so here: http://financeandfury.com.au/contact/ 

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