Cryptocurrency or the giant with feet of clay

Virtually everything in the cryptocurrency ecosystem is collapsing: flash crash, bankruptcy and major loss of market capitalization. Sebastien Mc Mahon notes the damage but reminds us that in every failure there are lessons to be learned.

Ashleay : Welcome to the In Your Interest podcast. My name is Ashley and I am with Sebastian McMann, our chief strategist and senior economist at AIA Financial Group. So today we'll be speaking about a subject that can be kind of nebulous. Cryptocurrency. So is it the right time to invest with $100? Will I Become a millionaire? Kind of feels like everything is crashing right now in that domain. Perhaps, Sebastian, you'll be able to give us a little bit more information on this special world that is cryptocurrency. Hi, Sebastian.

Sébastien : Hello, Ashley.

Ashleay : So can you start by explaining what cryptocurrency is?

Sébastien : Of course. But I'll start by saying that you won't become a millionaire by investing $100 in this thing, at least in the very short run. Unfortunately, at least I'm willing to make that call here today. But cryptocurrency, the way to define it and first, I'm not an expert on cryptocurrency, so I won't be going into the details of how these things work. But let's take a bird's eye view and the cryptocurrency. It's a currency that is not coming from a central bank, so it's not an official currency of the central bank. It's a form of digital asset that's based on a network of computers that is distributed across the world. So it's a decentralized structure. I mean, a lot of buzz words I'm using here just to tell you that it's it's more or less a software you get you get these these assets that are digital in nature that can be exchanged from one person to another, and they don't go through the usual financial systems or their alternative currencies. And there are some advantages to have alternative currencies like that, including that money transfer can be cheaper and faster, although it's it's not been the case for the whole life of bitcoin, for example. And you know, there are decentralized, so it could be more robust through time, but it's a lot of computers doing a lot of calculations behind all the all of the transactions using these cryptos. So consumes a lot of energy. So there's an environmental aspect to this thing that can be detrimental, let's say.

Ashleay : I see. And can you explain what we can buy with that?

Sébastien : Well, for a while you could buy a shiny new Tesla with Bitcoin. They did accept that Tesla. Now I, I searched around a little bit and I failed to find anything significant that you can buy officially. Let's go go to a store online and pay with bitcoin. There are a few things left and right, but the thing that I felt was worth mentioning here and when we look at the official statistics, while official quote official, we find that it's mostly on the black market that this seems to be used. So if you buy something that you don't want anyone to be able to trace, the transaction seems it seems to be the currency of choice.

Ashleay : I see. And some foundations of the crypto ecosystem have crashed in the recent months.

Sébastien : Yes, some exchange have failed. So exchange, think about, you know, when you send real dollars somewhere to buy Bitcoin, to buy any kind of crypto, you need to deal with an exchange. So some have failed, some have went bankrupt and people have lost the money that they deposited there. So imagine you just put money in a bank account and your bank fails and your bank account disappears and you'll lose your money. That's kind of the thing that happened. And prices have crumbled, crumble with the big C here.

Ashleay : Right. And can you give us a few facts about that?

Sébastien : Yes. Bitcoin touched an all time high of 67,734 USD on November nine, 2021. So remember, in 2021 interest rates were very low and speculation was abound. There was strong momentum in multiple asset classes, including stocks, including other assets. But the speculative assets were were very popular. And if we move to more recent date, December 31st, 2022, so about a year later, we're trading at 16,500. So that's about 76% lower. And we will be talking in a few minutes about FDX, the exchange that failed. Well, FDX, they did produce their own coin, which was called the stable coin. So the idea that it can be stable in value through time, so this is something you can do in the crypto world, you can produce your own coins and you have people attribute value to that and buy stuff with that. Well, it used to trade at $80 US dollars in September 2021, and now it's trading at below $1. So that's a 99% lower. So the market cap or the total amount of money that is invested in crypto fell from 3 trillion, which is $3000 billion to $800 billion since November 20. When he won the pull back of 72%. So lots of money was taken out, but also lots of money was lost by people that wanted to get rich quick, like you mentioned, early.

Ashleay : Yes. And FTC's crypto exchange is currently in Chapter 11 bankruptcy proceedings in the US. Its founder and the leaders are looking at criminal charges for fraud. Is that correct?

Sébastien : Yeah, exactly. And you know, there are a few aspects here. So as we said earlier, there was there was a speculation boom around the crypto. So when there's a new asset class coming in or in a new asset that looks shiny and promising speculative booms happen and then regulation is needed. So this has been standard to history. When you look at the history of financial bubbles, this is repeated one say once again, so over and over history. So there were the tulips in mania in in in the Netherlands that happened. So in Holland, people were buying and buying and buying tulips because you thought that the prices will go up forever. And you always think that there are there are some big fish in this market. So this can go down, of course, and everyone's making money. So I can't lose. I need to be in there until at some point, magically, just like in 2022, interest rates started rising and people realized that there were more tulips that were bought than what was available. So the system started to crumble, confidence eroded and we had the bubble that burst. So. So tulip bulbs, let's say, does not these do not enhance the productivity of a country, but maybe crypto can at some point. Maybe crypto will be something that is that is legit, that is adopted by governments. So we can make a parallel to the railway mania in the middle of the 1800s in England. So everyone was well, of course the steam engine was invented so the railroads were created and back then everyone could start a company, We could start the Ashley and Sebastian Railway Company and just raise capital to build railways across England. So let's say we want to make to make a railway that goes from London to Manchester. So we would raise capital, actually build it and get, get returns from the trains that go through that railway. But the returns, of course, were not up to par. Speculation was to large. Everyone invested lots of money, their returns were too low and interest rates at some point started to rise less liquidity. So this failed. After that, though, there was just so many railways all over England, although the roads taken were not the most efficient. But that did leave lead to a productivity boom later on in England. So no, this overinvestment, many people lost money, but in the end it was productive. Maybe it's the same thing we can say about crypto or maybe the same thing with the tech boom in the 1990 1990s. We still have Yahoo! We Google was was born during that period, but we also had the flowers that come and Pets.com, you know, things that everyone thought we would get rich by selling anything on the web. Turned out it was not exactly the case. So speculation brings money and at some point you need regulation to avoid frauds like we've seen at FTX.

Ashleay : Yeah, exactly. And who, like in theory, who would regulate this? Who should be checking up on any kind of fraud that would be done with crypto?

Sébastien : Well, it's a financial asset, so probably it would be the financial regulators that we need to do that. There are some similarities. You know, the FTC's in a nutshell the founders are are likely going to jail because now they're there the regulators see a fraud of about $8 billion over there. So the money was coming in. People were sending money on the exchange to buy crypto, but they did not buy cryptocurrencies with all of that money. They kept some for themselves and they bought real estate and they shared with friends. So it was a real fraud. So you need to have regulation then to make sure that you can have some real oversight because some some of the basic principles of investment that we repeat and repeat and repeat. I mean, they apply here when when you buy something, you need to make sure that you understand what you're buying if you're buying something, because everyone seems to be getting rich by buying that you don't know what it is, you're taking a huge risk. So governance is very important when you deal with the company. So the G in ESG, which is government governance. So understanding who runs the business I'm investing in, are they trustable? People who in this case, who runs the platform where my assets are kept and can I make a due diligence on that? And if not, because. Regulation is not up to par. It's not ready yet. If no one supervises these these these firms, it's hard for you to make sure that you know your money is in safe hands. And remember, it's your money. So take care of it. Don't invest in just anything and make sure that you. We can't stress this enough. Make sure that you understand the risks that you're taking when you're making an investment. Because when these platforms fail, your money is gone. Right? That's the. Point. Just disappears.

Ashleay : Yeah. Yeah, exactly. So that's something that we can definitely learn. So thank you so much, Sebastian, We will leave you on this and we will be discussing next week actually for another episode where we'll have Stephanie Le Duke, VP and Chief of Private Debt at AIA Financial Group about women in capital markets. So that should be very interesting. So thank you everyone for being there. And Sebastian, we'll see you next week.

Sébastein : Thank you.

Ashleay : Love this podcast. Want to know more about economic news? Follow our In Your Interests podcast available on all platforms. Visit the economic news page on Ayaka or follow us on social media.

About

Sébastien Mc Mahon joined iA Financial Group’s economy team in January 2013. Throughout his career, Mr. Mc Mahon has held various positions in several prominent financial institutions, notably at Quebec’s Ministry of Finance and the Autorité des marchés financiers, Quebec’s financial market regulator.

Sébastien Mc Mahon also serves as Vice-President, Asset Allocation, and Portfolio Manager for our subsidiary, iA Investment Management Inc. (iAIM), with assets nearing $15 billion. Mr. Mc Mahon is also a member of the firm’s asset allocation committee.

Sébastien Mc Mahon

Chief Strategist and Senior Economist

This podcast should not be copied or reproduced. Opinions expressed in this podcast are based on actual market conditions and may change without prior warning. The aim is in no way to make investment recommendations. The forecasts given in this podcast do not guarantee returns and imply risks, uncertainty and assumptions. Although we are comfortable with these assumptions, there is no guarantee that they will be confirmed.

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2023-12-01 11:43 EST
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