Author: Rahul

In our last post, we looked at the hedge fund manager Ray Dalio’s opinions on cryptocurrency.

Recently, the hedge fund manager Stanley Druckenmiller was interviewed on a wide range of topics, which included cryptocurrency.

Druckenmiller, himself a billionaire, managed the legendary George Soros’ Quantum hedge fund for over a decade and then ran Duquesne, his own successful hedge fund, full-time. He is one of the major people profiled in the book More Money Than God by Sebastian Mallaby.

~ “So here’s something with a finite supply and 86% of the owners are religious zealots. I mean, who the hell holds something through $17,000 to $3000? And it turns out none of them — the 86% — sold it.” – on learning that people held bitcoin despite its massive volatility, which meant that there was something bigger in play.

~ His opinion used to be that “crypto and Bitcoin are a solution in search of a problem” but now he realises, that it’s a credible hedge against the wearing of the US dollar. He has come around to the ‘digital gold’ view. See our last post for more detail on this.

~ However, crypto markets are extremely shallow compared to other real assets: “I tried to buy $100m of Bitcoin at a price of $6,200. It took me 2 weeks to buy $20m. I bought it all around $6,500, I think… I can buy that much gold in 2 seconds… So like an idiot, I stopped buying it.”

~ Meanwhile, Ethereum is a leader in building decentralized applications today, but it could be like “Yahoo before Google came along. Google wasn’t that much faster than Yahoo, but it didn’t need to be. All it needed to be was a little bit faster and the rest is history”.

(Indeed, there do exist alternatives like Blockstack, Binance’s Smart Chain and Polkadot. But there are also sophisticated projects (Matic, Uniswap, Raiden and many others) to scale different aspects of Ethereum. We will explore these in upcoming posts).

~ Finally, follow the talent: “One of the ways we’ve always invested in the private sector is to try and figure out where the engineering kids from Stanford, Brown and MIT are going… So many of them are in love with crypto and that’s where they’re going.”

Two major, long-time hedge fund managers were recently asked in detail about their opinions on bitcoin and cryptocurrency. Today, we look at Ray Dalio of Bridgewater.

Dalio spoke at the Consensus conference, organised by the publication Coindesk.

~ Dalio thinks the US dollar is at risk of being devalued at a level not seen since 1971, when it moved off the gold standard

~ This is because of unprecedented amounts of dollar printing (and therefore creation of new debt) by the USA central bank, the Federal Reserve to finance the pandemic stimulus, which itself is larger than the one after the financial crisis:

~ The impact of this is seen, he says, in the recent rise in inflation (ie. how fast the price of goods and services rises because there is more money available). USA inflation in 2020-21 was over twice the USA central bank’s long term target of 2%.

~ Inflation reduces the purchasing power of people. As Dalio says, ‘cash is trash’, so people buy other assets: real estate, stocks, bonds. That drives bond prices up and yields down, leaving investors search for still other alternatives.

~ This has traditionally been gold, but bitcoin and other crypto is now an attractive option. Unlike the dollar there is no central bank like India’s RBI or the USA Federal Reserve to print more bitcoin. It needs to be mined, and new bitcoin will be distributed as mining rewards at a pre-determined rate. And there will only ever be a finite number of bitcoin.

~ After years of skepticism, Dalio says he now holds some bitcoin, and personally sees it as a favourable option to holding bonds. His fund, Bridgewater, wrote a detailed 6000+ word analysis of their thoughts on bitcoin.

~ Finally, as Dalio says in the document, “Bitcoin’s biggest risk is being successful, because if it’s successful, the government will try to kill it and they have a lot of power to succeed.” Specifically, if large investors start to hold bitcoin as a store of value instead of government bonds (especially in a low-yield environment).

In the next post: Stanley Druckenmiller, who managed George Soros’ Quantum Fund for over twelve years.

India’s central bank, the RBI, reminded banks yesterday that its own 2018 cryptocurrency guidelines were no longer valid because the Indian Supreme Court had struck it down in 2020.

The RBI had effectively banned Indian banks from processing payments to/from cryptocurrency exchanges in 2018, throwing the country’s crypto ecosystem into suspended animation. After a case that made its way to the Supreme Court, those guidelines were overturned, and the Indian government was told to draft a law regarding crypto. (That bill has been pending in Parliament for months now.)

However as we have discussed on this group, banks have recently been using those very 2018 guidelines to impose a sort of informal ban on Indian rupee deposits into crypto exchanges, even sending notices to customers. The scramble to use alternative payment methods has meant that access to crypto in India remains extremely inefficient.

It’s probably that yesterday’s clarification will put an end to that.

Here is a screenshot of the RBI’s note yesterday (and a link to the note).

Iran is one of the world’s largest oil producers and exporters. For decades, though, it has been economically isolated as a result of USA sanctions. 

That makes international trade hard because few countries will accept Iran’s own currency – the rial – and Iran has problems accessing foreign currency. Oil exporting countries usually have no problems with forex – they can choose to get paid in dollars or euros. But Iran has diminishing leverage. Large importers like India and China now pay for Iran’s oil imports in rupees and yuan.

However, this has happened recently:

The Central Bank of Iran has declared that licensed banks and moneychangers in the country can use cryptocurrency that has been mined by officially sanctioned miners to pay for imports, according to a report from the Financial Tribune.

So Iran can’t manufacture dollars or euro, but it can manufacture bitcoin and other crypto. As long as exporters from other countries accept it, this is a sustainable way for it to participate in global trade.

In other words,

I find this fascinating, but I’m surprised it took so long. And I wonder how long before the USA moves to plug this gap too.

Until then, Iran has become one of the largest countries mining bitcoin:

So much so that private mining is overwhelming the country’s electricity system:

Iran banned the mining of cryptocurrencies like Bitcoin after a series of blackouts across major cities… The government has been cracking down on the 85% of mining that is unlicensed, even enlisting spies to locate miners who hide computers everywhere from homes to mosques.

Bitcoin and cryptocurrency has always been pitched as a means to individual economic freedom. We’re seeing this happen with a whole nation state. Unfortunately, it may be that, through licensing, individual freedom may be curbed for the ‘greater good’ of the country’s freedom.

The Economic Times reported recently on how Indian crypto exchanges are scrambling to process payments. As we have seen, banks have suddenly declined to work with them, possibly because of informal pressure from the RBI.

Now, the Mobikwik prepaid wallet has been left as one of the few ways you can get Indian rupees into crypto exchanges in order to buy bitcoin, ethereum and other tokens. But that access comes at a cost. 

Even if you can load your prepaid wallet at no cost via UPI (an instant bank-bank transfer method),

• You pay 1.5% + 18% GST on Mobikwik’s own gateway to money from their wallet to the exchange
• plus the local premium on BTC/ETH/others over the global BTC/ETH price
• plus exchange fees on every purchase.
• plus transfer fees to move it to your off-exchange wallet. 

And because the source is a prepaid wallet you’re limited by law to ₹100,000 per month, or ~ USD 1350. 

(to be clear, I’m not blaming Mobikwik for this at all.)

An alternative around this is peer-to-peer, or P2P. You can send money in Indian Rupees (INR) to people who already have crypto, and they’ll send you the equivalent tokens into your wallet. Many exchanges offer this as a trusted mediator, globally:

But there are inefficiencies. For instance, yesterday afternoon,

• The stablecoin ‘Tether’, the crypto equivalent of one US dollar, was available at INR 79-80
• But the INR-USD exchange rate at the same time was INR 72-73 per dollar.
• That means P2P was available at a 9.5 to 11% premium. 

See screenshots:

And this was just to get USDT tokens. The exchange will charge its usual fees to sell USDT in return for Bitcoin, Ethereum or other tokens.

P2P crypto exchange is a boon. But ultimately it’s a workaround for unclear regulation. And you and I pay a harsh premium for that workaround. 

On Friday, the Hong Kong Financial Services and Treasury Bureau proposed two major pieces of crypto regulation:

• One, that crypto exchanges be licensed compulsorily by the regulator and subject to money laundering and anti terror financing checks
• Two, that these exchanges only offer services to ‘professional investors’ in HK. That is, people with a portfolio over one million USD.

I dug up the actual proposal text, which is the conclusion of a ‘consultation’ held with ‘stakeholders’ between Nov 2020 and Jan 2021. [link to PDF]. It has a couple of important points that is left out of the Reuters article.

One, it defines virtual assets, which will be traded on these licensed exchanges, very generously:

a digital representation of value that (i) is expressed as a unit of account or a store of economic value; (ii) functions (or is intended to function) as a medium of exchange accepted by the public as payment for goods or services or for the discharge of a debt, or for investment purposes; and (iii) can be transferred, stored or traded electronically.

I wonder if by this, the proposed regulation allows payment for goods, and payback of loans via tokens, as well as investment products to be created? If so, this’ll be a big step towards programmable money.

Two, it explicitly leaves out some important tokens: stablecoins, central bank digital currencies (like the in-trial Chinese e-yuan), and items like non-fungible tokens (among others). That is, crypto exchanges in HK cannot list these. I think this is because digital currency will be separately regulated.

This Twitter thread, lucidly written, is an important read for anyone who wants to better understand the wild swings in the price of bitcoin.

It’s linked to the supposed stablecoin Tether or USDT, which is supposed to be the crypto equivalent of a USA dollar.

Tether itself is by far the most traded cryptocurrency. And, a large part (80%) of bitcoin’s trades are people buying it with Tether, or (naturally) selling it for Tether.

Therefore, since 1 Tether is supposed to be 1 USD, you could say the price of bitcoin is really denominated in Tethers, more than in USD.

But there have been serious doubts about whether Tether itself is worth that 1 USD. Strictly speaking each Tether is supposed to be ‘backed’ by cash reserved of one USD.

That has been under a cloud for years. Tether has refused to release proper audits of its cash reserves. It has been fined by the New York Attorney General’s office, and now, finally, it turns out a mere 3-4% of its reserves are actual USA dollars.

Here is a graphical view, from the Financial Times:

Finally, as the Twitter thread says,

A significant portion of bitcoin price formation is therefore quoted in dollars, but paid for in USDT dollars that are only actually backed by three cents.

Which would make most of the price formation of bitcoin completely synthetic.

Despite the unquestionable merits of bitcoin as decentralised money, I agree with the writer when he calls the price spike of bitcoin a Madoff-like Ponzi scheme.

Indian banks have ‘informally’ begun restricting deposits into Indian cryptocurrency exchanges.

IPL ads, Dogecoin frenzy may have triggered ‘informal’ curbs on crypto exchanges

Being in the spotlight could cost crypto exchanges dearly

The Economic Times speculates that this may have been because of two reasons:

• one, the recent trading frenzy, including in India, in the parody Dogecoin. The coin has gained 12000% since the beginning of 2021.
• two, the recent aggressive advertising on the IPL by crypto exchanges in India including WazirX and Coinswitch Kuber. WazirX highlighted bitcoin’s high recent gains in its ads.

What is also notable is how restrictions have been applied without any formal trail:

None of the banks or gateways have, however, issued any written instructions stating the rationale behind these curbs, triggering confusion in the country’s nascent cryptocurrency industry.

“Since there have been no formal instructions or circular issued by the RBI, you can’t even protest,” said an industry source. “It’s like a sort of stealth way of creating issues for crypto exchanges, which is very unfortunate.”

As of Wed, 12 May, deposits into WazirX continue to be unavailable:

Elon Musk has been quite influential in the crypto world. His company Tesla holds a lot of Bitcoin on its books. More amusingly his tweets about Bitcoin, and more recently the parody coin Dogecoin, have caused major spikes in prices. People bought those coins in a frenzy based on nothing but his tweets.

Last weekend Elon Musk hosted the live-action comedy programme Saturday Night Live. As expected, he was asked about, and he talked about Dogecoin. Instead of the price of the coin further rallying, as was widely expected, it crashed.

Dogecoin tumbles after Elon Musk jokes about it on ‘SNL’

Investors bet right: Elon Musk mentioned dogecoin on “Saturday Night Live” during his opening monologue. Well, actually, his mom did.

Like this article, many others also blamed it on Musk referring to the coin as just a ‘hustle’.

But this person on Reddit mapped the price of Dogecoin throughout the SNL episode (which airs live). It shows that the price fell long before the ‘hustle’ reference:

If anything, the price fell because there were essentially no references to the coin until nearly 45 minutes into the show – after which the price in fact (belatedly) recovered.

I find it very interesting that someone took the trouble of mapping the highlights of the SNL episode to the minute-by-minute price of Dogecoin. And how fickle the price fluctuations of cryptocurrency are today.

This blog post makes a detailed and extraordinarily bearish argument against cryptocurrency:

He covers
~ The energy footprint of cryptocurrency
~ The purely speculative nature of cryptocurrency investments, calling it a ‘financial betting game’
~ As a result of this, the propensity of financially vulnerable people to invest in the hopes of a windfall, not unlike a lottery
~ Its increasing use as the currency in which ransom must be paid for hacks and other digital infrastructure attacks.
~ Related to this, its use in manipulating public funding of elections and, overseas, in evading sanctions

The writer makes the argument that in light of this, the US and its regulatory bodies should invest instead in upgrading their existing digital payments system, reducing the widespread use of cheques and cash.

Most interestingly for me, he understands the choke points of access to crypto: the points where fiat currency like USD is converted to cryptocurrency and back. It is these choke points that he suggests regulating closely.

There are counterarguments that have been made already to each of ̉his points, some strong, some not. Regardless, the post remains a strong, cogently argued bear case for crypto combined with a call for financial system digitisation.