First, do no harm protecting your investments in a volatile crypto winter
Kitco Commentaries | Opinions, Ideas and Markets Talk
Featuring views and opinions written by market professionals, not staff journalists.
As a long-time doctor, I spend a lot of time thinking about how to help my patients get better as they grapple with complex immunological challenges. What treatments can alleviate their problems? Can I recommend lifestyle, diet, or other changes to reduce their exposure to problematic substances or conditions? It's all guided by the centuries-old medical principle: First, Do No Harm (from the Latin, Primum Non-Nocere).
As a long-time investor in cryptocurrencies, I bring some of the same do-no-harm mentality, especially at a time when prices for Bitcoin and other cryptocurrencies have plunged, and some blockchain-based exchanges and currencies are in trouble. For newer investors, who've never been through a crypto "winter," it's a terrifying time.
So, how do investors protect themselves as much as possible from the maladies suddenly afflicting the blockchain ecosystem? How do we reduce our exposure to unhealthy systems or conditions while enabling the exciting opportunities that fintech, Web3, cryptocurrencies, Blockchain, and related technologies promise?
I believe cryptocurrencies are a new asset class, sitting between equities and the traditional fallback of gold, while opening endless vistas of new opportunities. That's still true, or it will be again after this down cycle.
But it's also time for the crypto industry to mature and for investors to understand both crypto's bracing opportunities and its harmful components that need to be stamped out. Now is the time to make fundamental changes, as both an industry and investors, that can build long-term success for everyone.
Believe it or not, the first step is to embrace intelligent and balanced regulation of cryptocurrencies, stable coins, and related sectors. More regulation and centralization in the space have been anathema to many crypto pioneers.
But it's precisely what's needed to solidify a reeling market. We have an opportunity to clean up the "illnesses" impairing the growth and adoption of cryptocurrencies. To attain this classification as a new asset class, we need smart regulation that establishes guardrails and a better understanding of the oversight role for regulatory agencies such as the Commodity Futures Trading Commission, Securities & Exchange Commission, and Internal Revenue Service.
Congress is already considering regulation, specifically, or RFI, sponsored by U.S. Senators Kirsten Gillibrand (D-NY) and Cynthia Lummis (R-WY). In a statement, the lawmakers said the RFI "will create a workable structure for the taxation of digital assets and cryptocurrencies and will provide a regulatory sandbox for state and federal regulators to collaborate on innovative financial technologies."
SEC Chairman Gary Gensler also has called for intelligent regulation of fintech to unlock its power and prevent abuses.
It's time. The fintech situation is facing something like what traditional finance had to deal with nearly a century ago, after the stock market crash in 1929. Because of inadequate consumer protections like deposit insurance and minimum reserves, hundreds of banks closed after market fear and uncertainty led to devastating runs on their assets. Those runs cost many customers their life savings. Capitalism as a whole seemed in danger of collapse.
There are other comparisons, like this one from Galaxy Digital CEO Mike Novogratz, a prominent long-time investor who pointed to the industry-rattling shakeout after the highly leveraged hedge fund Long-Term Capital Management collapsed in 1998.
Now, some unregulated blockchain companies and investors have practiced the same wildly irresponsible over-leveraging that killed LTCM, or worse, they've been part of other problematic behaviors betraying the trust of their investors and customers.
Novogratz is right about one thing. The crypto sector is going through another epochal reset. Thankfully, the situation is nowhere near as dire as the 1930s or the overseas issues that fueled LTCM's collapse.
But the crypto industry is taking a hard blow. To recover and begin growing again, the sector needs operating requirements that reassure investors their money is safe while giving them the chance to take part in the next-gen opportunities created by Web3, blockchain technologies, and cryptocurrencies.
To start with, we need more centralized exchanges. That's something many long-timers oppose almost reflexively. But centralization allows accountability and the ability to enforce so-called KYC/AML (Know Your Customer/Anti-Money Laundering) restrictions that govern operations of every type of U.S. financial institution.
KYC/AML helps reassure retail investors that their money is being protected much higher than we've seen across crypto's history. KYC/AML systems help weed out fraud, abuse, and theft that have been far too common in crypto's dark corners.
Investors, meanwhile, need to employ their kind of KYC: Know Your Company. They must do their due diligence before investing in any company, but especially in a fast-growing, quickly evolving sector such as crypto.
Who are you doing business with? Some companies, for instance, promised double-digit returns when no one else offered much above zero. That's clearly not sustainable, and investors should have known better, but greed got in the way. As we advance, focus on the big, reputable companies running real businesses with KYC/AML provisions and must face regular audits of their processes.
Customers also need to think about how they're investing. Diversification has always been a smart idea. The traditional investment mix was a 60-40 split of stocks and bonds. The exact ratio shifted according to short-term market changes, with real estate and perhaps some gold or silver investments as another counterbalance.
But during the recent overheated market, people invested in many companies, in both crypto and the stock markets, that hadn't proven much of anything beyond the ability to issue news releases and hold splashy parties at crypto conferences.
A more balanced approach is still good advice, but now, it can be more nuanced, with cryptocurrencies as part of the mix. They just shouldn't be the entire mix, the way too many eager novice investors approached the sector.
As Charles Cascarilla, CEO of payment-processing firm Paxos put it during a recent interview, "You have to have an all-weather business plan." That goes for both companies and individuals.
Some people say they lost their life savings after investing everything in crypto when prices were high; Now, they have very little or nothing to show for it. That was not an all-weather business plan. That was hoping the winds would continue to blow in only one direction, at a pleasant, profitable pace, for years to come. But financial conditions change, often far more quickly than new investors understand.
You have to spread your investments accordingly and ensure you have guard rails on yourself (like working with reputable companies that don't promise the moon).
You also need to employ something called patience. Warren Buffett has become a billionaire many times over by building around a lot of smarts and a few simple rules, like "buy solid companies you understand, and hold onto them for years to come."
As we advance, investors face a much more complex market. That doesn't mean you have to quit and walk away. It does mean you have to be smarter going forward than you had to be the past few years.
"The reality is that like stock, with crypto, everyone is a genius in a bull market," said billionaire Mark Cuban, a frequent crypto investor. "Now that prices are falling for both, those companies that were unnaturally sustained by easy money will disappear."
With better regulation, more intelligent investors, and a cleaned-up industry, cryptocurrencies can be a significant part of the future of finance. Novogratz said Bitcoin might have a crucial role in our eventual economic recovery.
"Bitcoin will lead the markets back out of this Fed tightening," Novogratz said. "The moment the Fed flinches, Powell pauses because the economy's starting to roll over. You'll see Bitcoin explode north."
The question is whether the government, the industry, and the investors have positioned themselves to take advantage in a way that benefits everyone. We are at the dawn of another engineering marvel in Web3 and Blockchain technologies.
The United States needs to continue to lead and innovate in this next technological paradigm shift affecting the future of money. At the same time, the space should be safe for consumers. Remember, as we doctors like to say, "First, do no harm."