Date: 10/14/2021
Author: Mr. X
The cryptocurrency market is at a turning point. The Securities and Exchange Commission (SEC) is investigating complex exchange traded products (ETPs) and the ways that they can be used to invest in cryptocurrency. The SEC is reportedly working overtime in order to develop regulatory guidelines for cryptocurrency. While some hope that this will open the door for cryptocurrency exchange-traded funds (ETFs) that are approved by regulators, others fear that this is simply the beginning of a crackdown.
Clearly, some in the federal government are skeptical, if not hostile, towards cryptocurrency. In recent testimony to the Senate Banking Committee, SEC Chairman Gary Gensler bemoaned the current “wild west” atmosphere of cryptocurrency. “Currently, we just don’t have enough investor protection in crypto finance, issuance, trading, or lending,” he said. Senator Mark Warner (D-VA) said that “wild west” was actually understating the volatility in the market.
Not long ago, Senator Elizabeth Warren (D-Mass) wrote to Treasury Secretary Janet Yellen and said the Financial Stability Oversight Council “must act quickly to use its statutory authority to address cryptocurrencies’ risks and regulate the market to ensure the safety and stability of consumers and our financial system.” Treasury Secretary Yellen has also spoken somewhat skeptically of cryptocurrency in the past. “It is a highly speculative asset and you know I think people should be aware it can be extremely volatile and I do worry about potential losses that investors can suffer.” Neel Kashkari, president of the Minnesota Federal Reserve and a former Republican candidate for governor of California said of crypto: “Cryptocurrency is 95% fraud, hype, noise and confusion.”
Jamie Dimon, CEO of JPMorgan Chase [JPM] recently said, “I personally think that Bitcoin is worthless.” Nonetheless, he conceded that that many of his clients will disagree. Still, Mr. Dimon predicted that “no matter what anyone thinks about it, government is going to regulate it.”
In other words, many people are expecting the feds to bring the hammer down. Cryptocurrency has been on a bullish tear regardless. At the same time, Coinbase [COIN], probably the easiest on-ramp for beginning investors, needs to diversify its potential revenue streams. It can’t just be utterly reliant on cryptocurrency, especially if crypto’s potential as a speculative asset is taken down by more stringent regulations. Who knows how many of the alt-coins currently on the platform will even be around in a year?
To its credit, COIN sees this. Thus, the company is setting up a marketplace for NFTs, Non-Fungible Tokens. Already, there are reportedly one million people on the waiting list.
As I’ve written before, NFTs are a way for investors to possess digital artwork. Like art in the physical world, it can be used as a hedge against inflation. While we have been assured by the government that inflation is temporary, that benign outlook doesn’t seem to be showing up in the data. Gas prices just hit a seven-year-high, supply chain issues are causing critical shortages of essential components like chips, and the Consumer Price Index showed that inflation is at its highest rate in a decade.
There are now ways to invest in “partial ownership” over works of art. For example, the platform “Masterworks” allows users to buy at least a part of something made by Banksy or other famous artists. With modern art, this may come off as something of a gimmick. For example, in 2018, an anonymous buyer paid $1.4 million for a Banksy. When the auction closed, a shredder in the painting cut it in half. This already shredded painting just sold for $25.4 million. That’s more than a 1,700% rate of return in just a few years.
Yet NFTs may be a more practical way for ordinary people to truly own something. An NFT may sound absurd on the surface. How can you own a picture online that other people can just copy? Yet the emerging metaverse and more immersive social media networks show that NFTs will be something that people won’t just own, but use.
The “metaverse” refers to the merger of the Internet and real life via persistent, shared, and three-dimensional spaces. This is what Facebook [FB] is counting on for its next big leap, which is why it bought virtual reality startup Oculus. Roblox [RBLX] (part of the Rogue Investing Daily Model Portfolio) has released a plan for “the future of communication in the metaverse.” This includes seamless and varying modes of talking to others “not bound by the limitations of physical reality.” However, you would still have the digital equivalent of being able to speak publicly or “whisper” a private conversation.
Yet both companies are currently grappling with the issues that accompany creating a public space. A public space usually means offensive or explicit speech. FB is dealing with a public relations nightmare as the media and government are pushing for more regulation of what is allowed on its platform. RBLX may have acted to avoid this same situation when it banned “romantic” content and other speech that might lead to public relations controversies. Unfortunately, doing that also cut off a potential market as the company struggles to grow beyond its existing user base of young people.
There are no easy answers to these questions. It’s very hard to moderate what is supposed to be an “open” platform.
Yet NFTs don’t have to deal with this issue. They can exist in any platform that emerges. They can exist as static items. They could also serve simple practical purposes in gaming environments or social media. It’s easy to imagine a booming market in avatars or unique items in a game. The easiest way to capture value here is to control the marketplace for these items, not necessarily have to worry about the way they are used.
Here, COIN has taken a major step in establishing itself as the on-ramp for this entirely new market. What’s more, you can see the impact even within the cryptocurrency market. NFTs operate off Ethereum, and ETH has been outpacing even Bitcoin’s rate of growth in recent hours.
Perhaps “The Flippening,” the point when Ethereum becomes more valuable than Bitcoin, isn’t as fantastic as it once seemed.
Mr. X is an investment analyst working in the Washington DC area who specializes in the intersection of business and public policy. After fifteen years working in politics, he writes on a classified basis for RogueInvesting.com three times a week to bring you news on what those with power are debating, planning, and doing.
