Responding to growing interest from its clients as well as increased media attention and debate on the subject of cryptocurrencies, the Bangkok-based MBMG Group is launching a new service it says is aimed at providing its investment advice clients and subscribers “analysis on all aspects of digital disruption to traditional financial services”.
The analysis will take the form of regular emailed bulletins, research papers as well as events, such as a conference in Bangkok later this month at which Sanlam Investment’s Gideon Nell will speak on the topic of fintech and artificial intelligence, MBMG says.
Below, in the second part of his look at cryptocurrencies, MGMG Group managing director Paul Gambles – who says he doesn’t himself currently own any units of the new digital forms of money – considers whether the “cryptos” are “the currency of the future”, or rather, just another madcap financial bubble…
As noted here last month, whatever their proponents may say about them, cryptocurrencies are extremely volatile at the moment, which is why their price is the main focus of almost every discussion or news article about them. (As opposed, for example, to their possible merits as an alternative to conventional currencies.)
As is the case with any asset, when it comes to the price of bitcoin and the cryptocurrencies, it all comes down in the end to the perception, or even the whim, of the people who trade it or use it.
One big difference between the pricing of so-called “fiat” currencies, such as the euro, pound or US dollar and cryptocurrencies, is that fiat currencies generally have reasonable price discovery. Which is to say, when you want dollars in your pocket for a shopping trip to New York, your bank can tell you how much (in any other quoted currency) they’ll charge you to provide the amount you specify (give or take a few hidden charges here and there), and you can check then that online, and decide whether to use your bank, or take your FX custom elsewhere.
It is, in short, a reasonably open and competitive process, and any discrepancies very quickly get arbitraged out of the system.
With even the most widely available crypto, bitcoin, this isn’t really the case. Nowadays there are reportedly some 158 fee-based crypto exchanges in operation, and while that’s relatively few compared with fiat currency, you could argue that given today’s global and instantaneous communication capacity, that would be enough to enable one to make an enlightened choice. (These crypto exchanges claim to trade between nothing and $US442m on a daily basis, which isn’t exactly small, if you consider, for example, that it is approaching half the Singapore stock exchange’s average daily volume last year of around US$729m.)
However, the SGX is regulated, audited and transparent, and its volumes are therefore generally believed. It is one of the ironies of bitcoin (BTC) that while the blockchain can be open to the public, we have no idea whether all the BTC transactions can be considered “real”.
The result is that these markets may be doing a lot of daily business, but they aren’t generally overseen by financial regulators.
Regulators and governments don’t seem to have worked out how to handle the exchanges, while hackers, fraudsters and traders in illegal goods, critics claim, are able to go about their business – and, say these critics, are doing so in apparently increasing numbers, occasionally leaving investors out-of-pocket, and with little hope of recourse, a major Reuters report noted in September.
Said Reuters, in its report, headed “Chaos and hackers stalk investors on cryptocurrency exchanges”: “Huge sums are at stake. As the prices of bitcoin and other virtual currencies have soared this year – bitcoin has quadrupled – legions of investors and speculators have turned to online exchanges.
“Billions of dollars’ worth of bitcoins and other cryptocurrencies – which aren’t backed by any governments or central banks – are now traded on exchanges every day.”
The Reuters report goes on to quote David L. Yermack, chairman of the finance department at New York University’s Stern School of Business, as saying: “These are new assets. No one really knows what to make of them. If you’re a consumer, there’s nothing to protect you.”
What seems to be emerging, then, is that it is difficult to know for sure how reliable any of the figures released by these cryptocurrency exchanges are. Genuine daily transactional turnovers could be wildly exaggerated, to make an exchange seem more popular or mature; and the absence of a regulator gives us no way of being able to ensure that the numbers are accurate.
What is clear is that the price of cryptos typically shoots up in response to articles saying that they’re the currency of the future; the opposite happens of there’s bad press, or no press at all.
Bad press – such as reports of security issues, on possible government regulation/taxation, or reports that cryptocurrencies are being used for drug sales and other illegal transactions on the dark web – can check the rate of adoption and thus lower the price.
This is the opposite of the general predictability that is required for a normal currency. A vendor who sells goods will generally prefer US dollars or even Thai baht, because events like the 1997 Tom Yam Goong baht devaluation – which triggered the Asian financial crisis – happen relatively rarely. And when they do, although they might seem dramatic, they’re like drops in the ocean compared to what have come to be seen as normal daily moves for bitcoin.
Will limiting cryptocurrency circulation work?
Unlike fiat currencies, the amount of bitcoin circulating is limited to a fixed (and arbitrary) amount – 21 million “coins” worth. Some crypto proponents may believe that this means if a country decides to print its fiat money to pay for public services or assist exports, Bitcoin will get stronger relative to that currency; yet this would betray a lack of economic understanding.
As the Bank of England has explained – and as was evidenced starkly in 2008, when the Federal Reserve’s balance sheet doubled within two months but the US dollar nevertheless strengthened significantly – issuing additional currency is only inflationary, and only weakens the currency stock if it is then deployed in a relatively unproductive manner.
This highlights one of the reasons that cryptos aren’t currencies – they don’t have the same economic impact as currency issuance. Also, the 21 million bitcoin figure is a bit misleading, since supplemental units have been issued issued when we have “forks”, or splits.
Whilst many “coiners”– as some cryptocurrency enthusiasts have taken to calling themselves – rejoiced that a recent fork, in July, had no impact on underlying BTC, but created supplemental tokens with additional value, to me this was more evidence that bitcoin pricing is irrational.
Bitcoin should have fallen by an amount substantially similar to the new issuance (a kind of dividend, in effect) but it didn’t.
Irrational bubble QED.
Editor’s note: Paul Gambles is managing director of the MBMG Group, which is based in Bangkok. He was the subject of an International Investment profile last year. This was the second of two parts on cryptocurrencies. To read the first part, click here.
Gambles said he wished to thank Gerry Brady, the founder of the BOOM Finance & Economics weekly newsletter, for his help in enabling him to write this piece.