I recently rewatched SBF being interviewed on the David Rubenstein show - "Why do so many young people seem so attracted to crypto... it seems like young people are particularly are very interested in it. Why is that?"
"If you're...you know... twenty-one years old, and trying to get access to markets... you want to be able to trade, to invest. You can sign up for an account on crypto-exchange and get full market access. If you try to get that same level of access in equities, in commodities, you can't get it. You're going to end up with heavily mediated access that has like pretty limited amounts of real interactive-ness, limited amounts of liquidity, limited amounts of size, limited amounts of market data. And so for a natively digital generation looking to take more control of their finances, actually being able to do it with crypto is a big big difference."- SBF
Observe David Rubenstein's expression and you might detect a little skepticism and "wtf" in his responses.
So much of the above subconsciously embodies a culture of wanting unlimited quantities of everything. It also speaks to the rebelliousness and perceived inadequacies in younger people, that they don't get the same opportunities and access as older folks. And how does having unlimited amounts of liquidity enable one to "take control of their finances"? That just sounds crazy. Whatever happened to spending within your means?
Call me old school but if you are twenty-one years old, you shouldn't be trying to "get access to markets", you should be trying to acquire hard skills and work experience to do something constructive to society and the economy.
The problem with financial markets is that after awhile, everyone forgets the most basic purpose of a stock exchange: To enable businesses to raise money from providers of capital. Along the way, we somehow got carried away in the frenzy of buying and selling based on imagination and greed, passing on the hot potato down the line. Social media also amplifies a lot of that.
For what the FTX fiasco is worth, it has highlighted that:
Despite how far and sophisticated we have come in terms of building an efficient capital markets, our understanding of risk-reward has been severely distorted in the process. Leverage is increasingly being seen as a tool for achieving abnormal returns rather than a cost-effective way of expanding a business. The ability to tap on unlimited liquidity to have "more control over finances" simply removes having skin in the game. It transfers the risk onto the financial ecosystem, which is buoyed by layers and layers of story-telling.
This is not a post about I told you so.
It is about trying to understand how easily we can get carried away with mimetic desire and FOMO culture.
About three years ago, someone asked me what I had thought about crypto-currency. I knew very little about it. I think I still know very little about it today. After all, this is an asset class that only came into more prominent existence over the last decade. Will an investment into crypto or bitcoin take off? I do not know. But perhaps, more important than what I think is actually what others think of it. And that is exactly what brought FTX down.
Cryptocurrency, bitcoin, NFT, and all things in the metaverse, work the same way as stocks, bonds and paper money. The case with FTX is simply a bank run in the world of cryptocurrency. People who held these assets just lost faith in them. This is the unavoidable reality: Most of our material possessions are only as valuable as how others think it to be. That's all there is to it.
At one point of time, FTX was the second largest crypto-exchange in the world. So why doesn't a large financial firm like this get the same bailout treatment enjoyed by Bear Stearns, Wells Fargo or AIG? Why aren't middle eastern investors readily stepping in the same way they are concurrently evaluating a deal to put more capital into Credit Suisse? Systemic risk.
The same group of people who decided in 2008 that Lehman Brothers should be taken out to the streets and shot in the head are basically the similar set of people who decide whether FTX should be saved. If the carnage doesn't result in jeopardising the greater good of social-economic stability, we can afford for a few investors to lose money.
But no one wants to hold that hot potato.
When people say that they want to “evaluate the situation" before doing anything, they are not waiting for the favourable outcome of a due diligence exercise. What they really want to know is whether there is sufficient faith in the market to ensure that the assets in the business can be monetised at some point of time in the future.
This brings forth another argument - that all virtual and digital assets are valuable only to the extent that they can be monetised. If bitcoin and cryptocurrencies are truly valuable as what their advocates say they are, shouldn't these be freely used in our daily transactions? If tomorrow your company proclaims that all employees shall be paid in ethereum going forward, would you accept it? Why are people willing to accept discounted shares or stock options as an alternative form of wages?
At the very core of it, it is simply because both believe that for better or worse, these "assets" (the shares) can be sold in the future. I hear that there are even platforms today that facilitate the monetisation of employee share options in privately held start ups.
Therefore digital assets, like cryptocurrencies, are essentially a derivative product. Stocks are fundamentally a derivative product in which its intrinsic value is based on the performance of a certain underlying business, but perhaps more importantly, shares in a business can be sold for cash. Cash - the dollar, euro, yen or renminbi - is fundamentally a derivative product. The value of cash is based on the fact that people can use it to exchange for goods and services, knowing full well that the counter-party on the other end of the table can use that money to do the same.
Notwithstanding the multitude of currencies, the foreign exchange market is also a tried and tested system that so far works with traders all over the world. This is a USD 7 trillion market per day that works 24-7. Just loosely applying a 0.1% spread on this gives a USD 2.6 trillion annual wallet share - just on the FX business alone. Given the above, it is easy to see why there is so much resistance towards changing the status quo. The biggest stakeholders in the room are the institutions that hold the most amounts of cash.
Maybe the 'new generation' of investors who have experienced the devaluation of cash due to the ridiculous printing of money into the system, want some credibility restored to the markets. I can also understand that inflation (and hyper-inflation in certain countries) eroding the savings of many individuals also partially makes the case for cryptocurrencies. But ironically, it also seems that a huge part of getting crypto adopted into the mainstream has gotten carried away by the greed of a few individuals.
It's not that I don't believe in digital assets. Maybe it is just that I don't want it badly enough.