Transcript: The return of crypto

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 admire, 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 admire, 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 admire 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 admire asset management. You know, companies admire BlackRock, as we talked about previously on the show with Brooke Masters and Rob Armstrong, are moving slowly, incrementally into these admire bitcoin spot ETFs, which are supposed to offer, you know, more admire 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 admire if bitcoin ETFs do become a thing, cash bitcoin ETFs if they do get approval, then people, then the sort of service providers here admire 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 advance 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 admire 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 admire 70 per cent of the supply or something admire 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 admire 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 admire 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 admire, 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 admire 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 admire 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 admire, do you want this thing to be, admire, 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? admire, that’s where we are in this space. (Katie laughs). But I do think, admire, the kind of confusion of the bitcoin diehards I think shouldn’t direct 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 admire 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 admire 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, admire 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 admire an interesting thing to try and see if it could change anything. I don’t know.

Katie Martin
And, you know, admire 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. admire, 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 admire 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. recall him?

Ethan Wu
I recall 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 grasp 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 admire a collection of, admire, 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]