Investment

Charlie Munger says cryptocurrencies are a disease, many family offices think otherwise

Savers, rich and poor, are turning to bitcoin to protect their life savings from the ravages of inflation and exposures to stressed fiat currencies.

Crypto is becoming more popular in emerging markets with rocky economies. There was a 900% in global adoption for the year to June 2021, according to an index created by Chainanalysis.

Family offices and institutions were queuing to back crypto ventures at scale in the second half of 2021 and the trend has carried into 2022

Family offices crossed the Rubicon to invest in bitcoin 15 months ago – see Family Capital article. They continue to raise their allocations to crypto, including bitcoin, Ethereum and stablecoins. Anthony Noto, chief executive of SoFi Technologies, is the latest to confirm a family holding to Bloomberg.

Family offices and institutions were queuing to back crypto ventures at scale in the second half of 2021 and the trend has carried into 2022, according to CB Insights. 

Adviser NYDIG raised $1.4 billion in December from the likes of Bessemer Ventures and Morgan Stanley. Previous investors included Soros Fund Management and insurance tycoon Hank Greenberg.

Sam Bankman-Fried’s FTX raised $910 million in July, plus $420 million in October, with backing from Temasek and Paradigm – co-led by Coinbase founder Fred Ehrsam. 

Crypto lender Celsius Network raised $705 million; crypto payments system Moonpay saw $555 million and two firms involved in bitcoin mining raised $420 million apiece.

Institutions, scenting profits, are keen to respond to client interest. Fidelity, run by the Johnson family, has been an early mover. Goldman Sachs and BlackRock are getting stuck in. Ray Dalio of Bridgewater has invested with the likes of Paul Tudor Jones and Stan Druckenmiller. Many investors are intensely wary of crypto volatility –  but smart investors love to trade it. Institutions are seeking leverage and hedging through crypto futures. 

Governments are reluctant to ban crypto. But they are keen to talk up their own currencies. The Bank of International Settlements, owned by the world’s central banks, has warned countries need to set up their own digital currencies to fight back. It is countries with strong reserves, like China, an early adopter, which have a good chance of winning the battle. 

But the fear of inflation is already pervasive, as governments print money to service their obligations. A flattening of the yield curve suggests that central banks will not be able to increase longer-term rates too far, for fear of triggering a recession. If stagflation is the result, this could be even better news for cryptocurrencies. It may not be money, but it is a store of value that can be traded online with ease. 

Two Ocean Trust of Wyoming says it is easily superior to fiat currencies: “Increasing government deficits funded by debt monetization inevitably lead to monetary inflation. And monetary inflation erodes the wealth of those holding fiat money.” By comparison, there are strict controls on the amount of bitcoin that can be issued. 

The Russian central bank recently thought it wanted to ban crypto. But its government was aware that its citizens had put $66 billion in it. Crypto could also offer strategic value to the Russians, plus access to cross-border trade, if the US closes its access to the global financial sector after a Ukraine invasion. 

The crypto opportunity for the Russians is tempting, according to crypto cheerleader Anthony Pompliano:  “Bitcoin is censorship-resistant money. No one can shut down the system. No one controls it. Anyone in the world can send monetary payment to anyone else in the world. There are no middlemen.”

The Russians have now agreed to regulate local cryptocurrencies as a foreign exchange. Their legislation talks of bringing “the digital currency industry out of the shadows and creating the possibility of legal business activities.” 

Ukraine, ironically, has also been generating a tidy income from crypto mining and trading. Last September it regulated the sector, with a view to making bitcoin legal tender in due course. President Volodymyr Zelensky is a big crypto fan.

The Chainanalysis survey covers 154 countries. It says citizens have become users to preserve their savings and carry out international transactions, where exchange controls exist. 

Adopters are led by Vietnam, where there is mistrust of the local currency and hefty fees are charged for overseas remittances. Rather like Russia, India, the runner up, has seen demands for a ban from the central bank, and comments in favour of greater control by the government. 

Taking its cue from president Nayib Bukele, El Salvador has adopted bitcoin as legal tender. It has said it wants to issue bitcoin bonds in mid-March, even though the IMF has warned against its use of bitcoin. 

Bukele also likes the Lightning Network, financed by billionaire Kjell Inge Røkke – see Family Capital article  – which uses the bitcoin blockchain as a free, fast near payment system in competition with Western Union, which charges commissions. 

Honduras and Guatemala have toyed with giving crypto legal status, as has Tonga. Panama is moving towards giving bitcoin and Ethereum quasi-legal status. 

Paraguay passed a law regulating crypto in December. Leading congressman Carlitos Rejala has pledged to make bitcoin legal tender if he wins the next election.

Alberto Fernandez, president of Argentina, has said he is open to the idea of giving bitcoin legal status.

Crypto is in use across Africa. Serena Williams has agreed to help fund Nestcoin which wants to facilitate the spread of digital assets, with the Lightning Network, again, a key factor in bitcoin’s popularity.

Nigeria is a heavy bitcoin trader, even though the government has stopped licensed banks dealing with crypto and wheeled out an official digital currency, the eNaira. 

Inflation in Turkey has hit 49% following President Erdogan’s refusal to hike interest rates. Turkish citizens have been buying bitcoin to protect their finances, despite Erdogan’s determination to impose a ban.

Trading at nearly $44,000, bitcoin is one of the few digital assets to have regained the ground it surrendered in January.

It remains to be seen how salaries, earned locally, can keep pace with global cryptocurrencies. But as long as its price is riding high, no one is going to worry. 

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