The Future of Crypto after Two High Profile Convictions
In today’s newsletter:
- The Future of Crypto after Two High Profile Convictions
- Black Friday, Consolidation, Celebrating Christmas
- Kingdom Leaders Need Mentorship – 3 Reasons Why
Cryptocurrency wunderkind Sam Bankman-Fried (SBF) was convicted on seven counts of fraud and conspiracy earlier this month, after it was revealed that FTX – the second largest crypto exchange at the time – had defrauded investors and embezzled $8 billion from its users.
SBF’s company, which was overseeing $10 billion in trading volume per day back in 2022, did not even have an accounting department, and its financials, for obvious reasons, could not be trusted whatsoever. Needless to say, FTX collapsed into bankruptcy, and people lost a lot of money. Sam is facing 115 years in prison, and will most likely do at least a couple of decades in the big house.
Interestingly, in the wake of such a massive crypto scandal, the price of Bitcoin (often used as a reference point for the vitality of the entire cryptocurrency trade) did not experience significant movement on the day SBF was arrested in 2022, nor earlier this month, when he was convicted. It quickly recovered after a momentary dip of less than 1 percent.
Additionally, just last week one of the kings of crypto, Chengpeng Zhao, was convicted of violating anti-money-laundering laws, and was personally fined $50 million, forced to step down, and is facing possible prison time. Binance, the world’s largest crypto-trading platform, will pay a $4.3 billion settlement.
Again, BTC saw a small decline, which it rallied past after only one day. (To be fair, Binance itself saw a $1 billion net outflow in 24 hours).
On the year, Bitcoin is up over 125%, Ethereum is up nearly 75%, and Solana is up over 300%. Dogecoin has dropped about 3% this year, but nevertheless, it is still up nearly 3,000% since 2020, despite being an actual, literal, transparent joke.
So what is the average investor to think? How are we to understand this deeply technical subject? Is the reward worth the risk? And will these high profile convictions have lasting effects on the crypto market, or are they just yesterday’s news?
The Bullish Perspective
Bitcoin has inherent value because of the trustless system it has established and the resilience of the currency itself.
Advocates point to the incredible difficulty of organizing an attack on a blockchain as large and strong as Bitcoin’s, due to the massive redundancy inherent in the system, the ease with which past history can be referenced, and the prohibitive expense of garnering enough computing power to pull it off. This is used to argue that Bitcoin is incredibly secure. Transactions cannot be reversed, unless the two parties involved undo their own exchange – which is simply an additional transaction.
Bitcoin and other crypto are independent of central banks, and due to the intricate security measures, it constitutes a “trustless” p2p system. Since the public (understandably) does not have an overabundance of trust in many central governments around the world, and Wall Street is notorious for its market manipulation, this makes crypto an attractive alternative. Additionally, cryptocurrency is fast and efficient, as any amount of money, large or small, can be quickly transferred to any other crypto wallet by the consumer. SBF and CZ both got into trouble running crypto exchanges and issuing exchange tokens, but neither crypto exchanges nor exchange tokens are inherently necessary for the crypto economy.
Odds are, your next door neighbor does not have a crypto wallet and certainly does not use Bitcoin as currency to buy goods and services – even if they happen to have some in an investment portfolio. Still, crypto adoption, according to some sources, is on the same trajectory as the internet was in the early 90s. We are semi-early in the adoption of this new technology, the argument goes, but within just a few years we should see 1 Bitcoin being worth around $300,000. That means, given a current price that vacillates between $25,000 and $40,000 per Bitcoin, there is plenty of meat on the bones for the enterprising investor.
As the world gets more and more digital, cryptocurrency, the bulls will say, is inevitable.
Bitcoin’s recent price resilience proves that it can handle shocks and does not rely on the reputation of any crypto king or influencer. The central claims of cryptocurrency (and BTC in particular) are decentralization, security, inflation-resistance, and ease of access – all issues that are more relevant than ever. A few – even many – fraudsters going down does not change the reason there is demand for Bitcoin.
The Bearish Perspective
Bitcoin does not have any inherent value, the bears will counter, and the recent convictions of SBF and CZ are only the latest in a conspicuously long string of high-stakes fraud, rug pulls, and criminality that will eventually undermine investor confidence totally, leading to a steep decline in value or a collapse. (They will point to FTT and FTX, Cryptozoo, MTGOX, QuadrigaCX, Elongate, Luna, Terraform Labs, OneCoin, BitConnect, Bitclub, PlusToken, Hextracoin, Celsius, etc. as case studies.)
Bitcoin’s trading price may not have been immediately effected by the recent news, but it has, nevertheless, always been extremely volatile – even in the absence of clear reasons for big swings in valuation. As it is not actually backed by any physical assets, no less an authority than Warren Buffett says he would not pay $25 to have all the Bitcoin in the world. Thus, it is even more vulnerable to total, sudden collapse than any other currency or asset class. Investor confidence and hope of future value is all that holds up crypto, not unlike Tulip Mania of Holland in the 1600s, when futures speculation on the tulip fad drove investors to irrational overleveraging and outrageous prices before it all came crashing down.
The recent convictions did not destroy the crypto trade, because it is still seen as decentralized, secure, fast and efficient, and the future of currency, but when there is more widespread understanding that these claims are ultimately very exaggerated, crypto’s bubble will eventually burst.
For example, the irreversibility of transactions is part of the “secure” claim, but it is that very irreversibility that makes crypto holders more vulnerable to shakedowns. Because, unlike money in a bank, backed by federal insurance and anti-fraud enforcement, crypto is like carrying a lot of cash on your person at all times. All somebody needs is a password from you, and then they own your money, and there is no getting it back. No transactions can be reversed. Phishing schemes are also an issue because of this, and despite claims to the contrary, the blockchain could potentially be meddled with, using 51% attacks or other clever schemes, depending on how the blockchain is set up. Over 85% of the Bitcoin network is controlled by 7 entities (And about 98% is owned by a total of 11 entities), so in one sense, it is not nearly as decentralized as it is often presented.
Central governments and institutional banking systems can be annoying, but all we have done with Bitcoin is replace one authority with another, as in the future, all Bitcoin transactions will be charged a fee, which will go to this increasingly consolidated group that holds all of the computing power.
Finally, “efficient” is an odd choice of words used by crypto enthusiasts, as the mining system incentivizes every BTC mining machine on the network to compete for every single block it is able to pursue. Since these powerful supercomputers individually require a great deal of energy to run, collectively, it quickly gets ridiculous. One Bitcoin transaction requires an average of 700 killowatt hours to complete. This is equivalent to almost a month of electricity use for an average US household. Visa can process over one million transactions using the same amount of electricity that Bitcoin requires to process one. Additionally, a given Bitcoin transaction can sometimes take days to complete, and there is a big scalability problem, as more users would mean more strain the infrastructure, further slowing the process and increasing (currently) “voluntary” transaction speeds to incentivize miners to process a given transaction.
Finally, bears on Bitcoin constantly ask, “What is it?” If it is a speculative asset, what is the underlying value? If it is a currency, why doesn’t anyone aside from criminal organizations use it as a currency? It’s too volatile to be money, and it’s too ethereal to be an enduring asset. It is a hype bubble, overleveraged and destined to collapse, and SBF and CZ’s convictions are just tremors preceding the earthquake to come. Those early rumblings don’t take down any buildings, but they are a sign that a big one is coming.
Is Crypto’s Future Bright or Dim?
Leaving the realm of contrasting opinions, there are a few cold hard facts relevant to the discussion: Crypto has recently had a few key victories in court (particularly the Grayscale lawsuit against the SEC). It seems likely that Bitcoin in particular, and probably Ethereum as well, will soon receive a huge influx of cash, as spot ETFs for cryptocurrencies become legal, and pension funds, retirement accounts, etc. can more easily move money into this arena. Blackrock, in particular, seems likely to pour a mind-boggling amount of money into them within the next six months to three years.
That influx of cash, assuming the spot EFT applications are actually approved, will make Bitcoin trade for multiples of its current value.
By the same token, the market knows about the impending SEC decisions that could send crypto to the moon, at least for a while. That, at the end of the day, is likely why the market did not account for the two largest crypto exchanges taking damage (with FTX folding entirely).
Everyone is waiting to see if institutional investors are going to be able to throw some real weight around in the crypto space. So, for the moment, deciding whether or not crypto is worth the risk may have less to do with the claims, pros, and cons of the underlying asset, and more about trying to predict what Gary Gensler and the rest of the SEC are going to do.
None of this is intended to be construed as investing advice.
INDUSTRY INSIGHTS
Black Friday, Consolidation, Celebrating Christmas
Black Friday
Last week saw a new record for online spending on Black Friday, as U.S. consumers spent just shy of $10 billion in a single day of online shopping, a 7.5% increase from last year. Total online spending for Cyber Week (Thanksgiving through Cyber Monday) is expected to come in at $37.2 billion, per Adobe Analytics. Mobile accounted for over half of all online purchases, while in-store sales, by contrast to skyrocketing online figures, increased only 1.1% year over year for Black Friday.
Consolidation
Industry consolidation has been sharply increasing since 1997, and shows no signs of slowing down. In part, this may be due to decades of the Justice Department’s declining interest in antitrust suits, but more recently, the Biden FTC seems to have a critical eye towards massive acquisition deals. For some, consolidation is simply part of the industry life-cycle, while others worry about the negative consequences for small businesses and the effects of restricted consumer choice. Good or bad, consolidation is a major trend in global business, with footwear, healthcare, and media leading the pack in terms of market concentration, with five or fewer firms controlling over 90% of market share. The movement is so strong, in fact, that P&E organizations, which have driven much of the consolidation, are now buying each other, consolidating their own industry into fewer hands.
Celebrating Christmas
In 2022, 85% of U.S. respondents said they were planning on celebrating Christmas, although less than half seems to celebrate it as a religious, rather than a commercial, holiday. On average, Americans spend around $1,000 on Christmas. Last year’s holiday spending totaled just shy of a trillion dollars. Yes, trillion, with a “T.” As of 2017, about half of Americans reported that they planned to attend a Christmas Eve or Christmas Day church service, but given the generalized drop in church attendance since the pandemic, the current number is probably slightly lower. Somewhere between 2-5% of Americans celebrate Hannukah.
Sunday School
Q. What is the shortest book in the Bible?
A. Third John, at only 219 words.
“I’m telling you, Tom – everybody’s using computers for Christmas gifts now. Where does that leave me?”
TIPS & TRICKS
Kingdom Leaders Need Mentorship – 3 Reasons Why
“If I have seen further [than others], it is by standing on the shoulders of giants.” – Isaac Newton
Tiger Woods is one of the greatest golfers of all time, but from the earliest age, he had his father, Earl Woods, to teach him, guide him, and shape him as an athlete.
Wolfgang Amadeus Mozart is one of the most brilliant, influential composers of all time, but he had his father, Leopold Mozart (a composer in his own right), teaching him from the earliest age.
Mark Zuckerberg is one of the most innovative, successful tech entrepreneurs in living memory, but when things were not going well when Facebook was young, he had his mentor, Steve Jobs, to give him advice and guidance on how to reconnect with his core mission.
We often talk about the heroes, but it’s all too easy to forget that successful people usually have wise mentors somewhere in the background. If you do not have a mentor of some kind – even if you are already successful – you still need an older, wiser person to keep you on track from time to time. Here are 3 reasons why:
Ultimately, No One is a “Self-Made” Man
We love the idea of the outsider in American culture. We love the Lone Ranger, the lone wolf, the guy who pulled himself up by his bootstraps – and for good reason. Motivated, self-directed men and women can accomplish wonderful things, and they inspire admiration. But even the most independent person has needs, weaknesses, and a fundamental need for guidance.
John Donne, the 17th century poet turned priest, wrote the famous words, “No man is an island.” What he meant is that different people pull different skills, perspectives, and ideas out of us. We sharpen one another – especially when we brush up against someone older and wiser who doesn’t have a problem with challenging us to reach for more. We can never reach our full potential without being shaped, in part, by someone else.
We Need Community
The Bible says, “It is not good for man to be alone,” and that is as true now as it ever was. When we rob ourselves of outside counsel and put the burden of every decision squarely on our own shoulders, it is easy to burn out. We were meant to live in community. Even God is, within Himself, a community of three, and the Father sits at the head. Having a trusted advisor who knows you, who has been there before, and who is willing to help you succeed fends off a lot of the depression, paralysis by analysis, uncertainty, and other productivity-killing conditions. Community is healing, and it gives us peace of mind to know that we have someone to turn to in times of doubt.
The Experience of Others Saves Us from Making Similar Mistakes
The Bible is very clear about showing honor to our elders and those who have gone before. Israel is instructed, in Leviticus 19:32, to “Stand up before the gray head and honor the face of an old man.” We can’t fall into the trap of thinking that the older generation doesn’t understand today’s technology, culture, or challenges. The details may change a little, but people are fundamentally the same, and by learning from those who have already lived a long life and had a successful career, we can capitalize on more opportunities, avoid more mistakes, and consider their ceiling our floor.
Taking responsibility is admirable, but don’t forget to find someone older and wiser that you can spend time with, ask questions, and learn wisdom from.
Joshua had Moses. Polycarp had John the Apostle. Who do you have?
Quick Hits
- Robert Fergusson of Relevant writes about the value of spiritually dry seasons.
- Stocks rallied, reversed course, and then moderated Tuesday, as investors weigh conflicting signals about possible interest rate increases.
- The Gospel Coalition releases an empirical guide for comparing Christian Universities.
- $16 McDonald’s Combo has Americans lamenting the state of the economy.
- Social Security Benefits set to increase an average of $59/month per person next year.
- Charlie Munger, Warren Buffett’s right hand man, has passed away at 99 years old.
Guess the Prompt
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