By Megan O’Hanlon, Chief Macro Officer at University College Dublin Student Managed Fund
This article is based on insights from an event hosted by Dr. Paul Ennis (University College Dublin).
Having been a finance student until relatively recently, the subject of cryptocurrencies and blockchain has been on my radar since the very beginning of my undergraduate degree. In my first year of university, I was lucky enough to attend a breakfast briefing on the potentially transformative power of blockchain run by BNY Mellon, who have just recently announced plans to offer custodial services for cryptocurrencies. As part of a financial and economic history module, we debated the status of Bitcoin as a legitimate currency. In another module, about financial bubbles and crises, we examined the 2017 Bitcoin bubble. These assets have divided professional opinion, with some citing the potential financial dangers and others more keen to embrace blockchain as the next big financial revolution, and it is quite entertaining to read commentary from those who sit on different sides of the fence. Recently, on social media there has been an infestation of accounts trying to “coach crypto”, promoting trading tips and selling access to communities of the assets’ day traders. You’ll see bot comments on every Bloomberg news post on Instagram directing you to visit a crypto account that “changed their life”. These would not be endorsed by the true crypto believers, but are rather jumping on the bandwagon of making a quick buck.
In the past two weeks, cryptocurrencies have been making headlines. Mastercard has embraced the asset by announcing plans to offer cryptocurrency payments via their platform. However, the main driver of recent media hype has been none other than the twitter account of the newly-titled world’s richest man, Elon Musk. He had been tweeting about the latest “meme stock” (or asset, in this case), Dogecoin, several times before announcing that his company, Tesla, had bought $1.5million of Bitcoin and planned to accept it as payment.
Some have suggested that Musk’s endorsement of Dogecoin was simply misdirection, as he would have been unable to tweet about Bitcoin prior to the announcement of Tesla’s large acquisition of the asset. Michael Burry of Scion Asset Management, which features prominently in Michael Lewis’ The Big Short, has suggested that Tesla’s Bitcoin buy itself was a distraction against regulatory concerns in China (notably, Burry does currently hold a short position on Tesla, so he has a definite position on the company). Given Musk’s prior tweets and support of the squeeze on GameStop short-sellers, I think it’s fair to say it could be a mix of both.
Despite the wealth of commentary and its prominence as a ‘hot topic’ in the world of finance for the past number of years, the world of cryptocurrencies, as the name itself might suggest, can remain somewhat opaque to outsiders. According to Wikipedia, “a cryptocurrency is a digital asset designed to work as a medium of exchange wherein individual coin ownership records are stored in a ledger existing in a form of computerized database”. Bitcoin is the name that people are the most familiar with, as the ‘original’ digital asset, and most will remember media coverage of the bubble and subsequent bust in 2017-18. It was invented in 2008 by Satoshi Nakamoto (supposedly – he has never been tracked down!). The ethos behind Bitcoin was a decentralised, anonymised and yet transparent ledger system which would remove the need for financial intermediaries. However, there are almost 8,500 different types of cryptocurrency on the market today with a range of features. Bitcoin has the largest Market Cap, with a staggering $881bn. To put that in context, Facebook’s Market Cap is just under $770bn, so you can see why this one is still a pretty big deal.
Other coins were developed in response to the desire for different features. For example, Bitcoin was designed to be a finite and scarce resource, like gold, with a cap of 21 million coins in existence. Some in the community disagreed with this feature, arguing the deflationary pressure would be detrimental to the whole purpose and function of a digital asset – and so Dogecoin was created. Even Facebook, in partnership with a conglomerate of other firms, have been developing their own cryptocurrency, Diem (previously Libra), which is due to be launched next year. This currency would be a ‘stable coin’, as its value is intended to be pegged to a basket of other non-digital currencies.
There has been a consistent conversation in the world of business and finance for the past number of years about how blockchain, the mechanism underlying cryptocurrencies, could be adapted to revolutionise the way we do business. However, the adaptations of this have been slow. When I started my degree, most global banks had some form of Blockchain team, however small, and we are just now seeing proposals for cryptocurrencies make it to the mainstream of finance. Most people ask questions, when it comes to crypto, regarding if currency as we know it will become redundant – the answer is, according to Ennis, that it’s definitely possible, but it won’t be any time soon. Government institutions are defensive when it comes to cryptocurrencies, and rightly so, as their purpose is to avoid government regulation, and there is a serious question about security and consumer protection. These currencies, as they stand, are much better suited to the communities of people they were designed for, rather than the general public. Indeed, they were also designed to avoid intermediaries, and yet financial institutions, and other businesses have been seeking ways to get involved and capitalise on the new asset class. Central Banks could even develop their own digital currencies in the future, although this could pose risks to financial stability, and isn’t exactly a popular idea currently (Quinn, 2021).
The currencies and the technology which backs them are at their innovation phase, and it’s my guess that the change they bring will probably not be as simple as swapping real currency for a digital one – only time will tell what the technology can become.
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UCD I&E Student Managed Fund
The UCD Student Managed Fund (SMF) is a non-remunerated organisation which carries out a function similar to that of professionals in the fund and asset management industry but on a smaller scale and under the guidance of industry experts.