Crypto’s Future Is Even More Exciting, and Maybe More Volatile, Than Its Present

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Few sectors in the tech world are trembling like crypto. Bitcoin and other cryptocurrencies have lost $1.6 trillion in value since the market peak last November. Tighter monetary policy and recession fears are weighing not only on stocks, but in the case of crypto, an asset whose hype has long outweighed its real-world uses. The recent collapse of a major “stablecoin”, which wiped out $40 billion in just a few weeks, is not instilling confidence in the crypto ecosystem either.

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Nevertheless, bitcoin, the most recognizable cryptocurrency, is up five times from its pre-pandemic days, and the industry has expanded to other blockchain, token and app giants. The crypto market valued at $1.2 trillion now includes platforms for decentralized finance, or DeFi, trading and lending; non-fungible tokens, or NFTs, which give owners certain property rights to things like art or video; And stablecoins, which are supposed to act like crypto dollars, have a peg to one US dollar with the backing of a reserve asset.

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Yet despite its immense technical and financial potential, the crypto industry is finding it difficult to break into the mainstream, as investors retreat to safer assets while regulators tolerate more regulations.

Is crypto facing an existential crisis? Or, as the bulls argue, is it a cyclical blip for a technology that will revolutionize markets, transform global commerce, and even lay the groundwork for a new version of the Internet called Web3 ? We asked a panel of industry experts to weigh in on our first crypto roundtable.

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Our panelists included Dan Morehead, founder and CEO of Pantera Capital, a crypto hedge fund firm; Ishwar Prasad is an economist at Cornell University and author of the book future of money, Alkesh Shah, Head of Digital Asset Strategy at Bank of America; and Lisa Chalet, chief investment officer at Morgan Stanley Wealth Management. The round table took place in mid-May. What follows is an edited version of the discussion.

Baron’s: Bitcoin Is Down 60% From Peak Price, Looks Like Another “Crypto Winter”. In the last one, bitcoin lost 82% of its value and took three years to return to its previous high. Is this cool vibe comparable?

Alkesh Shah: This asset class belongs to riskier assets such as technology, and that sector has improved due to factors such as rising interest rates and inflation. For us to see a crypto winter, we need to see people exit the ecosystem – less institutional and corporate engagement, less developer activity. Instead, we are seeing the opposite, with more institutional, corporate and developer activity. Our view is, this is not a cryptocurrency. This is a consolidation period for riskier assets.

Eswar Prasad: It is not acting like a unique asset class. Factors driving other risky assets, including inflation, interest rates and liquidity conditions, are all driving crypto. And there are no fundamental valuation models to underpin crypto, especially currencies like bitcoin that have no intrinsic value. The Nasdaq Composite is down about 30% from its high, and the crypto is down 60%. This indicates that the crypto is about to become very volatile, with a lot of upside and downside risk.

Alkesh Shah, Bank of America’s Top Crypto Analyst

Photo by Guerin Blasky

Lisa Chalet: I would not say that the property class “winter”. But it is in a serious bear market, and questions need to be answered for it to revisit previous highs. Vulnerabilities around use cases continue to grow exponentially. We have seen major problems with stablecoins – one of the fundamental use cases for crypto. The lack of regulation and real collateral has been exposed, and this has exposed risks not only to regulators but also to participants.

,For us to see a crypto winter, we have to see people exit the ecosystem… instead, we are seeing the opposite.,

— Alkesh Shah, Bank of America

Dan Morehead: We have been doing this for 10 years and we have seen six big cycles. The weighted average bear-market loss has been 61%, and we hit 62%. It has been going for 110 days, which is close to the average for a bear market. This is the first bear market in bitcoin’s history in which it has given back more than 100% of the previous bull run, and the first time we have hit a new low after a bear market. All those things make me feel that we are closer to the end than the beginning.

One of the largest stablecoins, an “algorithmic” coin called TeraUSD,
recently collapsed, wiped out an estimated $40 billion in tokens and a related crypto called LUNA,
Largest stablecoin, Tether,
Is trading slightly below $1. Does this call into question the use of stablecoins as assets that can be relied upon to hold their full value?

Shah: There are strong use cases for stablecoins. The economies of the “metaverse” will probably be driven by stablecoins. A retailer may have a digital catalog on Meta or a platform operated by Microsoft.,
And payments can be made in stablecoins with transactions across borders in real time. If you use fiat currency today, it can settle in two to five days. If you are of the opinion that the metaverse is in the first inning, then you have to believe in stablecoins.

Offering: There is a rich irony in fiat-currency-backed stablecoins. The whole purpose of bitcoin was to do away with trusted intermediaries such as central banks, commercial banks or credit card providers. But in order to function as a reliable medium of exchange, stablecoins require a centralized verification mechanism. They need to be supported in exactly the same way that bitcoin was trying to get away from—fiat currencies.

Ultimately, when we think about the metaverse, stablecoins serve some of the most important demands of payment systems domestically and across borders. But what worries me is whether stablecoins can be trusted to maintain their value. Yes, they are collateral, but who knows what the quality of that collateral is. During the global financial crisis we had a problem with money-market funds, which were supposed to be safe. It is worrying whether an entire financial ecosystem is built on stablecoins.

Shah: The Terra failure will probably accelerate regulation. God is right: it’s not what the developers of bitcoin envisioned, but it’s programmable money, and you can do all sorts of things with it. PayPal Holdings
[ticker: PYPL] and Silvergate Capital
[SI] Looking at launching our own stablecoins, but we need a regulatory framework.

Morehead: The stablecoins we work with are backed and audited, such as USD Coin,
or USDC. It would be better if stablecoins were regulated, and I think this will be the model in the future. But the demise of Terra says nothing about the broad promise of stablecoins or blockchain. The failure of didn’t mean the Internet was stupid. This meant that one business model didn’t work.

An expatriate who wants to send money across the border does not want to speculate on the price of bitcoin. They just want to send payments instantly to someone with a smartphone. Banks and money-transfer businesses charge high fees and benefit from exchange rates for cross-border transfers. Stablecoins have an incredible advantage over money-movement systems like SWIFT, which are archaic, slow, and expensive. Therefore, USDC has a use case for non-volatile money, like stablecoins.

But stablecoins are backed by fiat money, which is being debated. Inflation is around 8%. This is going to prompt a lot of people to save in things other than fiat currency. Bitcoin and volatile currencies will have different uses than stable coins.

Lisa Chalet, Chief Investment Officer, Morgan Stanley Asset Management

Photo by Guerin Blasky

Bitcoin transactions, or mining, consume an enormous amount of electricity in a year, equivalent to the amount consumed by countries such as Norway, due to the laborious “proof of work” system. Much mining is now done with renewable fuels, but a large portion still relies on fossil fuels, making bitcoin environmentally controversial. What is the approach?

,We think blockchain technology will be transformative and eventually add value to a portfolio. Therefore, we advocate exposure.,

-Lisa Chalet, Morgan Stanley

Offering: My Cornell colleague Ari Jules, who produced proof of work in a 1999 paper, laments its use with bitcoin. It’s incredibly clever, but it’s inefficient and destructive to the environment.

If you think about the opportunity cost of energy, the notion that proof-of-work mining creates jobs, especially with renewable energy, is a mirage, which can be better put…

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