The Decentralists

Hot Topix: Crypto a No Go

January 06, 2022 Mike Cholod, Henry Karpus & Geoff Glave
The Decentralists
Hot Topix: Crypto a No Go
Show Notes Transcript

2021 was a good year but also a bad year for cryptocurrencies.

On January 1st 2021, Bitcoin was trading for approximately USD $29000 per coin and its value has more than doubled over the year reaching USD $66000 at one point. Bitcoin’s largest ‘competitor’ , Ethereum, has been on an even better run in ’21 starting the year at USD $737 per token and hitting a high of USD $4800 - a 6.5x increase.

These types of returns would make any investment manager blush yet crypto still struggles to go mainstream, why?

Join the Decentralists as we explain why cryptocurrencies could be a risk for everyone!

Henry : Hey, everyone, it's Henry, Mike, and Geoff of The Decentralists, and welcome to another Hot Topix, Crypto, a no-go.

Mike : Love that one.

Henry : It's a little funny, yeah, it's all about crypto, in 2021, it's been a great year and a bad year for cryptocurrencies; on January 1st, Bitcoin was trading for around $29,000 per coin, and its value has more than doubled over the year reaching over 66,000 at one point. Now, Bitcoin's biggest competitor, Ethereum has been on an even better run over the year, starting at $737 per token and reaching a high of 4,800, that's a six and a half times increase. 

So, these types of returns, they would make any investment management team blush with success, yet crypto still struggles to make it into the mainstream; gentlemen, why do you think that's the case? And do you think it has anything to do with the fact that China, and now India have banned private crypto coins? Mike?

Mike : So Henry, as you know, I kind of love this topic of crypto.

Henry : I know.

Mike : Because literally, everywhere I look, I just see scams all over the place and that's, I think, one of the reasons why it struggles to get into the mainstream, okay. I think that there's a lot of really bad, let's say press around crypto, ransomware being paid in crypto, people getting, what I think just even yesterday, it seems like every week, another $150 million worth of crypto goes missing.

Henry : Yeah, I saw that, how can they possibly expect good press after all this stuff?

Mike : Well, but the thing is, it's indicative of, to me, what the bigger issue behind these cryptocurrencies and why they make mainstream investment managers kind of run.

Henry : Very nervous.

Mike : Most of them, well, Hey, look at the end of the day, if you're sitting there and you've got an RSP that you got from the Royal Bank of Canada and it doubles in a year, you're going bananas, this is the best RSP on the face of the earth.

Henry : For sure.

Mike : Hell, if it goes up six and a half times in a year, you're going crazy, and the reason why you're going crazy is because an RSP, a traditional kind of investment thing that you see that a bank or somebody else carries. And the type of thing that can be relied upon as a long-term retirement investment strategy type of thing is based upon some group of companies or a stock in a certain company or whatever the case may be that say makes things and sells things, going up in value. 

So, your investment is to buy a piece of something that is real and tangible, it's revenue from an auto company or a bank, or grain elevators or whatever you're investing in, okay. And whereas with crypto, there's nothing, what drives Bitcoin from 29,000 to 66,000 is a bunch of people being told that they have to get onto this wave and they just put their money into it at increasing values as the other people cash out. This thing.

Henry : That's like a pyramid scheme.

Mike : Well, it kind of basically is because these currencies are supposed to be there like, oh, you get these currencies and this blockchain does this thing, but the blockchain just generates these tokens, it just prints the money. And so, where's the value, what's it tied to, it's already been burned, it's a bunch of energy, that's burned in Iceland, and now you've got a token, big deal. I think that's why it's not mainstream, it scares too many people, they don't understand it.

Geoff : It's also not mainstream because it turns currency on its head and not in a good way. So, the primary purpose of a currency, and I brought this up in a podcast we had a month or so ago where we're talking about money, which is, the primary purpose of a currency is to pay for goods and services. If I sell a bicycle, you give me $50, or I'm a lawyer and I do some work for you and you give me a thousand dollars, that's the primary purpose of a currency. And some people speculate on it on the side, the Canadian dollar goes up 5 cents against the US dollar or the US dollar goes down 10 cents against the pound, and if you have a million dollars’ worth, you make a little bit of money.

Henry : Yeah, it's not common though.

Geoff : So, most people when they're using their currency are not speculating on Canadian or American dollars, they're just using them to buy various products, and some speculators are doing that on the side. Whereas Bitcoin seems to exist, and Ethereum to some degree as well, seems to exist purely for speculation, and when it is used to pay for things, it's almost always used to pay for things that people would consider shady or it is just something weird that uber tech geeks are loving. Like Elon Musk, who is pretending that you can buy Tesla cars with it but really perhaps he's just trying to pump up the value and make another billion dollars to buy a rocket ship.

Henry : Yeah, and then he changed his mind.

Geoff : So, it continues to have a branding problem, and even if it was in the mainstream, imagine you're running a corner store and you sell someone a bag of chips and a bottle of pop and they pay you $5, and by the end of the day that currency they've given you is worth $2. Or conversely, you paid $5 but at the end of the day, that money you gave him is now worth $50, so how does that work day-to-day in any kind of country in any sort of meaningful way.

Henry : In the real world. Well, and Geoff, as far as I'm concerned, the mere fact that it is used for paying off ransomware hackers means absolutely 100%, it should be banned because if they didn't have that to pay them and they used normal dollars, we'd be able to find them.

Geoff : Well, this brings up the other point, Henry, is in my opinion, you can't ban it, you can make it illegal but if I use Tor Network to access an encrypted wallet and I send you 50 Bitcoins for a key to unlock my ransomed computer, laws are only as good as your ability to enforce them. 

And so, this whole notion of banning is to my mind, somewhat pointless, particularly in the west, I think maybe in China where the internet is so tightly locked down, it might be possible. But practically speaking, as much as the United States might curse and complain or Canada, there's really no way for them to effectively ban a decentralized currency because the people that use these things by their nature would be able to work around bans. I think the much more effective way would be to create a Canadian dollar centralized cryptocurrency where I can anonymously send you $50 from my wallet to your wallet, and suddenly all the things that make Bitcoin attractive go away,

Henry : Displace it.

Mike : Right.

Geoff : Yeah, just displace it as opposed to ban it. The only reason it's successful is because it is anonymous, and if you were to provide an anonymous alternate, I don't know that anyone would use it.

Mike : The general advent and availability of Central Bank Digital Currencies, so once it gets to the point where you're actually operating in a country, in Canada or the United States where there is an actual say, government-approved Canadian digital Loonie, or a Yankee dollar that's digital. Once you have that then any legitimate use case of a cryptocurrency, so if I'm the famous story, I'm the Papa John's pizza place in Florida, and I get a phone call from some guy who wants to order two pizzas and he'll give me 40 Bitcoin for it.

Henry : That's right.

Mike : Or something like this, 40 or 400, it was something crazy; it's the most expensive pizzas in history.

Henry : It was really in the beginning, the early days.

Mike : So, at some point, some uber-nerd had this file and he said, let me just transfer you this file that has these 40 digital tokens for two pizzas, and some guy took a Lark on it, and that's the story that basically made crypto into something legitimate because a pizza from Papa John's is something that most of us to that point had to pay for with after-tax dollars.

Henry : Yeah, of course.

Mike : We earned money as a citizen, working at a job in a country, and we're paid in that country's dollars after we'd paid taxes, and so crypto, there are no taxes, there's no tracking it, it's just up and down. And governments don't like that, they don't like you being able to exchange some kind of non-taxable, monitorable asset for a real asset, think Henry, what happens, you buy yourself your house across the street with Bitcoin that's not traceable. And now you want to go to the government 20 years from now and claim the capital gain when you sell your house, why would they give that to you?

Henry : They wouldn't.

Mike : Right, what some bank's going to do, say prove to me that you own that; that you paid for it. How are you paying your property taxes? In Bitcoin? No. This stuff isn't real, and so what governments can do, and I agree with Geoff, you can't completely ban it, there's nothing that's going to stop me from sending 50 Bitcoin to some guy in Russia for an AK 47. But it's going to be just that, it's going to go back into this dark world where if the government is in China and India, it's not so much a ban, they make it illegal, so it's not that you're banned from say doing things in India with crypto, it's just, if you do, and they catch you, you're in jail.

Henry : And they have done that, both China and India, correct?

Mike : That's exactly it, so they're not saying, yeah, you're banned, China banned mining because of the energy drain, and then they made it illegal to use cryptocurrencies. So, it's fine, you can go ahead and I can trade Geoff 50 Bitcoin for his bicycle, but it may end me up in jail.

Henry : Okay, well, what about.

Geoff : And China's even, sorry to interrupt Henry, but I'll just mention, China's even more complicated because they have laws about the amount of money you're allowed to take out of the country. So, I think the maximum you're allowed to take, sorry, convert to a foreign currency, and I think the maximum is 50,000 US dollars, something like that. Which is why these Chinese billionaires are forced to kind of sneak out with 500 Visa gift cards or suitcases full of money or whatever, because getting money out of the country is difficult, and when China owns all the banks it's difficult, but Bitcoin is one way to do that anonymously and secretly. 

And so, that's the other reason that China would crack down on this, they don't want you to use it as a means to get your wealth out of the nation, they want you to air quotes, keep your wealth in the country.

Henry : Right, okay, well, then what about the corollary of that? El Salvador has just made Bitcoin an official currency to buy whatever you want in the country, it's mind-boggling to me.

Mike : And they at the same time are setting up a crypto city, and all this other kind of stuff, they're basically, to me, I think what El Salvador is doing is trying to position themselves as essentially the new Panama Papers, it's going to be the El Salvador Papers, to Geoff's point, make it easy and legitimate to send a bunch of Bitcoin from mainland China to an outside country. And then from El Salvador, you can transfer it out but with El Salvador, it's funny they did it; they said, okay, we're going to make it a currency, and where everybody has to take it. 

And I was reading stories that were exactly Geoff's point about the chips, where you had retailers who basically on the day one of this thing went and sold what to them in their store was say, $50 worth of merchandise, and by the end of the day, they only had $40 in the till. And you're talking about a country that's not, it's not like it's up there on the richest place in the world to live and stuff like this, this is a poor country and these people just can't have this happen. 

But I think the promise of all of a sudden, all of these private jets showing up in El Salvador with all of these rich oligarchs and stuff on it, trying to come and fill up their suitcases with cash from their Bitcoin reserves and maybe dropping into a casino might be something that's enticing to a government person in El Salvador.

Henry : Wow.

Geoff : And also if you are in the government in El Salvador, and you believe and gamble that Bitcoin is only going to go up, and you give some of it to all of your people and suddenly overnight, they discover that they're the Salvadorian equivalent of millionaires, they just love you and vote you back. So, imagine you have a hundred dollars in the bank and then tomorrow you have $500 in the bank, and then the next day you have $10,000 in the bank.

Henry : Well, that's a good point.

Geoff : Now, of course, that just often leads to just rampant inflation in the nation where suddenly a Tamale costs you a hundred dollars because now everybody can afford it but that's sort of a separate question. But if you gamble that all your people are going to get rich because you hooked your sled, guess there aren't any sleds down there, but you hooked yourself to this, then everybody's going to love you. But as you say, Michael, as it goes up and down that isn't quite working out how they planned.

Mike : That's right, and what happens at the end of it, at the end of this experiment in a year, 5 years, 10 years from now when basically there are digital CBDCs all over the world. There's a digital pound, a digital Euro, a digital dollar, a digital this, and all those El Salvador Bitcoin-based retirement, rich millionaires that are spending a hundred dollars on Tamales, now have zero.

Geoff : Exactly.

Mike : And the government of El Salvador doesn't have any money in its bank that they've collected from taxes and stuff like this.

Geoff : And there are small countries that are too small to have their own effective monetary policy.

Henry : Correct.

Geoff : And do hook themselves to other accounts or other currencies, but they pick other currencies that are reasonably stable. So, if you go to Belize, which is right next to El Salvador, the Belizian dollar is pegged to the US dollar at two to one, so that means they don't have control over their monetary policy but it does mean that they have a reasonably stable currency that's easy to understand, and that is tourist-friendly. And it'll just go up and down that way, and nobody complains about converting to Belizian dollars, nobody tries to sneak them out of the country; there is an underground black money. 

So, if you want to say, well, we don't have a strong monetary policy, I'm going to attach myself to Bitcoin, that's a lot crazier than just saying, I'm just going to attach myself to the Euro or to the US dollar.

Henry : So, what do you think, the name of the Hot Topix is Crypto, a no-go, where do you think we're headed? Well, you already said that you believe that major currencies and countries will create their own digital currency, but the other thing I've been thinking is perhaps England and America, maybe they're just on the sidelines watching to see how popular digital currencies truly become. I don't think they are ready to jump in anytime soon, what do you think?

Geoff : I think the future is really what Dr. Nigel Dodd was talking to us about a month ago, which is, and certainly Dr. Geoffrey Goodell who works with us as well, has been talking about this extensively. And I think it is going to be Central Bank Digital Currencies, now the commercial banks, the Royal banks, and the Wells Fargos, and those organizations may scream blue murder, but that's a topic for a podcast another day. 

But I do think that a central bank Loonie, as Mike said earlier, a central bank Yankee dollar that's digital that I can move from my phone to your phone by scanning a QR code or something without all of these service fees, handling fees, the same way me just giving you $50 doesn't cost me anything, I think that's where the future is going to go. I don't know if it's going to happen next week, next month, or even next year, but I think that's what's going to happen.

Mike : My call is, I agree with everything that Geoff said, I do believe that Central Bank, digital currencies are coming and I do believe they will be the end of it, of these cryptos in the mainstream. However, I think that it will happen sooner than we think, and the main reason is because I think one of the things that crypto represents a lot of times when you talk to crypto people, friends, anything from friends that have got into it. I've had three conversations in the last week with people telling me they're into crypto, and things like this, and one of the undercurrents, is this libertarian ideal, which is I should have the right to transact business without the government looking over my shoulder, however I want to do that. 

And to me, that is indicative of this greater, and I'm going to get into hot water here, but I'm going to say this greater kind of libertarian political undercurrent that often gets associated with political extremes in societies, the Right, and the Left. They tend to represent these, I don't want the government in my grill, I should be able to do whatever I want, and have all these freedoms and da, da, da, da, da, carry a gun, unconcealed, all this other kind of stuff. 

And I think that those extremes are very dangerous politically right now, on this planet and they're getting more dangerous, and so I think that allowing cryptocurrencies to continue to stoke the fires of these libertarian sentiments in society and as I said, I'm using libertarian as a catch-all, but these extreme things I think are going to be an impetus for them to move faster with these digital currencies. It's just they already know, they don't like the fact that they're not issuing the currency, they're not controlling it, all this other kind of stuff, and you add all these other things in, I think you're going to see that it's going to push them faster.

Henry : Michael, thank you, Geoff, thank you very much. It is a complex and kind of a new world for everyone but cryptocurrencies are, I do find them fascinating and all we can do is sit on the sidelines and watch. Thank you very much, guys.

Mike : Thanks, Henry.

Geoff : Thanks, Henry.