I have an admission to make – I’ve bought a few tracker shares in Ethereum. By way of background, a few weeks ago my office kicked off its annual stocks competition. The idea is to select a long and short combination of underlying shares or tradeable assets. My short choice was Stanley Gibbons, my long choice Hurricane Energy. But something much more interesting struck me about many of my peers’ choices. There seemed to be an overwhelming consensus on shorting bitcoin. By contrast, the most technologically aware person in the office was aggressively long ethereum. Pete – the aforementioned tech supremo – gave lots of convincing explanations about why ethereum was the better digital currency. The technical language sometimes blends into the background but the long and short of it (!) was that because it’s connected to the blockchain, and because it is NOT bitcoin, it could easily emerge as the default cryptocurrency. I’ve subsequently dug around in more detail and I have to say that I’m not particularly any the wiser about either the technology nor the relative desirability of the currency but one thing has stayed in my mind. Lots of very intelligent, smart people think that ethereum is the future. As I’ve said they make lots of convincing arguments but its that social acceptance point that sounds convincing. Frankly, if Druids created enough magic witan coins and enough people believed in their powers, it would become a default currency by choice. That’s the thing about currencies – people just have to believe in them enough and then convince their friends and colleagues to go along with their view.
At this point the vast majority of people my age – being honest the dividing line seems to be around 45 years old and up – roll their eyes and in a perfectly rational manner argue that a currency is usually boring and backed up by meaningful institutions such as central banks. By contrast, Ethereum’s shocking price volatility is the exact opposite of what most sensible people want out of currency. But ethereum, like gold – another notional currency – isn’t really the same as a dollar or a pound in my pocket i.e a predominantly trade based exchange currency.
Its a notional currency but in reality, it’s a store of value and expectations, nothing less, nothing more. Like gold, it can be used as a trading currency but that’s very far from being its primary purpose. As for the store of value definition, ethereum seems fascinating, arguably even resilient.
Over the last six months, we’ve seen a concerted attack on all cryptocurrencies by every rational economic actor – and a few irrational ones at that. Yet over the last few days, Ethereum has started aggressively ticking up in price. This price resilience in the face of an almighty (rational) onslaught is I think fascinating. It shows the huge weight of money that is still flooding into digital currencies overall. Innovations in structure and the rise of futures markets is, of course, the primary factor powering demand. There are lots and lots of perfectly sensible, even rational folks out there, who are collectively saying – “hey, there’s a tracker which I can easily buy via my broker, let’s have gamble on price momentum”. It certainly applies to me. At the beginning of the year, I found myself so convinced by my colleagues narrative that I decided to have a small, fun wager on an Ethereum ETN tracker. To my horror, the price quickly plummeted soon after I bought it and I assumed that we had reached that inevitable point of peak bubble – with a complete price rout the next logical step.
Now, a few weeks later I’m not so sure. It seems to me that the digital currency rally has much longer to run. Of course, it’ll blow up at some point very soon, but that may be next month or maybe even next year. But something quite primal is happening. A large-ish, rational chunk of the population has willed itself into believing that digital currencies are a new asset class. Whoever delusional many might find that, it’s real and undeniable. And even after that inevitable collapse I sense it won’t go away – there’ll simply be a more rational discussion of which cryptocurrency to prioritise and how to better construct a meaningful market. Taking a step back, there’s an echo of trading in volatility here. Until just a few years ago, no one could conceive of investing directly in volatility as an asset class. But then it got measured, turned into an index and then finally it morphed into products that could be used for both speculation and hedging. Everything else is history – volatility is now its own investable asset class. In my humble opinion, we’re seeing the same thing happen again. Cryptos are an alternative asset class and demand for them, maybe at a lower price level in the future, is here to stay.