Mark Carnegie, Contributor in the AFR. March 1, 2021. See the AFR article here.
What can you do to protect against the real risk to savings when every country is printing currency as fast as the presses will go?
It took too long, but I now believe that crypto is here to stay.
Who would have thought that when the Federal Reserve, the Bank of England and every central bank and government in the world were adopting a “spend spend spend” policy to fight COVID-19, they were also creating the certainty of a new digital currency world?
Those who hate the new asset class the most have ensured that it will continue to exist.
Now my portfolios have a giant hole in them because they don’t include bitcoin and ethereum, and I only recently set about doing something to repair the damage from my mistake.
Traditional funds in Australia don’t reveal that they screwed up as well because crypto isn’t included in “the index”, but that doesn’t change the fact that virtually all Australian savers’ portfolios are worse off from the collective decision of their managers to thumb suck – like me – on an emerging asset class.
The first response from the traditionalists is: You can’t invest in bitcoin, the hackers will steal it. The fact is that hackers and scammers are trying to steal your crypto each day, and sometimes they succeed. However, the protection provided by the well-established players is immeasurably better than it was a few years ago.
Remember also that the hackers are trying to steal your real dollars too, and the ones doing that outnumber the crypto hackers 1000-to-one. The amount of fiat dollars stolen in online fraud is multiples of the crypto that is lost due to criminals.
I have found that wherever there is money, there is danger, and the hard job is to disentangle the two.
Hackers have successfully attacked the American government, AstraZeneca and countless other institutions. It is a fact of life. Crypto is no different, but at least with crypto you are awake to the possibility every minute of each day, and you ensure that every step minimises that risk. I don’t want to tell you it eliminates risk, but in 2021 risk is everywhere.
Hard currency has been around a very long time but there has never been as much of it borrowed or spent as in the past 18 months. Don’t waste your time looking for financial prudence. There isn’t any. Not in any corner of the globe. Nor is there any convincing theory about how we are going to unwind the knot. There has never been a better case for saying that any serious investor needs to do the work and at least try to understand what is going on.
The legendary investor Sir James Goldsmith said, “When you see a bandwagon rolling, it is too late to get on it.” And the bandwagon is well and truly rolling and the “easy” money has been made long ago. This has been what has troubled me since bitcoin was $4000.
However, the real business and investment opportunities created from decentralised finance have not yet been fully imagined, let alone built. They are hard to evaluate, and picking them out of the sea of rubbish takes a great amount of hard work.
Throughout my career I have found that wherever there is money, there is danger, and the hard job is to disentangle the two. It is only now, very late, that I can see a genuine road forward for crypto and believe it will become a part of our lives.
There are two principal questions people seem to be focused on in this area; one is external, and the other internal.
The first is the external question everyone is asking that has put bitcoin (and other cryptocurrencies) in the spotlight: What can you do to protect the real value of your savings when the world is printing every currency in existence as fast as the presses will go?
Hedge funds and smart money are currently focusing on two areas to buy insurance against the consequences of abandoning sound money: commodities and cryptocurrencies. I think there is a case for both.
Personally, I like the gold miners and platinum metal, and have dabbled in both, but the investment success I have had has been dwarfed by what I would have earned if I had instead bought bitcoin and ethereum.
You need to think through how 193 separate countries are going to unravel the current economic supports and interventions. Like the lockdowns and border controls in the pandemic, not all countries are going to do it in the same way, and not all the outcomes will be good. The economic ramifications of 2020 and beyond have just begun.
So far a sideshow
Crypto is currently a sideshow for Australia, but as an effective protection from expropriation in many other countries where hyperinflation and economic collapse are potential realities, it might just be the only answer.
The second question is internal to crypto: Will the promise of decentralised finance and smart contracts revolutionise transaction friction in human relations?
The first place that this question is being answered is in payments and money transfers. Right now there are some extraordinary new fintech platforms making giant strides in this area, and whether crypto will add anything of permanent value is being debated.
Maybe PayPal and Stripe will do all that is needed to protect the world’s small savers from expropriation and make their businesses grow? Or maybe they won’t. My bet is that protecting savers’ money from being stolen by governments will require many different solutions, some fintech, some crypto, and maybe a combination of both.
My current investments in crypto are broadly diversified and the talent spread of my partners is wide and eclectic, as it needs to be given the spread of players who have driven this industry so far and fast.
My partner in one of the businesses I am invested in got his team to write their first blockchain project for the UN in 2017, designed to deploy the technology in Papua New Guinea’s Central Highlands. My partner in our crypto fund has been involved in the asset class since 2011 and entrenched since 2016.
I’ve also just found that a senior ANZ financial services banker has had 10 per cent of his portfolio invested in this space for several years, and finds the area so exciting that he’s agreed to join our investment committee.
If you are wondering what all the fuss is about, then ask yourself this: What insurance have I bought against the world’s financial system creating a monetary policy-resistant financial crisis? It might just be that crypto is the vaccine you need.