Silver as an investment

Novogratz Slams Dimon: Buy Bitcoin Because “We No Longer Trust Financial Institutions”

It must be a sign that cryptocurrencies are becoming mainstream when Bloomberg TV launches the first of a six-part series on this comparatively recent innovation. Setting the scene, Bloomberg replayed comments made in interviews from what it described as “Wall Street sceptics”, including (not surprisingly) JPMorgan Chase’s Jamie Dimon, Neil Dwane of Allianz Global Investors and Severin Cabannes, SocGen’s Deputy CEO. The vignettes were peppered with sound bites like “index of money laundering” and references to tulipmania, as well as the standard establishment narrative of “blockchain over Bitcoin”.

In the studio was high-profile crypto advocate, Mike Novogratz, of Galaxy Investment Partners, who is setting up a crypto investment fund (believed to be in the region of $500 million).

The Bloomberg reporters asked why he’s so bullish on the space when some of his peers, like Dimon et al, are the opposite.

You might have noticed all of those guys are over sixty and I’m not. There’s some truth to that. It’s very difficult for someone who didn’t grow up in a digital world to actually understand how we could be moving into a digital world.

We know Dwane and that’s a bit harsh. However, this was Novogratz’s take on why Bitcoin has value.

Bitcoin you can look at as digital gold. What is gold? Gold is precious metal. It could have been copper, there are lots of things on the periodic table, but way back people chose gold to have value. It has value solely because people say it has value. Bitcoin is built on an amazing technology, there’s limited supply of it, people are trusting it.

Probably the most insightful part of the interview was Novogratz’s explanation about the rationale behind the crypto revolution – which was the perfect retort to the likes of Jamie Dimon and SocGen’s Deputy CEO.

Remember, this whole revolution came out of a breakdown of trust. It came out of the ’08 financial crisis when people said we no longer trust financial institutions, we don’t trust governments and, in parts of the world, today still. If you’re in Venezuela, it’s really hard to trust the central bank, or in Zimbabwe. So, the decentralised revolution, which Bitcoin is really the poster child of, is a response to the breakdown in trust.

The number of people calling out Domon for his Bitcoin view is growing. Morgan Stanley's CEO, James Gorman, said that Dimon was wrong about Bitcoin while our favourite pushback (before Novogratz) was Macquarie's head of AsiaPac equity strategy, Viktor Shvets. In "Macquarie Lashes Out At Dimon: "Modern Finance", Not Bitcoin, Is The Real Fraud", we quoted Shvets.

When a number of financial executives recently described Bitcoin as a “fraud” akin to the tulip mania, it exhibited their apparent lack of appreciation of fundamental shifts that are altering global monetary and financial systems. If one describes Bitcoin as a fraud, how would one describe a ‘financial cloud’ that is at least 4x-5x larger than the underlying economies? It is unlikely that US$400 trillion+ of financial instruments circulating around the world would ever be repaid and most are now backed by assets that are already either worthless or are diminishing in value. How does one describe rates and  the yield curve that are either directly determined by CBs (BoJ or PBoC) or heavily influenced by them (Fed or ECB)?

Back to the Novogratz interview and the Bloomberg reporter asked “Is it an investment, or is it a trade?”, citing the theft of Tether tokens overnight and the knock-on effect on Bitcoin volatility.

“We are in the second or third inning of this revolution, so these are very young experiments. Each of these coins are individual eco systems, with their own use case. Bitcoin, the largest, is really the decentralised system of money, the decentralised system of the store of wealth. But there are thousands of coins, thirty or forty decent market cap coins that have their own system. Because prices have moved so far, like in anything, people are nervous so you made a whole lot of money and there’s news, you book your profits and get out.

This didn’t satisfy the Bloomberg anchor who pressed Novogratz “People lost millions of dollars they’re not going to get back. How does that not put the whole model into question?”

The total market cap of the crypto space is about a quarter of a trillion dollars and $30 million got hacked. So, it certainly gets people nervous. We spent a lot of time think about security of our coins, how to custody them, how to keep them safe. A few year ago, when I had a smaller amount invested, I spent a lot less time.

After the Tether hack, the Bitcoin price rebounded to a new all0time high.

The Bloomberg reporter noted that Etheruem reached about 35% of crypto market cap earlier this year, before drifting back to less than 20%, while Bitcoin is almost 60%. Novogratz sees Ethereum making a new high shortly.

While Ethereum really had an amazing run, from a dollar two years ago, up to $400 and Bitcoin stayed on the sidelines, then Bitcoin had a big move. I think right now, for first timers entering this market, I think Bitcoin is the name they’ve heard of and that’s really kind of driving that move. Just in the last few days, Ethereum has started to move, I think it’s going to put in a new high soon. There’s a lot of positive things happening in the Ethereum eco system.

Asked about his price projections for the two leading cryptos.

I think we end the year at $10,000 on Bitcoin, so that’s a decent move from here. I think we end the year at close to $500 on Ethereum.

Novogratz would not be drawn on the size of his crypto fund.

The SEC doesn’t allow us to talk about fund raising, so I’d get into big trouble. People have been interested and receptive.

Bloomberg asked him whether he’d made any bets on the recent plethora of ICOs?

Sure. We’ve been betting on lots of ICOs. I’ve got a bet on WAX which is coming up. It’s a token that’s going to try to decentralise the market place for “skins”, which are the clothing, shields, swords, helmets, which gamers buy to make their avatars look prettier.

This was too much for one of the Bloomberg reporters which, given Novogratz’s wry smile as he was saying it, was probably the point. He continued.

How about this. There are more people that buy and sell digital clothing than there are that buy and sell Bitcoin and the rest of the cryptocurrencies combined.

And to cries of “What?” from the Bloomberg reporters.

It is a giant market.

Still discombobulated by the size of the skins market, the Bloomberg anchors seemed satisfied that Novogratz had given them some punchy price forecasts. However, they should have pressed him a bit harder as he told Reuters TV a week ago that Bitcoin would hit $10,000 in 3-6 months and $20,000 by the end of 2018, when the crypto market in aggregate would be worth $1 trillion. So, apart from bringing forward his $10,000 forecast slightly, the price projections weren't that punchy.