This article was written exclusively for Investing.com
- Michael Lewis understands markets
- A warning the crypto asset class could go up in smoke
- It’s a real possibility: Ray Dalio
- Control is the central issue
- Only invest what you are willing to lose
Author and financial journalist Michael Lewis started his career at multinational investment bank Salomon Brothers in the 1980s and worked as a bond salesman for a few years afterward. His first successful published work, Liar’s Poker, chronicled his experiences on Wall Street during that period and highlighted many of the flaws in the financial system.
He's written many books since, often with a focus on the faults and anomalies in the US financial or political system, including such best sellers as Boomerang, The Blind Side, The Big Short, and Moneyball.
The author recently commented on the burgeoning cryptocurrency asset class after watching the raging debate between supporters of the libertarian form of currency and its skeptics over the past years. Lewis has a fascinating, even-handed perspective on the situation as he watches from the sidelines.
Lewis Understands Markets
It's no surprise, therefore, that this author with a solid background in finance has now commented on cryptocurrencies.
In his podcast, “Against the Rules,” he said:
“Crypto is an act of faith—like gold, like the dollar.”
Gold is the world’s oldest means of exchange, dating back before biblical times. Gold’s value comes from a long history of faith that the metal is a store of value and a symbol of wealth. Central banks and governments validate gold’s role in the worldwide financial system as they hold the metal as an integral part of foreign exchange holdings. Over the past years, governments have been net buyers of gold as the price rose from $252.50 in 1999 to more than $2,000 per ounce at the most recent high.
The US dollar has been a fiat currency since the early 1970s, when President Richard Nixon took it off the gold standard. The value of fiat currencies comes from the full faith and credit in the countries that issue the legal tender. The stability of the US political and economic system has made the dollar the world’s reserve currency. Lewis puts gold, the dollar and crypto values in the same category—an act of “faith.”
Crypto Asset Class Could Go Up In Smoke
Religion, faith—or a strong belief and trust in God or religion’s doctrines—is based on spiritual factors rather than empirical proof. Lewis warned that the faith-based cryptocurrency asset class “could all come crashing down” as faith can be fickle.
It’s A Real Possibility: Ray Dalio
Ray Dalio, one of the most successful hedge fund managers, has called the ascent of the cryptocurrency asset class “very impressive.” However, he has also said:
“If it is really successful, they will kill it and they have ways of killing it.”
The “they” Dalio refers to are governments.
In broadcasting his opinion on cryptos, Lewis essentially agreed with Dalio's assessment, saying the same thing albeit perhaps more gently:
“It’s hard to judge—impossible to judge—whether that faith is sustainable or not. But the longer it goes on, the more of a threat it poses to the existing financial order.”
Central Issue Is Control
Lewis isn't wrong. In general, governmental power comes from the military which supports leadership and control of the money supply which is an integral power source, allowing leaders to expand or contract the money supply to achieve economic dominion.
Cryptocurrencies present an ideological dilemma for countries since they return the power of the money supply to the collective marketplace. Crypto values are solely a function of bids and offers for the tokens.
Though there's widespread support for Blockchain technology because it improves efficiency, record-keeping and transaction speeds, cryptocurrencies are less well-liked or trusted, notwithstanding they're based on the same Blockchain technology. As Lewis points out, they truly are just a leap of faith on a number of levels for interested investors.
He then went on note some positives about the digital asset class:
“[It] eliminates middlemen. If you are trading on a cryptocurrency exchange, you have an account with the exchange; you don’t account with a broker who’s moving your stuff in and out of the exchange. There are no high-frequency traders who are paying the cryptocurrency exchange for faster information about the exchange. The whole jerry-rigging of the stock market isn’t happening here.”
Though Bitcoin (BTC) was the first cryptocurrency, today, over 19,100 other tokens are floating around in the asset class that has grown exponentially. The same two factors that boosted BTC from five cents in 2010 to nearly $69,000 per token in November 2021 remain a catalyst for the entire asset class—ideology and speculation.
Anyone investing in cryptos should note those catalysts and heed Lewis’ warning. It could "all come crashing down.” Thus, only invest capital you are willing to lose. The potential for oversized rewards comes with commensurate risks.