FLASHPOINTS #2: Is Crypto a Bubble Or Is It The Future?

An interview with Marc Rubinstein

FLASHPOINTS is a series of e-mail conversations with experts on complex and contentious topics. In each edition we pick a knotty question and talk it through with someone who knows their way around it. The aim isn’t to persuade you of anything, but to help you think about it: to understand the relevant evidence, hypotheses and arguments. Last time, we investigated the gender gap in mental health with a scientist who has studied it. This week we’re looking at a question that generates controversy and moves money: cryptocurrency.

If you need an explainer on crypto there are plenty of decent ones online, like this one or this one. In short: a cryptocurrency is a currency that circulates without any central monetary authority. Digital assets are created through encryption; users can buy and sell them anonymously. A record of all transactions ever made is kept on the ‘blockchain’, a distributed ledger. There is no need for governance, or for trust in banks, since the blockchain effectively tells everyone who can do what. Crypto can be used to buy things, although more often the various currencies are used as investment vehicles. Some experts believe crypto means the end of banks and the transformation of our financial system; others worry it’s simply one big chaos machine.

Should we all be investing in crypto, or should we be running away screaming? I can’t answer that but I want to help Ruffians think about it and there’s nobody I’d rather have talk us through this subject than Marc Rubinstein.

Marc is a former hedge fund manager with over 25 years of researching and investing in financial services companies. Now an independent investor, he writes a weekly newsletter on the financial sector, called Net Interest, which is how I got to know his work (Marc is also a Ruffian subscriber). If you have even a passing interest in finance and investing, Net Interest is a must-read. Marc not only has very deep knowledge of his subject, he writes about it with a calming lucidity and elegance. I can read him on the most arcane aspects of finance and come away feeling that I’ve at least half-understood what’s going on. Sure enough, the conversation I had with him on crypto is fascinating and illuminating.

Hi Marc. When did you first become aware of crypto and how has your thinking on it changed since then?

I remember it well! It was back in 2013. I was a partner at a hedge fund based in Mayfair at the time. My fund invested in banks and financial institutions around the world. We’d been active through the financial crisis and we were now attempting to navigate the Eurozone crisis. At the beginning of 2013, banks in Cyprus were in a lot of trouble and had to be bailed out. As part of the bailout, a deposit levy was introduced, crushing uninsured depositors. The panic sparked a flurry of interest in Bitcoin, which was touted as an alternative store of wealth that governments couldn’t get their hands on. This was the first time I’d heard about Bitcoin. I then saw on Facebook that an old school friend had mined one! I downloaded Satoshi Nakamoto’s white paper and read it through.

For a long time I was extremely sceptical.