I met a lawyer friend at a Starbucks last week because I’d been thinking a lot about cryptocurrencies and why people are attracted to them.
Raul is a small-time investor in digital coins. He’s also a good storyteller and has a probing curiosity about shady people and their works. So talking with him for an hour or so over a $2 bottle of water seemed like a cheaper, more enjoyable way to get a feel for cryptocurrencies than actually buying one.
If you bought a Bitcoin early Wednesday, it would’ve set you back $11,421. Ethereum? $396. Litecoin? $59.
By the time you read this, who knows what any of them will be worth. Even before the pandemic, Bitcoin was prone to wild swings. The currency hit $17,436 on Dec. 15, 2017. Less than two months later, it had sunk to $7,987. Since then, its price chart has looked like an EKG.
One big reason for cryptocurrencies’ volatility is — it’s backed by what, exactly?
“This isn’t backed by anything but a person’s faith,” he said.
That isn’t entirely accurate. Some of the newer cryptocurrencies are anchored to real-world assets such as real estate and gold. Some are tied to the U.S. dollar and other fiat currencies.
Still, Raul’s point is valid: A lot of coin buyers’ zeal comes down to faith. Faith that their investment will retain its value or become more valuable. That they’ll be able to use their digital currency to buy goods and services (enough of them, anyway, to make it worth their while). That the main exchanges where they can trade in cryptocurrencies, such as Coinbase, are open and transparent, more or less.
Another part of the allure — maybe the largest part — is anonymity and the fact that government regulation of digital coins is tissue-thin or nonexistent. Which is why some digital currencies are backed by the full faith and credit of the Russian mafia.
A 2019 study — called “Sex, Drugs, and Bitcoin: How Much Illegal Activity Is Financed through cryptocurrencies?” — concluded that one-quarter of digital coin users are to up something illegal. Another finding: Nearly half of all crypto-transactions, totaling $76 billion annually, are for drugs, prostitution and other black-market stuff.
But the study’s authors also observed that “the illegal share of Bitcoin activity declines with mainstream interest in bitcoin.”
Cryptocurrencies are inching toward, if not respectability, at least broader acceptance. Raul’s dabbling in digital coins is a pretty good indicator of its evolution.
It’s important to note here that Raul is a financial thrill seeker. He admits it. When he discovered online poker, he bought a bunch of books on the subject and availed himself of a few offshore poker sites.
He faithfully contributes to his IRA account, thinking ahead to his retirement, and he personally manages a basket of blue-chip stocks, which he rarely trades. But where’s the excitement in that?
Raul sets aside between $10,000 and $15,000 to play around in cryptocurrencies — as an investor, not an actual user. “It’s money I would have taken to Vegas,” he said.
Digital coins have replaced his passion for penny stocks, those thinly traded securities sold by desperate, or sometimes just plain fraudulent, companies that nobody knows anything about. Most of these stocks are dogs, but every now and then one of them pays off handsomely.
It was the crap-shoot aspect of penny stocks that Raul liked.
Sometimes clients go to him for advice after hearing pitches for can’t-lose investment schemes. Raul’s recommendation is almost always: Do not do it.
“I’m a lawyer — I don’t trust anybody,” he said. “If it’s that easy to make money, why do they need your money?”
Similarly, he doesn’t recommend spending any of your real money, the kind that pays for your household and other living expenses or your retirement, on cryptocurrency.
The rich among us? Go nuts.
They’re not doing that just yet, but they’re getting a little interested. In its “2020 Crypto Hedge Fund Report,” the accounting and consulting giant PwC noted the funds that trade solely in digital coins doubled their assets under management between 2018 and last year, from $1 billion to $2 billion globally.
That’s still a blip in the world of professionally managed investments. For a little perspective: a single San Antonio investment firm, Victory Capital, reported assets under management totaling $129.1 billion as of June 30.
I put in calls to several mainstream investment advisers in San Antonio, but didn’t hear back, except for one who administered a very polite brushoff. I read their silence as a kind of judgment on cryptocurrencies — as high-risk, squirrelly investments they’d rather not be associated with.
The thing is, the shadow financial system that’s taking shape so quickly online, mostly beyond the reach of any sovereign nation, is a reality they’ll have to grapple with in the near future.
Just look at what Facebook contemplated. The social network that everybody hates and uses came close to establishing its own cryptocurrency system, called Libra.
Think of the titanic financial-market disruptions that could have created, as well as the global regulatory tie-ups. That’s not to mention the political crisis that Facebook would have set off by grabbing so much power for itself.
Not surprisingly, Mark Zuckerberg and the project got blistered, with a lot of the attacks coming from lawmakers and regulators, and Facebook backed down. It’s retooling Libra as a digital payment system, kind of like PayPal or Venmo, but with coins pegged to the national currencies of the countries in which the transactions take place.
Raul also hated Facebook’s designs on the crypto-world, but not primarily because of the potential for a corporate assault on national sovereignty — like a modern-day version of the East India Company bringing India to its knees.
He shuddered at what Facebook could have done with the juicy details gleaned from each Libra transaction.
He wants governments and Big Business to keep their hands off cryptocurrencies. But as the coins increasingly enter the mainstream, that’s as unlikely as conventional investment managers thinking they can ignore them indefinitely.
Maybe that’s why Raul talked the way he did about the future of digital currencies.
He sounded a little wistful when he said, “Part of the attraction is the risk, the potential for it to go crazy.”