Cryptos ain’t too big to fail

This is the second article written for us by Robert McDowell.

He is a long time supporter both personally and through Summerhall of Scotcoin. He is currently chairman of that renowned venue in Edinburgh, and a long time top level financier and economist. He has written a couple of pieces for us. The first one was on the macro position we find ourselves in and the true scale of the credit crunch that is here now. This second piece is specifically on cryptos and where they might be headed.

Cryptos ain’t too big to fact in the bigger scheme of things they are not even ‘big’. The question is twofold. Are prominent cryptos a financial ‘safe haven’ compared to others (like Gold just now) or cash (either one or several currencies). We are in a low (probably negative) inflation situation. We have falling central bank interest rates even although we have higher risk premia. The question is are cryptos volatile or have they now found ‘fair value’. That may be the case today but they fell dramatically further than other assets over the last week. In fact by more than half as much again as the USD. (See Daily trade volume is 1/4000th of regular currencies.

Cryptos like other new alternative assets such as securitised bonds in the 2008/9 crash had not until then been tested by major recessions (global scale economic cycle downturns) or even by secondary market conditions. What had been largely a one-way primary market faced major exogenous shocks, shifting into dramatic sell-offs & volatilie gyrations of two-way secondary markets.  Central banks won’t be expanding their balance sheets to shore up crypto currency markets. There are no guarantors of last resort, no market brakes i.e. ‘trade halts’, no regulatory inquiries into quality of market conditions or very much else in the crypto world.

You can think but not say , quite truthfully and realistically, that the next two years are a test for the long term survival of cryptos. Of course, mentioning words like ‘survival‘ is anxiety-inducing & negative signalling, so perhaps it is best not to opine in those words exactly!

As a safe haven asset class is it truly liquid? In other words, do sellers always find buyers? Obviously this hasn’t happened in the last week or so.  Are there other advantages such as that they are unregulated, anonymous, unauditable & untaxable, without or beyond all borders that outweigh that fact? Are these what cash-surplus or cash-rich people need just now or those who cannot buy foreign currency or cross physical borders to travel to London or NYC with cash-packed suitcases stuffed with USD for fear of inter-bank audit trails?

There is $1trillion net flow from ‘south’ to ‘north’ every year below the radar, characterised as cross-border money-laundering & tax dodging. How much of this will deploy into cryptos because that’s better & surer than less unconventional assets & currencies? 10% of this processes itself via the world’s art markets – maybe 1-2% might transfer via cryptos?

I suspect that for the next 2 years the outlook for cryptos is neither better nor exceptionally different from other assets. I suspect that not until there is economic recovery & governments are looking hard again at tax-raising will there be positive movements.

However, I’m not confident about making predictions in an asset class that has relatively so little volume or history. Hence, I’m not sure what is best to say publicly. It may be that, for a long while yet, least said soonest mended. We should not be thinking speculatively, and markets will move better the less focusing there is of a caustic-minded attention on cryptos. Few media commentators can be relied upon to look kindly at anything relatively eccentric at the moment even though there are billions of people out there feeling extremely nervous & open to suggestion more than they realise. As has been said elsewhere, with all the massive “printing” of money, there WILL come a day of reckoning in terms of inflation. That will be the time to be glad you tucked away some crypto.

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