It was entirely coincidental that when Matt Levine’s magnum opus on cryptocurrencies went live on Bloomberg earlier this week, I was cooped up with Anurag Dixit, co-founder of Kunji.io. He and I were in a slugfest for over half a day because the former hedge fund manager believe cryptocurrencies will have a huge role to play in the future of finance and that retail investors such as me should think of it as an asset class.
Now, the thing is, I’ve always been a cryptocurrency sceptic and have articulated that in as many words on these pages. So why bring it up again? Because after stepping out of Dixit’s office in suburban Mumbai, I felt compelled to question some of my assumptions: Did I get it wrong? I could also feel the FOMO (Fear of Missing Out) creep in. Like any good hedge fund manager, he had done a pretty darned good job to make me think that.
Consider his answers to my questions like, why invest in crypto, and why go through an intermediary like him? The latter especially since the very idea of intermediaries goes against the philosophical grain of crypto, and that includes regulatory bodies controlled by any sovereign government. Even as we speak, there are at least 10,000 cryptocurrencies, most of which are worthless. But how are investors to sift the wheat from the chaff? And what about the future of the well-known ones like Bitcoin and Ethereum, I asked him. Bitcoin was the first cryptocurrency and at its peak in October 2021, each coin was worth a little over $61,000. Since then, investors have pummeled Bitcoin and this week, it is worth between $16,000-$17-000. Whatever happened? No one seems to know. This is why entities such as Dixit matter and they seem to understand what led to the fall.
One of the first to collapse was Luna, a Stablecoin, from $80 to practically zero in May this year. A Stablecoin, unlike a cryptocurrency such as Bitcoin, is backed by assets such as dollars or gold. The second reason, Dixit says, is that when Bitcoin touched $61,000, early investors started to book profits. So, a decline was inevitable. And finally, the geopolitical quagmire caused by the Russia-Ukraine crisis led to yet another market rout because central banks the world over are tightening fiscal policies. There was no money left for investments, and assets such as crypto got hit by a triple whammy.
So, has anything changed? Here again, Dixit has much to say. I’ll stick to one of his points. Putin’s war against Ukraine is taking its toll on Russia in various ways. This includes sanctions against the country and it was expelled from SWIFT, a global payment network. With that, the country’s access to reserves of US dollars parked in other parts of the world is now frozen. In turn, that limits the country’s ability to trade with other nations the world over.
Outside the Western World, China under a resurgent Xi Jinping, and the Middle East are wondering what can possibly happen if their economies are expelled from SWIFT in the future. In any case, the infrastructure for SWIFT was built in another era and a more contemporary one is called for. When looked at from that perspective, blockchains, the underlying technology on which cryptocurrencies such as Bitcoin and Ethereum are built, make sense. It is contemporary, can be thought of as digital gold, and it is a matter of time before they adopt some form of it.
While technically this sounds feasible, I have a problem with it: The marketplace for gold evolved over decades while most crypto markets are still nascent.
When I placed all these concerns before a bond market veteran, he had an interesting take to offer. “Pakistan was the favourite to beat Zimbabwe on Thursday evening. If you had bet your money on Zimbabwe then, you’d have made a lot of money. But would any sensible person bet on Zimbabwe? Crypto is a bit like that right now.”
(Disclosure: I will invest a little money next week in crypto that I can afford to lose. I do not recommend anyone investing here without being prepared to lose it all because the space is totally unregulated and choc-a-bloc with scammers)