CrypTalk ep 8 – Why you should invest in crypto beyond the ‘greater fool’ theory

In this episode BizNews’ Ross Sinclair and Gaurav Nair of Jaltech discuss the outcomes of the Ethereum merge, the adoption of cryptocurrencies, why you should invest in cryptocurrencies, and which crypto exchanges look as though they are going to win.

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Gaurav Nair on what needs to be done to get mass crypto adoption 

It’s often said that one of the main reasons adoption is slow in the crypto industry. Well, I suppose the first thing to consider is it actually is slow. And what we’ve seen is that the adoption of crypto has actually had one of the fastest adoption rates. There’s a nice graph which has been circulating around quite a bit, which shows the adoption of various technologies over the last hundred years from refrigeration and colour, TV, etc.. And it goes from 0% up to 100%. You see these slopes. And when it comes to crypto, it has a very, very steep slope. And of course, that’s because crypto has the Internet to spread its adoption, whereas refrigeration didn’t.

Image Credit: Caroli

So the adoption has actually been extremely fast. But the question is, what are the impediments to further adoption? And one of the objections is that crypto is a solution looking for a problem or blockchain technology. Well, this isn’t strictly true. There are many people in emerging countries who use cryptocurrencies to opt-out of their financial system because governments are printing a lot of money or inflation is out of control. And so it does have a use case. And interestingly, when you look at the penetration of crypto ranked by country, most of the countries that are the most penetrated by crypto are actually emerging markets. Secondly, people use crypto as a payment system for international payments, in many cases faster and cheaper than the SWIFT network. However, I think that when people object to use cases, it’s because crypto seems to hold a lot of promise and people are asking, Well, when is the rest of this promise going to be delivered? And while it does hold a lot of promise, I believe that most of the use cases are going to be figured out in the future. If we compare it to something like the Internet. In the nineties, the Internet also held a lot of promise. But if you asked the venture capital firms back then, what’s the Internet going to do, they would not have been able to predict what it actually ended up doing over the last 30 years. So fundamentally, crypto has some great properties. It has the ability to have smart contracts, contracts that execute automatically. It’s called programmable money. And you can just imagine a bunch of uses there. It’s a system that’s totally transparent. Again, the same uses there. You can imagine a scenario where lenders know exactly what a borrower’s balance sheet looks like. They can see it in a blockchain, it doesn’t involve any trust. There’s a numerous list of properties it brings. And so you can imagine a lot of use cases that would want to make use of those properties. 

On whether crypto has met the expectations or has taken a different path

I suppose it’ll be a bit of both, but we’ll have to see how this plays out. When we’re dealing with crypto compared to, let’s say, the internet and blockchain technology, the one thing we’re dealing with is that blockchain technology is disrupting money. And so there are huge vested interests that have a lot to lose, and some of them might fight the change. And some of them might, in fact, get on board with the change. And we’ll have to see how those kinds of powers play out. And, of course, governments themselves don’t want to have less power, even in the most benevolent case. Governments need power to achieve their policy objectives, whether it’s reducing poverty or delivering health care or whatever it is. 

So it may or may not actually play out, but what we see internationally from a geopolitical point of view is that the US runs the financial system. Swift is a US company, and when the US imposes sanctions on countries, sometimes unilaterally, they lock them out of the Swift system, which settles international trade and that really hampers a country’s ability to trade with the rest of the world. And so what a lot of thinkers and analysts in the space are saying is that cryptos, since it is very difficult to control, it’s decentralised, and is probably going to be a credibly neutral alternative to the systems that can be controlled by various states. You know, it’s been said that China is trying to start a digital Yuan as their currency, as an alternative to the dollar. But it’s unlikely that countries will opt out of the dollar and just be dependant on China instead.They’d rather probably use something that’s neutral that they know, that neither China nor the US can control either, something like Bitcoin or probably more likely something like Ethereum because Bitcoin’s functionality is only to settle Bitcoin, but Ethereum has more sophisticated functionality.

On why you should invest in crypto

So I think that when it comes to cryptocurrency, there are numerous use cases to it as we described before. Some of them are yet to be discovered, but a lot of them have already been discovered. And so it’s about fundamentally believing in the technology. Now, when it comes to a lot of people, when they look at cryptocurrency and they see that it’s so volatile, they’re kind of confused about this, you know, does it mean the fundamentals of the technology and its promise are changing that often? And again, a comparison with the Internet is a really good comparison, because when you compare it to the Internet, you know, most of the early Internet companies went to zero. They ended up going bust. And numerous of them, including the likes of Amazon, that on the way to becoming some of the biggest companies in the world today, they had numerous times they dropped 90%. They had huge drawdowns. And this speaks to potentially taking a more diversified approach than trying to pick single winners. The other thing is that a lot of the Internet companies, we couldn’t actually see their value when they were still in the early stages. That’s because they were held by venture capitalists. They were listed only once. They became quite large companies that these venture capitalists list them when it comes to cryptocurrencies. Often as a team is building something, they can list a token and it’s at a very early stage. It’s like investing in Google when it was only ten employees, and if Google had been listed then, it could be the case that we were to see extreme volatility in the likes of how we see cryptocurrencies. 

On the technology side, one of the other things that people find to be quite compelling about cryptocurrency and Bitcoin specifically is that it serves as an inflation hedge. Now, this narrative has been questioned lately because as inflation has increased, Bitcoin’s actually dropped. And that kind of speaks to a couple of things. The one thing is that you know, Bitcoin is still seen as a high-risk asset and we already described the Federal Reserve. So when the interest rates go up and people get out of risky assets, cryptocurrency suffers for that reason. But one can actually differentiate between two types of inflation. So the one type of inflation is inflation driven by spending, and that is what we’re currently looking at. And that’s because of COVID and stimulus that government gave to a lot of people. And then people have been spending that money as well as other supply driven issues. The war in Ukraine, etc. However, what Bitcoin seems to be more likely to protect against is something called asset price inflation. And this is the type of inflation has actually been going on for many years where money is very cheap and really financial institutions can access this cheap money, not so much individuals. They can borrow money very cheaply. And so what they end up doing is they end up buying assets. And the price of assets climbs and climbs and climbs. And this explains kind of the multiyear run up in asset prices. And so this is the kind of thing that Bitcoin protects against, because when you look at the Bitcoin price versus the amount of money in circulation, then actually you see an obviously very volatile but increasing line. 

So that’s one of the narratives that actually provides an inflation hedge. Another narrative which is kind of closely linked, is around abuse of the monetary system. So this is where and this is something which people are speculating is going to happen more now. with interest rates going up and governments finding themselves in debt, they find it difficult to pay back that debt. As interest rates go up, it becomes more and more expensive. And so one way of getting rid of the debt really is to inflate it away. As inflation goes up, the interest rate stays the same on all of this debt and paying it back in real terms becomes much cheaper. And this is often how countries deal with debt. That’s just they have no other way of paying back again, this kind of inflation Bitcoin should protect against. And so these are some of the reasons people may want to invest in Bitcoin. And then I suppose finally there is the idea of having an asset that is resistant to seizure by the government. And so I guess people have different views on how much of a risk is this really that the government is going to start seizing personal assets? It has happened in the past in the US at one point, under FDR when he was president. At one point he implemented that no one could own gold and all gold was bought from private citizens. So I guess it’s difficult to quantify the risk until it happens. And so for a lot of people, it’s really important for them to have a seizure-resistant asset and cryptocurrencies are in fact that. However, it requires you to take the cryptocurrency yourself and have it in your own custody if it’s on an exchange and the government changes the laws and tells the exchange, yeah, give us the cryptocurrency. We’re going to give you dollars. And the exchange is certainly going to comply. They’re not going to send the directors to jail. So it requires you to actually have custody of your own cryptocurrency in order to benefit from that.

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