Gravedancing On Crypto

Hey, how is the cryptocurrency market doing?

Early June brought us some news. Three big pieces of news in fact.

First, the US Securities and Exchange (SEC) sued US-based cryptocurrency exchange and public company Coinbase for violating securities law by operating an illegal securities exchange. 

Second, the SEC sued Binance, the largest cryptocurrency exchange platform globally, for violating securities law by operating an illegal securities exchange and also for misusing customer funds. The iconoclastic multi billionaire founder of Binance, Changpeng (CZ) Zhao, was also personally charged for securities violations.

Third, the SEC declared 10 additional cryptocurrencies as securities, a designation that makes trading in them in the United States subject to SEC regulation. Interestingly, the two cryptocurrencies in widest usage – Bitcoin and Ether – were not declared securities.

Look, I don’t want to gravedance on the crypto market but –

Ok, fine, I do want to gravedance a little bit.

During the hype times of crypto – especially the 2019-2022 years – I tried my best to never mention crypto because media coverage of crypto was itself a big part of the hype problem. Now, as crypto fades from view, I mostly still don’t want to talk about it, but I feel like there’s some value in a post-bubble post-mortem. If we can understand the phases of bubbles, maybe we can avoid their destructive power in the future? So in that spirit I want to offer some further context on the June 2023 news, what it means, and why I think this is worth understanding. 

Let’s talk about Coinbase first. The company has long represented the most mainstream access point to cryptocurrency for US-based people and institutions. It trades on the US stock exchange, does 80 percent of its business in the US, and continues to have a roughly $13 billion valuation, albeit down from a peak around $100 billion two years ago.

Although many in the crypto world have been passing in order through the five stages of grief over the past year – Denial, Anger, Bargaining, Depression, Acceptance – I would say Coinbase CEO Brian Armstrong is still in the bargaining phase, based on his comments. 

“The whole point of this case from our point of view is to go get regulatory clarity,” Armstrong told CNN in early June, after the SEC sued his company. “Regardless of the outcome of the case, it’s a step towards clarity.” I find his optimism refreshing. Refreshing, and utterly unrealistic. Coinbase makes money charging huge fees to US crypto investors, and that business has to halt now. Best of luck, Coinbase. Best of luck, Armstrong.

Binance and CZ are in a slightly different place as a result of the SEC action. They have operated less directly in the US markets, which in theory leaves them less exposed to the US’ SEC regulation. “We are operating as a fking unlicensed securities exchange in the USA bro” is something Binance’s chief compliance officer once wrote in an email, so they were long aware of the business risks operating here, and didn’t put as many eggs in this basket. With the SEC moving to freeze their US assets and the claim that they misused customers funds, however, Binance’s reputation will be put at risk. 

Reputational risk, you may recall, is what destroyed one of the previously largest cryptocurrency exchanges named FTX, run by wunderkind and one-time billionaire Sam Bankman-Fried, last November. Interestingly, it was a tweet from Binance’s CZ regarding the risks at FTX that started a weeklong long chain of events that culminated in FTX’s bankruptcy.

One thing that’s clear is that few people in the crypto enthusiast world actually trusted Binance CEO CZ. Rather, they seem to think he is just clever and roguish enough to remain beyond the heavy hand of US government regulation. Time will tell whether he is, and what that will mean for his company.

The theoretically great thing about cryptocurrency was that you didn’t have to trust anyone. It was just code. Immutable, mathematical, scientific, apolitical, and non-geographic. Outside of any particular regulatory regime. No trust in a government regime or finance companies required. 

What crypto enthusiasts hate about the SEC action is that it brings the heavy hand of US government regulation down on the free-wheeling markets of this promising area of financial technology. What non-crypto enthusiasts hate is people pumping up fake securities to investors and stealing money, which happens an awful lot in the free-wheeling markets of this promising area of financial technology.

Crypto Winter

In the light of June 2023 developments, I checked in on my favorite source of community cryptocurrency news – the social media site Reddit, where the last year is described as crypto winter. 

A few patterns of reactions seem noteworthy.

Reaction 1 on the Reddit news threads is that this June 2023 SEC action is proof that the US is becoming authoritarian, because authoritarian regimes generally tried to shut down crypto in earlier years. Okay.

Reaction 2 on the Reddit news threads is lots of anger at the SEC for either:

1. Being too late 

2. Being too early  

3. Specifically targeting the little guy  

4. Specifically targeting the whales, but leaving the little guy exposed. 

What there is less of is introspection into the fact that the absence of regulation of financial assets – the thing crypto enthusiasts seem to want – historically correlates to a very high level of fraud. 

On the Reddit threads, many claim to be still accumulating their magic beans. 

By the way, the best description of crypto is “magic beans.” If you know nothing else about crypto, remember this: These are invented magic beans that true believers think other people will someday value highly for “reasons.” 

Common reaction 3 is the idea that crypto enthusiasts should protect themselves by moving their magic beans off of centralized exchanges such as Coinbase, Binance, or the now-defunct FTX. Keeping your currency in what they call “cold storage” is the proposed plan, removing them from circulation. This is roughly analogous to storing your data on a non-internet connected hard drive. Or like stuffing your cash in a mattress, or your gold in a lockbox, buried in your backyard. I mean, sure. But, like, hard drive cold storage, mattresses, and backyard boxes are great for preppers, but really not great for spending. Currency loses its central function when it is totally removed from circulation. 

On the Reddit threads, in June 2023 they are not at the depression phase yet.  Mostly they have moved past denial, but are still in the anger and bargaining phase. I would judge they are not yet at the acceptance phase of grief. 

Obviously, I still don’t get it. 

A version of this also ran in the San Antonio Express News and the Houston Chronicle

You may also be interested in these related articles:

A fall update on billionaire philosopher kings — and some have fallen

Sam Bankman-Fried — billionaire philosopher at cutting edge of cryptocurrency, philanthropy

Post read (76) times.

Interview: Author Lars Kroijer (Part I) – on Global Diversification

Lars_kroijer

In the first section of this interview with author Lars Kroijer we talk about his idea, from the book Investing Demystified, that we should all seek portfolio exposure to the broadest segment of global equities – essentially all 95 stock markets in the world.  In the second part of this interview we talk about the opposite – namely the dangers of concentrating all of your investment portfolio within, say, your home country.

 

Michael:          I’m talking to Lars Kroijer, [/Kroy’-er/] the author of Investing Demystified which I’ve reviewed on the Bankers Anonymous site. First things first, I read your book and I agree with a ton of it, the theory. And then I thought about my own portfolio, and I thought I’m two-thirds the way towards what you’re saying. By that I mean I invest in index-only Russell 2000 index funds. Talking about my retirement portfolio. I halfway embraced what I think is – in shorthand – an efficient market hypothesis. But I’m not entirely there, so tell me about why I’m doing it wrong.

Lars:                It’s an interesting place to start because you are doing it less wrong than most people in the world would be. You being an American investing in a very broad US index, you are already invested in a very large portion of the world-equity portfolio. What I would normally tell people is you need to invest cheaply and extremely broadly in equity indices for your equity exposure.

Now what does that mean? That means all equities traded in the world.  I think there are 95 public equity markets in the world today, and you should be invested in all those in proportion to their values. You’re only invested in one, the US one, but that’s the biggest one by a very large margin. So failing to invest abroad is less of a sin than it is for someone who is based in Denmark, where I’m from, that represents only 1 or 2% of the world-equity markets. Where I’d tell you you’re going wrong is you should diversify beyond the US, and you’re not doing that.

danish_flag
Only ~1 % of global equities in Danish stock market

Michael:          So I’m a complete hypocrite on this front. I worked in emerging markets so I professionally, on Wall Street, worked in non-US markets. Whenever I speak to friends, I say, “If you’re completely exposed to the US, you’re doing it wrong.” And nobody who grew up in any other country but the US would probably ever dare to be so bold as to only invest in their own country. It’s an irony.

Lars:                It’s interesting you say that, if I could just interrupt you there; you look at institutional investors in the UK or in Denmark, really any country in the world, and a lot of them will have exposure to just their own domestic stock markets, for lots of terrible reasons.

I’m saying that is generally a mistake, but in your case, it’s less of a mistake than if you lived in Denmark. If you lived in Denmark you would only have exposure to 1% of the world equities, where in the US it’s more like 35-40%. When I tell people to go buy the world-equity portfolio, you already have 35-40% as opposed to in Denmark you’d have 1-2% of that, so that is a big difference.

Michael:          Getting extremely practical, how many different positions in either ETFs or mutual funds do I actually need to buy if I’m going to get some kind of efficient frontier of global equity exposure?

Lars:                You can do just one.

Michael:          There’s a single ETF?

Lars:                The reason I’ve refrained from endorsing just one specific security is because I’m hoping that world-equity markets is a race to the bottom in terms of fees product. Right now, that might be called MSCI All Country World. Personally I don’t care what the index is called because what we’re after is the broadest, cheapest exposure. If someone comes up with a cheaper, better index, that’s even better. If an index-tracking product is cheaper and better, that’s even better. But you can buy the MSCI All Country World in one ETF, iShares will do that, DB Trackers will do that, Lyxor will do that. Vanguard does a version of it.

Michael:          I was going to ask: I use Vanguard because of their brand name, and low cost, passive mutual fund investing.

Lars:                They’re very good.

Michael:          They have this global, total world-equity exposure. Are there another half-dozen US fund companies who also –

Lars:                Yeah all the large ETF providers will have it.

ETF

This idea that you have your house, your education, your pension, all your assets come together and really are correlated to the same thing, which is typically your local economy. So one example I have in my book is imagine you’re a London-based real estate agent and you have your own flat. And you have a pension with the real estate agents, and then on top of that you own a couple of real estate related stocks in the UK.

Now, you are really long in London real estate market and that’s crazy to do that in your investment portfolio when you’re already so long in the rest of your investment life. This is yet another reason you’ve really got to stay diversified in your investment portfolio. Even sometimes your future inheritance is going to be in the same stuff: your parents’ house, your spouse’s job, dependent on the same local economy, your future job prospects dependent on the same local economy. Don’t have your investments in that same area.

This argument actually works better outside the UK because you can apply it to ‑‑ instead of London real estate I say Denmark. So very easily don’t have your equity investments in Denmark because you’re already long in Denmark. I think that’s a hugely important part of why these kind of diversified products really make a lot of sense for a lot of people. And why I think it’s a great shame that people tend to have their equity investments and investments generally so close to where their other assets are. They really all can go badly wrong at once, and that’s exactly what you should avoid.

Michael:          We know from the 2008 crisis that all risk assets correlate almost to one. In extreme downturn – everything that is a risk asset goes down all at the same time. That was a very scary reminder of that. There is nothing that is at all risky that doesn’t drop in value in a crisis.

Lars:                You’ve got to diversify. Then you could also look at if you’re a Greek investor, your real estate, your future pensions, your house, your job, all that would go belly up at the same time. Meanwhile, the rest of the world was fine. Imagine you had Greek government bonds as your low-risk asset. If you’d also had the Greek equity market as your equity exposure, you really would’ve been toast. Don’t do that. You’re not getting additional expected returns to reward you for that.

I think that’s an area that’s very important that people don’t talk enough about. That frustrates me. Again, people don’t want to listen to it because there’s little money in telling someone to buy the world-equity index. No one is interested in that.

Michael:          As an emerging-markets guy, it’s clear to me that anybody with any kind of net worth in any of these countries which has experienced typically a currency devaluation or nationalization or national political crisis, anybody generationally who grew up in that who has any net worth, always has a significant portion of their assets in Europe or the US or hard currencies. But in the US we don’t have an experience of having our credit – of course it’s been downgraded in the US but it’s not been junk status.

Our currency has never devalued wildly or unexpectedly. People are quite complacent about the idea of our exceptionalism. I’ve often said ‑‑ you said you wrote this book in a sense for your mom. I’ve often had conversations with my mom along these lines of do you know that most US investors have never considered that their house, job, currency exposure, government credit exposure is all US based? With almost no diversification. And we’ve gotten away with it up to this point, but it doesn’t mean we will in the future. It’s imprudent but as you say, people continue to do it because it’s either complicated, seems hard, boring, or not enough people are telling them to look elsewhere.

Lars:                No one is really incentivized for you to do that. No one makes money. The CFAs or financial planners don’t make money from this. What we’re talking about is not a good thing for the financial-planning industry either.

Michael:          It’s a much lower fee situation.

Lars:                Much lower fees, and paid by the hour kind of stuff.

Michael:          For the typical ‑‑ my orientation is the US investor ‑‑ the typical US investor, it will sound like madness when you say exposure to every equity market such that two-thirds of your money will be exposed to non-US will sound very aggressive to the US market. It doesn’t sound aggressive to me. It sounds like an obvious, logical outcome of the efficient-market hypothesis, just get the broadest exposure. But it will sound aggressive. You mean you’re going to put 65% of your net worth in non-US?

Lars:                You’re going to own Indonesian stocks? Where’s Indonesia?

Michael:          It sounds very aggressive. It sounds less aggressive to anybody who doesn’t live in the US, because they’re used to that.

Lars:                That’s right, I couldn’t agree more. This book actually shouldn’t but it’s going to be an easier pitch outside the US because you’re already likely to have exposure to non-domestic securities or at least you’re going to be accepting of the possibility that you should.

Michael:          In currencies and government exposure, and all of that.

Lars:                That’s why all the best FX (foreign exchange)  traders are all Argentine. They grew up ‑‑ my college and business school roommate is from Bolivia. He said the one time in his life his mom ever hit him was when he was a kid and he’d gotten some US dollars. He had to run down to the bank and exchange them. Or he had some bolivar or whatever it’s called. He ran down and exchanged the US dollars. He came across a [soccer] pitch and a bunch of guys were playing football,  so he played football for two hours and then he went to exchange it. The amount of money that had cost in the currency…

Michael:          Poor kid.

Lars:                You learn about inflation real quick.

Michael:          Tough lessons about inflation.

Please see related post, a book review of Investing Demystified, by Lars Kroijer.

 

Please also see related podcast post, Interview Part II – Do you have an ‘edge’ when it comes to investing?  We doubt it!  Also, a description of  Kroijer’s previous book Money Mavericks: Confessions of a Hedge Fund Manager

Post read (4407) times.

Book Review: Investing Demystified by Lars Kroijer


Can we invest our own personal portfolio in a sophisticated way, to maximize our risk-adjusted returns, without incurring high costs or having to be financial experts ourselves?

In his book Investing Demystified: How To Invest Without Speculation And Sleepless Nights, Lars Kroijer says yes.

Kroijer was a hedge fund manager who argues forcefully against hedge funds, because of their high costs as well as because most active managers claim an ‘edge’ on markets which they are unlikely to really have.

A priest’s guide to atheism

As he says in his introduction, the irony of his position is not lost on him.  It “may seem like a priest writing the guide to atheism.”

As “Anonymous Banker” of course I am personally all in favor of finance folks criticizing, from their experience, the financial industry’s areas of high cost/low value-added.

We need the Lars Kroijers of the world to tell us that “simple is better,” “low cost is better,” “retail investors should avoid complex financial products,” and a better solution exists.

The author says that he designed his book as the grey Volkswagen, rather than the red Ferrari, of investing.[1]

Volkswagen_style_investing
Sensible, unsexy, rational: The Volkswagen way to invest

 

 

60-Second Version of Investing Demystified.

Kroijer helpfully offers a “60-second version” of his book – the 4 take-aways to remember:

  1. We as individuals do not have an ‘edge’ in financial markets.  We should invest accordingly.
  2. We can construct a cheap and simple optimized portfolio using world-equity tracking indexes and the highest-rated government bonds.  We can then choose whether to add a level of complexity by deciding about a) What % of the portfolio should be in our ‘risky’ equities bucket, and b) Whether adding some corporate bonds or risky governments bonds also makes sense
  3. We need to think carefully about personal a) risk appetite b) Tax consequences c) non-investment assets and liabilities such as real estate, income, and debt
  4. We should pay attention to investment and transaction costs as these matter a whole lot in the long run

I like Kroijer’s 4 lessons because they are correct, simple, easy-to-remember guides to personal portfolio construction that eschew hype.  His VW will get you from here to there with minimal cost, minimal risk, and maximum performance.

I also like that Kroijer’s personal background and professional experience make his advice free of national bias.  What he says about personal portfolio construction applies equally to a Belgian, a Brazilian or a Bostonian.

International perspective advantage

One advantage Kroijer brings to the typical discussion of optimal, low-cost, low-maintenance personal investing is that he’s a Dane by birth, a Londoner by choice and profession, and a citizen of the world.  As a result, he solves the personal portfolio puzzle differently than your average American who has a US-centric view of the investing universe.  He’s unmoored from a parochial investment approach.

This matters because:

  • Your dominant currency may not be the US Dollar.
  • Your tax regime may not be the US tax regime.
  • Riskless bonds in your portfolio may not necessarily come denominated in your home currency, or from your own national government.
  • The best, low-cost diversified mutual fund from Kroijer’s perspective is not a Russell 5000 index tracker therefore, but rather a whole-world equity market tracker.  Only through a ‘whole-world’ index tracker, Kroijer argues, can you achieve the optimal point of an efficient frontier portfolio.

Recommendation

I would recommend this book to a friend who has a traditional “Left Brain” orientation with an accounting, engineering, or mathematical background, but who may never have studied personal finance up to this point.  For that person, Kroijer’s vocabulary and engagement with portfolio theory will be quite gentle, because Kroijer never actually goes too far with technical explanations.

For the creative or non-technically inclined, however, Kroijer’s grey Volkswagen approach – and especially the peeks under the hood at the financial theory – may leave them a bit cold.

The practical, diffident, Dane isn’t flashy, and he isn’t trying to entertain.  He’s just rational, right, and could help you get wealthy.

Please see related post:

Lars Kroijer on agnosticism over ‘edge’

Audio interview with Lars Kroijer Part I – On Global Diversification

and related post: Audio interview with Lars Kroijer Part II – On having an ‘edge’ in markets

and an Amazon link to his other book, Money Mavericks, Confessions of a Hedge Fund Manager

Please also see related post: all Bankers Anonymous book reviews in one place.

 


[1] The jacket cover confirms his sensible/boring/diffident approach, as the grey cover with block letters is unconvincingly enlivened with awkward rainbow-colored arrows all pointing in the same direction.  It’s not the red Ferrari of jacket covers either.

Post read (14802) times.