One of the few financiers to ring a warning bell ahead of the global financial crisis believes today’s cryptocurrency “meltdown” was predictable and that “nobody is paying much attention” to a broader financial market problem.
In an interview with ABC’s The Business, former financier and author Satyajit Das said the cryptocurrency market has been buoyed by the unbridled liquidity and cheap cash pumped into the financial system by central banks.
“I can understand why people got into crypto. It was populist anger,” Mr Das said.
“There are a number of people who are very adept at exploiting investors’ desire for get-rich-quick schemes.”
Mr. Das’ comments come as the fallout from cryptocurrency exchange FTX’s spectacular collapse continues.
The Bahamas-based company, founded in 2019 by tech prodigies — Sam Bankman-Fried and his partners Zixiao “Gary” Wang and Nishad Singh — foundered after revelations about its business practices sparked a wave of customer withdrawals.
FTX enabled people to trade cryptocurrencies – a form of non-centralised, non-government-backed currency – centrally.
The most well-known cryptocurrency, Bitcoin, has been on a steady decline this year, but it continues to fall as the FTX fallout continues.
Bitcoin is down more than 60 percent this year and is now below $16,000 ($24,000).
Overall, the market cap of the crypto market has split from around $3 trillion around this time last year to around $800 billion.
“That’s a loss of over 70 percent,” Mr. Das told The Business.
“It’s a financial loss as well as a loss of confidence. But I think you have to put it into perspective. Cryptocurrencies have always been plagued with problems.
“In a way, it’s nothing new.”
As administrators clean up FTX’s “complete outage,” still-in-the-game cryptocurrency advocates are pushing for “smarter regulation” in the key United States market.
In a CNBC comment, the CEO of one of the world’s largest crypto exchanges, Coinbase, said there must be rules that “protect consumers.”
“Coinbase has no material exposure to FTX, but I have deep sympathy for everyone involved in the current situation,” wrote Brian Armstrong.
“It’s stressful whenever there’s a potential for customer loss in our industry, and a lot of people are losing a lot of money because of FTX’s struggles.
“Despite the prevailing view that crypto companies don’t want to be regulated, many – if not most – companies have been working with policymakers for years.”
Coinbase has also lost nearly 40 percent of its share price over the past month amid fears of contagion in the sector.
Satyajit Das said it was “amusing” that a movement based “on the displacement of governments” with non-traditional currency now wants regulation.
He said it remains to be seen whether the current problems of cryptocurrency – and the blockchain system it relies on – will spill over into the traditional financial market system.
“The crypto space may not be as contagious as, say, the 2008 mortgage meltdown, and (that’s because) the cryptocurrency space isn’t integrated into the financial system,” he said.
“One way to think about the cryptocurrency issues right now is that they are essentially part of the big financial bubble of any bubble that gets pricked.
“And that’s being fueled by higher interest rates and the general trend toward a little more financial sanity.”
At this point, Mr. Das pointed to the problem of the financial sector, which “nobody really pays much attention to”.
Broadly speaking, traditional financial markets have also seen sell-offs throughout the year.
Wall Street’s tech-heavy Nasdaq is down 30 percent in a year. The broader S&P 500 is down about 18 percent.
“Cryptocurrency losses become insignificant when compared to $30 trillion in asset writedowns,” said Mr. Das.
“What’s going on in stocks, they’re going into bonds, they’re going into private markets investing into real estate. So it’s part of a general adjustment to the rating.”
Mr Das said the issues hitting the tech sector — like Twitter, Meta and Google’s owner Alphabet — share some “common features” with those hitting cryptocurrencies.
However, he said the technology has been more noticeably affected by rising interest rates around the world.
With cash rates kept at pandemic lows and quantitative easing boosting the market, central banks around the world, including here in Australia, are now raising rates to fight inflation or price increases.
Mr Das said this is dampening economic activity – which affects technology in particular – and depressing their advertising revenues.
And it makes investors generally suspicious, he said.
“People are basically taking cold showers now,” Mr Das said.
“It’s been four or five years. It’s no surprise to someone who looks closely.”
Mr Das said how badly this will affect economies around the world depends on how much it hurts consumer confidence.
“There will be a wealth effect. People lost money,” he said.
He believes the push to raise interest rates to fight inflation may not be having the intended effect as prices are rising in part due to global forces beyond financial markets’ control, such as the war in Ukraine.
This led Mr. Das to his final thoughts on broader issues facing the global financial markets, which he believes even fewer people are considering.
“I think there are two runaway trains that have been going away for a while,” he said.
“One is geopolitics. The other is deglobalization, particularly in the form of sanctions and trade restrictions, which are accelerating around the world.
“And that has historically tended to destabilize growth and economic prosperity quite radically.”
Satyajit Das is a former financier and author of Banquet of Consequence and Fortune’s Fool.
#Populist #anger #fueled #crypto #craze #bankruptcy #Satyajit #Das #bigger #threat #lurking #sight