Transcript: The return of crypto

This is an audio transcript of the Unhedged podcast episode: ‘The return of crypto’

Ethan Wu
A reading from the Book of Crypto: Rocket emoji. Rocket emoji. Moon emoji. Moon emoji. Moneybags emoji. Moneybags emoji. We are so back. Let’s effing go. Today on the show: Really? Is crypto back?

[MUSIC PLAYING]

This is Unhedged, the show where we talk about interesting smart things in finance and also cryptocurrency. I’m Ethan Wu here in the New York studio, joined by Katie Martin from London, who is fresh from a crypto conference. Katie, I can’t believe they let you in the door as crypto’s most notorious hater.

Katie Martin
I’m not crypto’s most notorious hater, but I am impressed that you managed to get hold of the holy scrolls of crypto there.

Ethan Wu
They were buried in a secret (inaudible).

Katie Martin
So it must be true.

Ethan Wu
Somewhere deep in Egypt.

Katie Martin
Yes. So the FT hosted a digital assets summit and, you know, there was some crypto stuff in there. But here’s the thing. The primary focus for kind of grown ups in the crypto space now — by which I’m thinking kind of banks, other kind of financial market intermediaries — are how can we use the technology, not which silly coin can I put my life savings into? So a massive change of tone there. And we also spoke to the new Binance chief executive, Richard Teng. The other one has agreed to step down and pleaded guilty to some stuff that we can get into later on, but.

Ethan Wu
Some bad stuff.

Katie Martin
Yeah, some not-great stuff. But if you’re thinking, OK, you know, new broom, new Binance, then I’m afraid I’ve got news for you because we were interviewing Richard Teng, the new chief executive, and we asked him a very hard question. Ethan, are you ready for it?

Ethan Wu
I’m ready.

Katie Martin
Where are your headquarters?

Ethan Wu
I’m shaking in my boots. My PR person didn’t prepare me for this.

Katie Martin
And he said, why do you feel so entitled to these answers? (Ethan laughs) So that is it right there. That’s the new, transparent Binance for you.

Ethan Wu
They’re turning a new leaf, clearly. Well, Katie, we too are entitled to answers for what’s going on in the crypto space, which recently feels like a lot, right? I mean, Bitcoin the other week crossed 40,000; now it’s like at 45,000, I think. It’s gone up double-digit percentage points in the last month or two. You’ve got the Coinbase CEO who’s stock has tripled this year saying, one idea I’ve been contemplating is that Bitcoin may be the key to extending western civilisation, which is something you only say if the price is going up. You don’t say it if the price is going down.

Katie Martin
Yeah, far out, man. Yeah.

Ethan Wu
It really feels like some degree of boom times are back. Maybe not the same as 2021, but I mean, you’re seeing it even in the long tail of the crypto market. There’s a brand shiny new alt-coin to describe it, politely called Bonk, and it’s based on a meme of a dog clubbing people that get too excited. And Bonk is up over 1,000 per cent in the past month.

Katie Martin
How are you spelling this Bonk?

Ethan Wu
B-O-N-K. Bonk, right on the head.

Katie Martin
Hmm. Means something different in English, English English. But whatever.

Ethan Wu
(Laughter) You know, I will say, Katie, the last time we had all this hullabaloo on the way up, I felt like I had a certain youthful vitality to it. Like I could, you know, be optimistic. And this time, I just feel tired. I don’t know.

Katie Martin
Crypto has won. It’s finally ground you down.

Ethan Wu
God, it really has. I will say, Katie, on the margin I’ve been seeing, just, you know, I follow some crypto influencers on Twitter just, you know.

Katie Martin
Why, why, why?

Ethan Wu
Just to keep up with the zeitgeist. You know, it’s important. And I’ve heard them talking about liquidity and interest rates a lot more this time than I ever did in, you know, 2021 or ’22.

Katie Martin
I mean, not to get me cross, Ethan, but here’s the thing. These guys always want it their way. So when yields are falling because interest rates are coming down, they’re like, see, buy bitcoin. But when yields are rising because inflation’s really high, then they say, see, buy bitcoin because it’s an inflation hedge. And so you end up with these really funny circular arguments where it’s like, you know, geopolitical risk is higher — buy bitcoin. It’s lower — buy bitcoin. Yields are higher — buy bitcoin. Whatever the question is, the answer is for these people, buy bitcoin. So I do get the argument around kind of like global liquidity if you say, OK, bitcoin is exclusively a highly speculative asset that’s very sensitive to interest rate risk. Fine. OK, I can I can go along with that. And as usual, I don’t wanna spoil anyone else’s fun. If they wanna buy it, they can knock themselves out. But other stuff that is going on, right, is that I mean, you know, Ethan, you read the financial press. Hell, you write the financial crisis of the time. You will be aware that there has been a very large regulatory crackdown on crypto for the past few years.

Ethan Wu
It’s been truly huge. I think it’s an interesting moment for the crypto industry where essentially the two biggest institutional players in the entire space were a fraudulent exchange run by Sam Bankman-Fried and a headquarter-less exchange, God knows where, run by CZ that just paid over $4bn for being complicit in money laundering. And the question is, you know, when your two biggest players have done that, right, where does the industry go from there? It’s not gonna shut down. There’s too much money already in the space. There’s too much interest already in the space. And, you know, I think what you’re seeing now is more focus on things like asset management. You know, companies like BlackRock, as we talked about previously on the show with Brooke Masters and Rob Armstrong, are moving slowly, incrementally into these like bitcoin spot ETFs, which are supposed to offer, you know, more like efficient exposure to price movements.

Katie Martin
So here’s the thing, you know, that could actually be meaningful for the bitcoin price. I have been convinced on this point by people who know what they’re talking about, which is that like if bitcoin ETFs do become a thing, cash bitcoin ETFs if they do get approval, then people, then the sort of service providers here like BlackRock will have to buy bitcoin in amounts that sort of match whatever buying interest there is in the ETF. So they will be buying in the cash market on the back of the ETF launching. A couple of things here. First of all, we don’t know what the actual demand for these things is gonna be. Maybe huge. Maybe not. But either way, you could argue that some of these purchases have already been priced in. This is why we’ve already seen the move that we’ve had. I don’t know. Nobody knows. But I would be, you know, a little bit cautious around this rhetoric.

Ethan Wu
Right. One reason I feel kind of like instinctively cautious whenever I read “Big uptick in institutional demand for bitcoin will send the price to the moon” is that one of the key characteristics of bitcoin, right, is that most of the existing supply sits totally inert, not moving, totally illiquid. Part of the reason for that is so much of bitcoin is out there sitting doing nothing, that if people were to sell even a small chunk of that, it’s like 70 per cent of the supply or something like that. Something even a little bit of that would crash the price, right? So if there is an uptick in demand, you could invite the supply back in and just push the price back down.

Katie Martin
So, you know, I talk to portfolio managers and chief investment officers and these sorts of people basically for a living. I have never once spoken to any that like bitcoin or that are into crypto. They’re kind of interested in it as a kind of technology thing da da da; as a kind of, you know, intellectual exercise. But institutional investors are not buying this stuff. If they are, they’re doing a really good job of pretending they’re not. The sort of institutions, quote unquote, that are buying this stuff are things like venture capital firms, a few specialist hedge funds — you know, the types of investors that don’t have fiduciary duty to, you know, the person in the street and that can just play around with their own money. Sure, they’re kind of, they’re buying this stuff. That’s fine. That’s very nice for them. But the idea that like, you know, pensions and insurers and asset managers are kind of really getting into this space is as far as I can see, just not right.

Ethan Wu
Yeah. But let’s talk about the technology for a second, because on this front, there has been an interesting development recently that’s been building for some time now, which is that a big bank is getting into a particular corner of crypto called stablecoins and the bank is Société Générale in France. They are issuing soon a stablecoin on a cryptocurrency exchange. Katie, we probably should first define what a stablecoin is, right?

Katie Martin
Yeah. So it is a cryptocurrency, but its aim in life is to be as boring as possible and to effectively track the value of another normal currency — think dollars, sterling, whatever — but on the blockchain. And the idea of this is that if you wanna hop in and out of different crypto assets, this is a much easier sort of money to use to do that. So the most popular ones are based on and backed by dollars. This one from SocGen is all about euros. So it’s effectively putting a form of euros in a private initiative like this that lives on the blockchain and should make it easier to make euro-type payments.

Ethan Wu
It is literally the opposite of going to the moon. It is structurally designed to stay at the same exact level on the floor forever, right? If it works well it will never go up.

Katie Martin
Yeah. But with regards to bitcoin, you know, one of the, so like I was sort of alluding to, different people buy bitcoin or other cryptocurrencies for different reasons and these reasons often contradict each other. So on the one hand, the sort of true believers will say you’ve got to own bitcoin because you need money that doesn’t have the involvement of governments or of banks, right? At the same time, they’re saying, but also buy bitcoin because we might get some regulated ETFs that come out at the end of it. It’s like, do you want this thing to be, like, regulated or not? Do you want government involvement or not? But either way, the answer, Ethan, as I’m sure you’ve gathered through the course this conversation is, buy bitcoin. That’s always the answer from the bitcoin fans.

Ethan Wu
There is something preposterous about the fact that we started with decentralised, uncensorable money and we ended up with SocGen and BlackRock, right? Like, that’s where we are in this space. (Katie laughs). But I do think, like, the kind of confusion of the bitcoin diehards I think shouldn’t lead us to ignore genuine changes in the space. I think what SocGen is doing goes back to the original promise of blockchain, which is that it’s like an interesting computer science database technology.

Katie Martin
You say interesting, but I say . . . (Laughter) Yeah, it is.

Ethan Wu
(Laughter) I think it’s interesting. It’s like using Sequel or Azure or whatever. It’s a way to store information in this way. It’s decentralised rather than, you know, centralised at one particular, you know, data warehouse. But that could be useful, like you said, Katie, it could speed up certain types of transactions if it’s all implemented well. I think it’s hard to exactly say the extent of the efficiency improvements beforehand. But it’s like an interesting thing to try and see if it could change anything. I don’t know.

Katie Martin
And, you know, like a lot of people in this space who do stuff around payments at banks and all that kind of nerdy stuff, they would love nothing more than for a lot of these stupid coins to just disappear and stop sucking in so much attention. Like, this is not the point for them at all. They’re not about shilling coins. They’re about efficiencies deep in the back office of large financial institutions. But what you always come back to and what they will definitely throw at us on email after this podcast goes out, Ethan, is, you know, oh yeah? Well, you know, look at the price of this thing. You know, you’re so wrong. I’m making my fortune out of it. To reiterate, that’s great. I’m really, really pleased for you. I just think it’s a really weird situation where you’re buying it for this reason, the person next to you is buying it for a completely different reason and the third person’s buying it for another totally different reason. I can’t construct a narrative that makes any sense out of that.

Ethan Wu
Katie, are you having fun staying poor?

[MUSIC PLAYING]

Katie Martin
I am, yes.

Ethan Wu
That’s really like us here at the Financial Times — poor and enjoying ourselves.

Katie Martin
Exactly that.

Ethan Wu
All right, Katie. We’ll be back in a moment with Long/Short.

[MUSIC PLAYING]

Welcome back. This is Long/Short, that part of the show where we go long a thing we love, short a thing we hate. Katie, are you long or are you short today?

Katie Martin
I am gonna be short Kwasi Kwarteng. Remember him?

Ethan Wu
I remember him.

Katie Martin
Yeah. He was the chancellor that inadvertently blew up the UK government bond market a year or so ago, and he has just done a podcast for, I kid you not, the Library of Mistakes in Edinburgh, (Ethan laughs) which is an organisation that’s there to kind of help people better understand financial history. Anyway, he is here to tell us that bond markets are not rational and that quotes, I was in a way a victim of that last autumn. So another way of looking at it is that this was kind of on you. And he’s saying, you know, the more I think about it, you’ve got to have a balanced approach to fiscal policy. I mean, I guess at least he understands that now. But, you know, styling it out right there.

Ethan Wu
This episode is just like a collection of, like, theatre of the absurd. Just all our favourite absurdities from across the world, with Ethan and Katie.

Katie Martin
Yeah. What have you got? Are you long something?

Ethan Wu
I’m long central bank speak. I love their choice of words. Here’s a comment from Bank of Japan governor Kazuo Ueda that set off all kinds of reactions in Japanese markets. He’s commenting on the chances that interest rates will stay below zero in Japan for the rest of the year. Just listen to the phrasing here: “It’s impossible to say the chances are zero, in truth. But as I just said, there are less than two months left in 2023”. These are both true statements. Both true statements.

Katie Martin
Guy’s not wrong.

[MUSIC PLAYING]

Ethan Wu
And you know, next time, Katie, someone asks us about our recession prediction, I think we should just tell them. It’s impossible to say the chances are zero, because, I mean, that is the truth.

Katie Martin
Not wrong.

Ethan Wu
All right, Katie, thanks for being here. We’ll have you back soon. And listeners, we’re back in your feed next Tuesday with another episode of Unhedged. Catch you then.

Unhedged is produced by Jake Harper and edited by Bryant Urstadt. Our executive producer is Jacob Goldstein. We had additional help from Topher Forhecz. Cheryl Brumley is the FT’s global head of audio. Special thanks to Laura Clarke, Alastair Mackie, Jacob Weisberg and Jess Truglia.

FT Premium subscribers can get the Unhedged newsletter for free. A 30-day free trial is available to everyone else. Just go to FT.com/unhedgedoffer. I’m Ethan Wu. Thanks for listening.

[MUSIC PLAYING]