Anders Kvamme Jensen of the AK Jensen Group and Max Thowless-Reeves, founding partner and CIO, Sorbus Partners break down the advantages and disadvantages of cryptocurrencies
Yes - Anders Kvamme Jensen, founder and chairman, AK Jensen Group Limited
On Wall Street, value flows towards the large institutions at the centre. In DeFi – decentralised finance – value flows outwards. While many new technologies aim to automate standardised jobs in the peripheral, the blockchain will automate the centre itself. In short, rather than making the taxi driver superfluous, blockchain will bypass Uber and allow the taxi driver to work directly with the client.
The market has so far grouped all cryptocurrencies together into one big speculative bunch. Much like in the traditional market however, they are not at all the same and a more mature market will not trade them together. For example, Ethereum, with its smart contracts and DeFi applications, generally trades in tandem with bitcoin, cryptoland’s store of value. They are, however, as different as Apple and gold in the traditional world.
Much like the dotcom collapse in 2000, deep corrections – such as we have seen in crypto over the past nine months – tend to separate the good from the bad, and fast. In DeFi, investors will distance themselves from purely hype-driven, speculative tokens with no underlying substance or sustainable traffic. In centralised finance (CeFi), companies with sound financials, healthy balance sheets and established substance will take advantage of market weakness to strengthen their dominance and roll up undercapitalised projects. eBay, Amazon and Yahoo spent the years after the dotcom crash fortifying their positions and investors who followed them were highly rewarded.
Cryptocurrencies like Ethereum will still thrive. Even in doomsday scenarios, the decentralised Ethereum blockchain would continue its disruption of the financial industry, as a true unicorn along the likes of Airbnb, Amazon, and Uber. The financial industry was shielded from disruption by regulations, but as seen in the last G20 decision that is about to change.
Contrary to the belief of traditionalists, crypto welcomes a regulatory approach. We are assisting regulators in finding solutions on how to regulate a decentralised future. After all, without regulations crypto will never see meaningful institutional adoption. And without institutional engagement there would be a lack of stability and industrial scale liquidity in the protocols. Moreover, without regulations, projects like Terra, 3AC and Celsius would continue to erode our trust in the system. The latest G20 communication signalled a more universal regulatory framework allowing developments to thrive and improve standardised financial services, one by one.
With that, a new digital era will usher in a better way to conduct financial services. The benefits of operating within an infrastructure that executes based on logic, with record-keeping in real time on an open network, are just too many. Siloed entities, in need of constant reconciliation and controls at higher costs and with less transparency, cannot compete.
Much like during the dotcom era, the gems will rise from the ashes and reward investors handsomely in the years to come. Projects that were based purely on hype will remain deflated, and the industry will move forward as a healthier one, based on decentralised ledgers that are harder to manipulate than today’s outdated systems.
No - Max Thowless-Reeves, founding partner and CIO, Sorbus Partners
Bitcoin was memorably described as “everything you don’t understand about money combined with everything you don’t understand about computers”.
To the extent that shady characters wish to exchange digital records that they believe they can later transfer elsewhere and receive a roughly similar number of digital thingys, then crypto has a place. But so does Monopoly money. If it was as innocent as that then it would be mostly harmless.
Where crypto is a malevolent charlatan is in persuading people that it is more than fake money being exchanged for goods that in most jurisdictions are illegal. Believers insist that crypto has a much wider role. The zealots would have you think that cryptocurrencies can be a new money, a method of exchange, a store of value, an inflation hedge, an investment, the means to world peace and a medicinal compound most efficacious in every case.
Cryptocurrencies cannot be a form of money for several reasons. One of the great claims of crypto relates to scarcity (a finite number can be created) but plenty of scarce things have little value and scarcity is true only when looking at certain cryptocurrencies. The total number of cryptocurrencies is very far from scarce; there were more than 10,000 a few months ago (though probably fewer now).
We had a dozen or so currencies within Europe some time ago and got so fed up the euro was created. The sheer number of cryptocurrencies speaks to their ease of creation and get-rich-quick inspiration not of their ability to replace currencies.
Even if you ignore all but the biggest, bitcoin, you still face three profound structural problems.
Firstly, transaction costs. Transactions and their digital logs require significant computational power and energy cost to maintain (estimates of $75 per transaction) which is clearly unsuitable for everyday transactions. The incentive for people to accept the cost of maintaining this digital ledger is that if they do enough they are awarded (“mined” in the parlance) a bitcoin. Consider what happens to the blockchain should the value of a new bitcoin be below the cost of maintaining the digital ledger?
Secondly, security. Cash is “bearer”, that is it is owned by the person that carries it. A bank balance has your name attached to it. Crypto believes it is the best of both worlds but in fact is neither. The anonymity that many of its users crave has been penetrated by government agencies and your claim on your asset is vulnerable to hacking and the counterparty risk of the intermediary that holds your crypto. Crypto is not secure.
Finally, volatility. How can crypto be a currency if the value of what you can buy with it soars and plummets? While bitcoin and the like were rising in value, their proponents couldn’t have cared less. When their values crash then volatility comes more sharply into focus.
Cryptocurrencies are not money, an inflation hedge, an investment or anything of the kind.
