FINANCE, Interviews

Artem Genkin: Cryptocurrencies attract people with a strike gold syndrome

Over the past six months, Bitcoin has been the headliner of all breaking news. Digital currencies thrill top ranking officials, lawmakers, professional investors and everyone aiming to make hype money. Invest Foresight discussed the nature of cryptocurrencies, the risks of trading them, and the prospects of their circulation with Professor Artem Genkin, Doctor of Economics, President of Center for Protection of Depositors and Investors (CPDI), and author of numerous books on currencies, digital money and blockchain.

– Mr Genkin, various media recently reported that all our national authorities are keen on the digital economy, President Vladimir Putin even directed to issue a cryptoruble. Would such an idea fit contemporary Russian economy?

– It is a fact that for a few years by now, our country is in an environment of imposed sanctions. In the context of geopolitical interests struggle, the present day global financial system is by no means neutral. We may eventually find ourselves left with no Visa, MasterCard or SWIFT. Hence, availability of some back-up financial instruments could not be neglected by the President. A national cryptocurrency as a concept and a viable possibility is not aimed at by Russia only. One of the first ones to follow the path was the United Kingdom. Every country minimizes the costs of a gradual breakup with a predominantly cash money turnover in В2С and Р2Р, in its own fashion. Cryptofiat money is one of the options here.

– Elvira Nabiullina, Central Bank Governor, compares Bitcoin to a financial bubble and warns about the dangers of cryptomania.

– In 1980s through 2000s, until digital currencies emerged, all private money were intended to replace or supplement national currencies as settlement means. But it turned out that Bitcoins and cryptocurrencies are also means of investing, or investment assets. A growing demand and a limited supply result in a rising price. A broad strata of population is getting involved in cryptocurrencies investments, and inevitably many such investors have a strike gold syndrome. Such people believe their assets will certainly be priced higher tomorrow than today, since such assets are priced higher today than yesterday. But a price booming with no objective cause will unavoidably undergo a correction. The first individual who looses his investments in a cryptocurrency, will call it a financial bubble, but will he be right to say so? The difference between financial bubbles and cryptocurrencies is quite clear and real as far as an underlying fraudulent intent is concerned. But as for the effects they may produce on the wallets of unskilled investors guided by social instincts, the distinction is, regretfully, much less evident.

– Is cryptocurrencies emergence a natural phenomenon in the financial evolution process?

– One can read a lot on the money evolution in my books. It is true, some sort of Darwin’s natural selection did take place in respect of various types and kinds of money. In early 20th century it looked like the national currencies totally defeated private money. But later private currencies started to spring up far and wide. Still, even in the 1990s most of the 3-something thousand private local settlement systems which expanded all over the world, had no electronic record due to the absence of a proper technology. It took a blind signature technology invented by David Chaum and omnipresence of E-money, for cryptotechnologies development to generate cryptocurrencies.

– In the Internet, one may find in abundance the stories about the first cryptotokens owners growing awfully rich. If Bitcoins are purchased now, may a sizeable profit be expected?

– Certainly, not all of such owners became millionaires. Many people spent their cryptoassets. I recall a story told by Herman Gref, CEO and Chairman of the Executive Board of Sberbank of Russia, about a T-shirt he had bought long ago for Bitcoins, which now, given the skyrocketing Bitcoin value, is worth a fortune. During a Skype conference with a well known US venture investor Tim Draper, though, I heard a very much different story from him. Some while ago, he bought quite a lot of Bitcoins from the US Marshals. Then, he lost some of his assets. But Draper became absolutely certain about Bitcoin’s great potential when the currency lost merely 15% of its value following the bad news on Bitcoin standing, whereas similar news would have ruined any stocks issuer by slumping its stocks value.

– Hence, everyone who is concerned about not loosing one’s money in the next crisis, should buy cryptocurrencies?

– I do not know. Maybe, it is not too late yet. Maybe, it is. Maybe, investments should not go into Bitcoins, but into other digital currencies. Who is this advice intended for? The answer to this question will make the advice right or wrong. Let’s imagine for a second that the perfectly correct advice is, it is time to buy now, but not for too long, and the market should be attentively monitored afterwards on a daily basis so that once any minor negative trend is detected, cryptoassets must be immediately sold. The question is, will a retired old lady be able to follow the advice in its every aspect? A daily market monitoring and other things like that are certainly not her story. So the ideal strategy that we advise may easily leave such a lady with no savings left. That is why I support a ban on a free access of unskilled investors with no investment experience and no adequate professional training, to the cryptocurrencies market. The community of cryptocurrency players may disagree with me. Still, we do have securities market professional players. Why shouldn’t we have professional players in the cryptocurrencies market? An old lady may invest her savings via such professionals. In this case, her investment will no longer be a risky gamble since she will be protected by a professional intermediary. And she must be also informed of all potential exposures.

– One of the major complaints about Bitcoin is its high volatility. Will that last forever or go away in some while?

– The volatility will probably decrease. Apart from other aspects, it results from national and geographic specifics. It is quite evident that pricing is much different in the countries where Bitcoin is legalized and the countries where Bitcoin transactions are a legal offence. But harmonization of the cryptocurrencies legislation in most developed nations is on the doorstep already.

– What effects Bitcoint pricing? Why has the Bitcoin value grown five-fold over the past year?

– In my book Webmoney Planet, published in 2003, I attempted to answer the question about the factors influencing the price of a US dollar. In that book, I presented many expert opinions, and most of them put among top such factors Hollywood (ideological influence), US Navy (global presence and military power), while Fort Knox (official gold reserve) was named somewhere in the rear. Many – but not all – Bitcoin-related elements are sort of irrational, too. Things which matter, are mining equipment capacities and price. A most essential impact on price formation is produced by the news, such as legalization or prohibition of cryptocurrencies by lawmakers in various countries, hacker attacks on cryptocurrency wallets and cryptocurrency exchanges. The digital currencies market reacts to any news instantaneously. This year, a number of factors played in Bitcoin’s favor. Among those, the ICO (initial offering denominated in cryptocurrencies) boom, financial sector’s mounting interest towards investing in Bitcoin and other digital currencies, Bitcoin’s legalization in Japan, and a growing difficulty of mining (Bitcoins issue).

– There is a word around, that Satoshi Nakamoto, Bitcoin’s father, owns over a million of Bitcoins. Still, for more than a decade the funds are kept idle. In you view, when can we see an activity of this legendary figure?

– In an emergency only, I believe. His golden share, if you wish, is capable of stabilizing Bitcoin value even in the times of the peak turbulence.

– Bitcoin is a great seduction for fraudsters. How vulnerable are cryptocurrency wallets owners and their assets?

– Irreversibility of transactions is Bitcoin’s inborn trait. Therefore, my answer would be as follows. Inelaborate practices can minimize the risks of loosing Bitcoins. In technical terms, it compares to safeguarding already habitual E-money in a digital wallet, whereas reimbursing the Bitcoins lost is highly problematic.

– Some often associate cryptocurrencies with illegal transactions and shadow economy. Is it a reasoned view?

– Criminal organizations (one may be surprised, but non-criminal organizations as well) certainly use Bitcoins in their investment portfolios as investments. The Islamic State which is banned in Russia, keeps merely two or less percent of its aggregate assets in Bitcoins, according to the expert assessments. I present these figures in my recent book on blockchain. For their illegal dealings, criminal networks prefer to use more traditional financial instruments (with well established infrastructure and low volatility) or absolutely anonymous types of cryptocurrencies. Bitcoin, by the way, is not an anonymous currency, but a pseudoanonymous one, since each deal leaves a quasi perpetual trace, which is inconvenient for organized crime. Anyone interested in the subject may refer to researches by FinCEN and Europol.

– Bitcoin is not the only cryptocurrency, but the best known one. May it loose its leadership?

– In my book Private Money: History and Contemporaneity (published in 2002) I forecasted there would be many digital currencies. In my other book, published in 2003, the cover featured an apostate – for those days – wording, ‘If capable, anyone can create one’s own money. A society is free to trust any types of money’. Friedrich August von Hayek, Eduard August von Regel, Johann Silvio Gesell, Michael Mark Lynton and others foresaw the world of competing currencies long before me. You know, when ideas gain support, they materialize.

Who can beat Bitcoin? I am old fashioned, to be honest. I fancy non-state currencies with real commodity cover. But I prefer polycommodity standard. In the present day triumphant mainstream of the cryptorevolution, my ideological fellows may be a minority. A commodity basket of Greenfield and Yeager composed of some dozen commodities traded at world exchanges, may be a suitable backing for a currency which can defeat Bitcoin. As far as I can see though, Professor Mikhail Gelvanovsky and his team are the only ones who share my ideas in the contemporary environment. Well, when predicting the present-day cryptotsunami, I was in fact alone, too. So, I am used to that…

– Is it possible to forecast cryptocurrencies’ future?

– Globally, there are about a thousand major cryptocurrencies these days. Their aggregate capitalization is somewhat USD 150 billion which is approximately 2% of NASDAQ capitalization. In ten years’ time, there will still be a thousand cryptocurrencies, but they will be very much different. Some 90% of the current leaders will disappear by then. Some cryptocurrencies will end up being fraudulent scum, some going genuinely bankrupt. There will come others to take their place. Cryptocurrencies market will remain an essential sector of the global financial market. Its volume may keep growing and reach a level comparable with the global forex market. In a while, volatility of major cryptocurrencies will significantly decline and their profitability will stabilize accordingly.

– Experts see blockchain technology as a way to resolve the problems of financial crisis, bureaucracy and corruption. Do you think blockchain is capable of vanquishing these everlasting evils?

– Blockchain results in lower expenses on bureaucratic procedures and bureaucratic mechanisms. But that is theory. In practice, a new IT transformation leading to implementing bockchain technology in major corporations and public sector companies will undoubtedly become a corruptogenic factor, since misappropriation of budget funds will be commonplace. In general, blockchain is able to change the global economy, first of all, by dramatically influencing the labor market, structurally redistributing and releasing labor force in a range of white collars sectors. In November, Alpina Publisher will release my new book, Blockchain. How It Works and What Lies Ahead. In that book, there is a special chapter on the impact blockchain may have on the global economy.

– You head the Center for Protection of Depositors and Investors. Could you give three most valuable recommendations to those who intend to try making money on investments into cryptocurrencies?

– First of all, when you engage in cryptocurrencies trade, do not sell your home and do not make any interest-bearing borrowings in order to get some investment capital. Second, if you do have a desire to try and if it is legal in your home country, you can spend 5% of your savings on transactions with cryptocurrencies, but you should take your investments most seriously, as your personal investor training course. By all means, that will not be a one-off investment allowing to idle away your time and reap rewards forever afterwards, since the market is too tight. Third, do read my new book on blockchain when it is on sale soon. By the end of the year you will be able to read it from top to bottom.

By Anna Oreshkina

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