Crypto 2.0 - This Time It's Institutional
It's a generational wealth opportunity, but not in the usual meaning of the phrase.
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The older generation never understands the younger, ever. When the young people were listening to Elvis, the old people cussed and said (1) this will come to no good end and (2) it’s not even music anyway. When those young people who listened to Elvics grew up and their young people favored gangsta rap, they cussed and said (1) this will come to no good end and (2) it’s not even music anyway. And now, when grandma is listening to gangsta rap and the kids are trading crypto, grandma is sat there going, huh, crazy kids, (1) this will come to no good end and (2) it’s not even money anyway.
It is, in our view, facile to point out that crypto has no intrinsic value, no unique utility. Because neither does gold, nor the US dollar, nor goat wool, nor small highly polished pebbles or whatever was the primary unit of denomination and exchange in antiquity. Currency - current-cy - is worth whatever the transaction participants deem it to be worth at the current time. Indeed the very essence of fiat currency (currency backed solely by the issuing and sponsoring government, without any physical asset basis in the price) is that it is simply worth what everyone says it is worth. That value changes according to prevailing conditions. A dollar buys less gas now than it did two years ago. Why? Because that’s what transaction participants agree it buys whenever someone pumps gas. And if trading crypto is pure gambling, what then is FX trading? God’s work? Hardly. If you trade FX - which the good people of the world deem to be a perfectly sensible thing to be done on Wall Streets real and virtual, large and small, what are you doing if not betting that currency X will rise or fall at the expense of currency Y? And why is that different to trading Bitcoin or Ether?
Here at Cestrian Towers we are too old to go all-in on crypto, and too young to declare it bunk. We think it’s an interesting development in the history of money. We see the desire to push money beyond the control of the nation-state and we see that Bitcoin goes some way to fulfil that brief, and we think that can run. We see the development of a more immersive Internet - what is currently called the Metaverse but soon will just be called the Internet again - and that it has a currency with prevalent adoption, Ether, and we think that has legs too.
All early markets are characterized by a Wild West nature. And where wildcatters rule the roost, rules are there to be ignored, laughed at, taken advantage of, etc. The present debacle at FTX (latest twist: the $134m-worth of Bahamian real estate owned by SBF’s professor parents … they had been trying to give it back this whole time! Phew. They are good people after all. Must have been some mistake to think otherwise) is just one in a long line of cons, thefts, hacks and fails since Mt Gox, Silk Road and all the other miscreants that have lined the roadside en route from crypto’s creation to its destiny.
FTX, Binance, Bitfinex, Gemini and all the other names that have been top of mind in Crypto 1.0 most likely won’t exist in a decade’s time - maybe not even in five years’ time. The coins they shepherd will be, but they as custodians and processors of the coins won’t be.
Want to know who will provide the plumbing for your Bitcoin in 2030 and probably earlier? The Chicago Mercantile Exchange ( CME 0.00 ). State Street ( STT 0.00 ) . The Intercontinental Exchange ( ICE 0.00 ) . And so on. In other words, the same people that manage Grandma and Grandpa’s fiat.
Because the young people are going to keep owning and investing in - yes, investing in - and trading crypto. Why? Because it is native to them just as 401(k)s are native to the population of Boomersville, USA.
And where is the money - the real money - in crypto? Is it in mining? It is not. Is it in own-account trading? It is not. (This year or that year, sure, but, long term, slow money, Big Money-money? Nope.).
The real money is in the flow of crypto assets, in the custody of the assets, the servicing of the assets. Just like with your fiat and your 401k. Big Money is Boring Money. As the pesky kids hit middle age and they get richer and own more crypto - which they will - there will be more assets to process, service, account for and look after. And this will be great news for your above-mentioned Big Money players.
Crypto 2.0 is Big Money Crypto.
This in our view is positive news for the long-run value of the assets themselves. Bitcoin and Ether may hit air pockets in the near term but long term we think they are going-up names. The long tail of spitcoins, we have no view on, we know our limits. We choose not to own them, mainly out of ignorance. But the big two, we think they will work out just fine for the patient investor.
At the intersection of wildcattery and Big Money right now are Coinbase ( COIN 0.00 ) and the Grayscale investment trusts ( $GBTC and $ETHE ). It remains to be seen whether they cross the chasm or not. If it turns out that those Grayscale funds actually do own the coins they say they own, then the discount to NAV is going to be eroded fast - that’s akin to multiple expansion in stocks and that means free money for any investor brave enough to just take it on trust right now and buy at these levels. If it turns out that there is enough substance to Coinbase’s operation that it can’t simply be replicated by a Big Money player, it will likely be acquired at some premium to the current stock price. Or maybe these half-wild, half-domesticated names won’t make it fully inside the tent. Maybe their wild nature means they won’t be able to settle inside. It remains to be seen.
Fortunes will be made in crypto from this point forward, in our view - they will be slow-burn fortunes, built over decades and accumulated by grandma- and grandpa- type Big Money shops and their shareholders, who see a generational wealth event before them and are poised to take market share in the coming year.
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So, be disgusted at FTX for sure. Be suspicious of Binance and anything else with crypto-bro DNA. Most likely all toast. But don’t write off Bitcoin and Ether. Big Money is just getting started with them.
Cestrian Capital Research, Inc - 23 November 2022
DISCLOSURE: Cestrian Capital Research, Inc staff personal accounts hold long positions in, inter alia, ETHE, BITO, COIN .