Bernstein's Michael Parker probes cryptocurrencies and asks if you're paying for everything via your smartphone, why does the currency in which you are paying matter?

By Gareth Vaughan

In a world where you can pay for most things via your smartphone, does it matter which currency you are making payments in?

So asks Michael Parker, the ex-pat Kiwi who is the Hong Kong-based managing director, strategist and deputy director of research at Bernstein. In a research note published with colleague Jodie Huang, Parker looks at cryptocurrencies, acknowledging he has been a sceptic on the likes of bitcoin, ethereum and ripple.

His scepticism stems from three key reasons. Firstly, Parker says it seems to be impossible to assess demand for cryptocurrencies. Secondly, he says it seems almost as difficult to assess supply. And thirdly, Parker argues that for cryptocurrencies to make sense, a sufficiently large percentage of the population has to believe a global, widely adopted system of cryptocurrencies will be better than the current global, widely adopted system of fiat currencies.

Then there's the anti-establishment angle. Cryptocurrencies as a critique of the Quantitative Easing (QE) or money printing undertaken by major central banks in recent years, and the hold that the financial services industry is believed to have over the levers of political power globally, makes sense.

"[But] it would make a great deal more sense if we had spent the last 10 years in a global depression purchasing groceries with wheelbarrows full of fiat currencies. We did not. Yet the political events of 2016 hint at a rage consistent with a collapse in faith in the western financial system. Perhaps cryptocurrencies are best understood as the [financial] market equivalent of the Trump Presidency and Brexit. A percentage of the population (a surprising - to me - large one) in developed markets really does wish to burn it all down," says Parker.

"The one caveat to my initial scepticism is that, in 2018, cash is dumb and your phone is smart. When you can pay for everything on your phone, why does the currency in which you are making payment (dollar, pound, euro, renminbi, bitcoin) matter? And if it can be any widely-accepted medium of exchange, when you are buying coffee at Starbucks in Hong Kong with a French credit card, why does it have to be a fiat currency?"

"There are systemic risks that governments would have to address if cryptocurrencies become ubiquitous, - like the end of monetary policy. All that is for later. For now, the only thing that matters is that some percentage of the global formal economy (Exhibit 6 below) are staring at bitcoin and hearing the Call of the Wild. Revolutions have been built on less," says Parker.

Of the three reasons noted above as to why Parker has been sceptical about cryptocurrencies, he maintains the third reason is the most important. Delving into this in more detail Parker says the starting principle of cryptocurrencies and blockchain is that it's an unregulated system where the ledger, the blockchain, is maintained in multiple locations globally and updated continuously without the approval or control of any governmental body or authority.

"No government can seize cryptocurrency, or block a transaction, or act to depreciate its value. There is no reliance on a bank or banking system to transfer funds and therefore no ability of those banks to charge fees for transfers. The key question is whether you, and a large number of others, think all of that is a good thing," says Parker. 

"Yes, fiat currencies create havoc where the government issuing the currency expropriates value from those holding the currency. We have previously documented the 30-odd occasions over the last 40 years where governments have manufactured depreciations or devaluations and extracted value from their citizens in doing so (Exhibit 5 below)." 

"Obviously, anyone holding a large percentage of their net worth in Argentine pesos in 1982 or 2002, the Mexican peso in 1982 or the Russian ruble in 1998 would feel aggrieved and very sympathetic to the idea of a cryptocurrency that operates beyond the reach of any government. And it happens closer to home too. The British pound exited the Eurozone's Exchange Rate Mechanism in 1992 and depreciated under an attack on the Bank of England orchestrated by George Soros. The loss of value against the dollar was 29.2% at the most extreme and the currency did not fully recover until 2006," says Parker.

"Maybe this is the Rorschach test: to me, this fear of government action to expropriate value from citizens feels like aluminium-foil-on-the-head paranoid… although I have lived through two of them (New Zealand, 1984; QE). What is not theoretical is the fact that - according to The New York Times - the world's most successful cryptocurrency investors, Cameron and Tyler Winklevoss, secure their keys to their bitcoin wallets by cutting up print-outs of these numerical 'keys' and then leaving them in envelopes within safe deposit boxes around the US, ensuring a single thief would never have the entire key," writes Parker. 

"At least when I consider the likelihood of these two risks playing out - a libertarian fever dream of a mendacious government seizing assets from the citizenry versus a bad actor thwarting a Cluedo-level of security and stealing a billion-dollar fortune - it makes me want to continue throwing sticks at zebras and simply accept I will inevitably be eaten by a lion. But maybe that is just me."

We welcome your help to improve our coverage of this issue. Any examples or experiences to relate? Any links to other news, data or research to shed more light on this? Any insight or views on what might happen next or what should happen next? Any errors to correct?

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41 Comments

I'm wondering if the Cyrptocurrency thing is already burning out. Looked at coin market cap earlier today and it looked like 80% of the top 100 cryptic were down for both the 24hr and the 7day periods. Not exactly booming.

Blockchain and Cryptocurrency are here to stay. What we will see in 2018 is a consolidation phase, which was absolutely required after speculative 'cash grab' at the end of 2017 (hence price recession). The transition and iteration of platforms and coins has started. The move from ideological to utility and use is now.

What does this mean? We will see a handful of winners, that is it. There are some amazing platforms and products that are already being used in real world financial settlements that drive efficiency and effectiveness. Do your own research, view this asset class as Gold Bullion and Silver, look at total addressable market, management team and the ability to implement network effect through pre-existing relationships (you will be surprised how deep Crypto is already intertwined with the biggest of businesses).

Sure they will, it is not like technology can radically change over a 5-10 year period as better solutions come out. The cryptocurrency market will stay frozen in relevance like this forever... unfortunately we have proof that even in the last couple of years the market has become less a concise set of divergent currencies to transact in and more just a high risk speculative market of clones. Where exchanges push crappy code straight to production without basic testing, staging or even a production rollout switchover with backups ready. It is all so technically embarrassing in this day and age. Even a junior engineer should know better. Even a blog site would have more skilled admins. But in speculation and FOMO fever you can sell anything to anybody with the right marketing wrapper. Even Kodak was able to reap customers money with a tiny brief. How about opening up a video rental business with blockchain ICO, you could call it Blockchainbuster... yeah. It will stay exactly like this, with this technological cryptocurrency road crash forever.

I think you lost your point somewhere in this rant. Maybe rewrite it more concisely. 6 out 10

So your argument is a statement that you have an inflated sense of self importance, lacking in communication skills and an inability for technical & financial conversation? You know they do have classes in schools to help with that.

You did it again. 3 out of 10

Ii commend interest for recognising scepticism as well as the establishment view.
And written with undertones of humour..
Depreciation of a range of currencies ...gotta laugh..i thought like real estate they only went up...or down...

“Journalism is printing what someone else does not want printed: everything else is public relations.” (Orwell)
Reminds me of a conversation I was having on this very site yesterday....

There's fraud at every turn with cryptos.
http://behindmlm.com/companies/usi-tech/usi-tech-suspend-withdrawals-18-...

Why don't financial publications provide coverage of extensive fraud using cryptocurrencies?

There is extensive fraud across all industries, professions and where any money exists anywhere in the world. It's more of a human being thing, than a crypto thing. Obviously a newer, less regulated financial area will suffer more fraud, as would any other area in early stages. People find something that they can take advantage of (whether that be, no Capital Gains Tax in NZ or individual or corporate tax evasion using tax residency in lower tax countries, for instance) and they milk it. How long do you think the Panama gig was ongoing? How long did it take financial publications to write about that?

The funny thing about the Panama / Virgin Islands / Cayman Islands thing is it was all set up during the cold war to allow US friendly dictators in Africa and the Middle East to get their ill gotten gains out and into the financial markets of Britain and the US. According to Michael Hudson anyway. So set up by the US government to serve US foreign policy. Presumably it is still in service today. Corruption needs a blind eye to be turned, either willingly or otherwise.

It is the duty of all citizens to pay as little tax as possible.

That doesn't make any sense. 3 out of 10

You got the 3 points for keeping it concise

You missed the point of it being a quote and the referenced humour. Look I know communication and searching for things online can be hard for many, but you seem to display a lack of comprehension that is quite humorous if it wasn't so pitiful.

What part of the above is a quote? Who was quoted? There is nothing in this sub-thread to indicate a quote that I can see. I assumed it was "It is the duty of all citizens to pay as little tax as possible.", but google finds nothing much. The best match is

"Anyone may arrange his affairs so that his taxes shall be as low as possible; he is not bound to choose that pattern which best pays the treasury. There is not even a patriotic duty to increase one's taxes.
Over and over again the Courts have said that there is nothing sinister in so arranging affairs as to keep taxes as low as possible. Everyone does it, rich and poor alike and all do right, for nobody owes any
public duty to pay more than the law demands." -Judge Learned Hand

Which really is not the same thing.

So you found the original prior to paraphrasing & reuse and numerous links thereof in paraphrased and non paraphrased versions, but missed the current references of it being used by very orange handed figures.
For you Pragmatist https://xkcd.com/1942/

I love being told I have an inflated sense of self importance by people who are a model of these attributes =) I think its like a sense of achievement maybe.

Also, you missed the point again, 2 out 10
extra 1 point deduction for referencing a terrible source

It's the duty of all plebs to pay the taxes, and the duty of those who can afford to, to avoid them.

Rick,
You've got it. Most of us can't afford to hire Very Expensive lawyers and accountants to minimize our tax bill. I spent my working life in the investment business and remember well organizing a scheme to help an already wealthy family avoid a multi million pound Capital Gains Tax liability through a highly artificial but legal scheme. Only a short time later,the Courts decided that these schemes could be 'looked through' in order to determine whether or not the main purpose was to avoid tax. That was the right decision and I have long since ceased to be proud of my part in these tax avoidance schemes.

and bleed the State for as much health care, education, welfare, police/safety, infrastructure use etc as possible.....nice person.

Don't get involvedlwith anything financial that you don't understand.
Seems to me the promoters of the crypto thingees don't even try to help you understand. It's 'trust me, it's magic"
I got better stuff to do.

Crypto is in the Cambrian Explosion phase: numerous body types/applications/configurations.

And as the CE wore on, evolutionary forces whittled down the incredible variety to the tune of 95+%: most of the more exotic body forms were - buzzword alert - Unsustainable.

Perhaps Interest could run a sweep on how long the expansion phase of cryptos will last. My own guess is that it will run a lot longer than most would credit, but that the collapse/whittling phase will be, like bankruptcy in Hemingway's characterisation, Gradually and then Suddenly.

I'll make a punt....

At the moment coinmarketcap has 39 coins/tokens with market caps of a billion USD or more. By the end of 2019, there will be less than 10. None of them will be big enough to really be of much use as a day to day currency, ie. I wont be pulling into the petrol station and seeing XYZcrypto accepted here anytime in the next 5 years as a regular occurrence.

The ultimate winner in the cryptocurrency (as a real widespread currency) space doesn't exist yet. It may come from one of the existing ones that undergoes a lot of hard forks and development, but it will have a different name, it wont be anonymous, the authorites will have a way to find the owner of an address if they want to.

Actually, after a brief rethink.. there will be more than 10 with a billion dollar market cap. But still only 10 with $10B or more.

@Pragmatist - I think you are there or thereabouts on the number. However the values are wrong from my perspective (albeit on a crude measurement of value in Market Cap), I think total Crypto will top roughly 1.5 Trillion by the end of 2018, with number one +500bn, two through three 250bn and five through seven +100bn. This would mean this asset class will be roughly 20% of Gold and 1.5% of total Broad Money, completely sensible numbers to me*.

There are two major reasons for this; the first being accessibility, we are going to see more regulated and effective exchange corridors. These will either be developed specifically by new organisations or by current financial institutions. I know of two that have the resource, people and connections to deliver on their plan in Q1 2018.

The second, market cases backed by results that has actually improved overall profitability for big business. Right now we are still dealing in pilots and tests, without any hard data on what the overall impact to business has been, once we get results and earning reports driven by this asset class, mainstream adoption happens.

I have a vested interest, so take the above with some skepticism.

*Source: http://money.visualcapitalist.com/worlds-money-markets-one-visualization...

Supertramp song Dreamer comes to mind

I think the most important point in there is talk about filling up your car. The worlds economies run on energy, and to buy it you need USD.

Terrible, dog-whistling and contradictory article, from an out-of-touch old boomer who clearly has minimal understanding of the asset class.

He says that it's "tin foil hat" to refer to Central Bankers erosion of fiat currency, then points out how many times in recent history it has happened. But he did leave out the fact that it's an explicit current aim of the monetary authorities around the globe. Not to mention the extreme levels of public and private indebtedness that underlie the government issued paper.

Why would anyone have "faith in the western financial system" under such circumstances?

*Not to mention the extreme levels of public and private indebtedness that underlie the government issued paper.*

You think changing the form of currency is going to make the public debt go away? Trading dollars for bitcoin isn't going to get rid of your share of the debt, or stop the govt reaching into your pocket to extract "money" of some form to pay for it.

At least if we implement QE or reduce interest rates, then that'll only make cryptocurrencies worth more relative to the NZD. There's absolutely nothing wrong having some form of value that's outside the control of central banks.

We already have gold, and the ability to trade in currencies that are outside the control of whichever govt you are scared of. And bonds and commodities futures.

It does depend on how you classify NZ company, e.g. registered in NZ, operated in NZ by foreign arm, etc. NZ is particularly favourable to ICOs not having regs for them yet. Plus the ICO did get to sell out with not a lot more than the brief and the pants they are wearing. But the value is low in respect to other coins, about Ink, Namecoin and Coindash level about 200 down the list.

Hey if you have any interest and about 30min you too can create a coin. They are sold a lot like the Kickstarter projects were the initial donated money is without guarantee of value (i.e. not tied to a product, IP, IPO or company value). Much like Kickstarter though it is the media communications & hype which matters most and often customers can be left holding mere thin air at the end of the day.

Actually it seems Stuff misreported the est coin value by the company @ $262,000,000USD, which brings them to 100 down around BitcoinDark, Bitcore, and Emercoin level. But this would be after repeated rounds of funding. Another success for the Blockhaus sales app used. Centrality coins could be used in their procurement app. Like White House Akl dollars, game currency or casino chips. Most Centrality scene app plugins for their system are local travel & rental vehicle based initially. But there are some other apps they are onselling. Blockhaus might be the more successful web service offering.

For ICO comparison
https://longcatchain.com/ico/centrality

Whitepaper for Centrality, I would recommend reading it if you have a black humour & a bit of tech skills. Pages 30 onwards is where the ICO part & risk is outlined
https://www.centrality.ai/wp-content/uploads/2018/01/Centrality-Whitepap...

How long till we see these cryptos collapse like this https://www.coindesk.com/3-pre-bitcoin-virtual-currencies-bit-dust/

Well there will be a long time for worm to turn, many ICOs crash and burn after the major sales but the existing top currencies with corporate support may be in use for another few years with life support. Many are just web service start ups so like most early funders they may see none of their investment retain the value after a couple dev cycles. The Kickstarter platform was a little bit kinder to early investors allowing them some realised benefit initially, but it pales in comparison to an IPO. Really the coin market movement is mostly down to the whale movements, hype & the exchange development, (as exchanges control the movement of funds, new currency trading adoption, the entrance requirements, the level of fees, level of security and attacks, customer protections or lack thereof etc).

Some crash and burn. Many were pump and dump ;-)

1) Re “a sufficiently large percentage of the population has to believe a global, widely adopted system of cryptocurrencies will be better than the current global, widely adopted system of fiat currencies” – or do they just mean they think they can make short terms gains by buying some betting on it – the “tulip” effect.
2) Re “why does it have to be a fiat currency?” – it doesn’t but who knows who really is pulling the strings on cyrptos? Why any more trustworthy? Who the hell is producing this stuff and for what reason – philanthropic ? Yeah right. Will stand behind it at all times? Yeah right.
3) Re “There is no reliance on a bank or banking system to transfer funds and therefore no ability of those banks to charge fees for transfers.” - so the fees being charged to buy and deal in crypto don’t matter? Or are ok? Why?

It is "the devil that you do not do due diligence on" principle. They start out being an unknown vector, therefore they must be better than the known vectors. Any fraud or failings on the new vector can be accommodated so long as the experience and understanding of the market & tech is low. When cases like exchange fraud, misreporting, tech failures & market closures happen they are often treated as normal and acceptable practice (with no legal standing to ensure the customers are protected).

Essentially part of the movements after the GFC & online viral markets. More popular due to the ability to have wide fluctuations & volatility. Easy for whales to pump and dump. Plus with tech startups they can get funding without the guarantees of at least selling shares, IP, products etc. Far better than Kickstarter etc. So for tech startups they are very popular. Frankly I am surprised they have not saturated more into the industry.

Oh crap, argh, a drop like that in an hour is going to be spamming the tech news, gah. Even the stories about the turtle egg gender shifts & botched windows updates are far more interesting than another 15% fluctuation in volatile speculation markets. What is even worse is these markets just increase the need to stay on top of hourly fluctuations for buys/sells. A horrible habit.

Bugger, the family are going to call tomorrow with more should I sell questions, I was trying to avoid them for at least another week (xmas/new years qs were enough). Might as well write the rote email guide to create/update the stop limits and wait a bit. 12000 wall my ass, whomever believed that was counting the chickens before they hatched.

Peter Schiff reckons its junk - will head to zero
https://www.cnbc.com/2018/01/16/cryptocurrency-sell-off-bitcoin-and-ethe...

None of the crypto can be used as a currency with such wild movements on a daily and weekly basis - it’s just a mania no different to kids trading baseball cards