Summary

Santiago focused his conference call on digital currencies, understanding how the pandemic has ignited a rally in cryptocurrencies and providing a top-down macro view on this new speculative space. The global acceptance of digital money has been on an upward trend throughout the 21^st Century, however the pandemic caused a big spike in e-commerce sales in retail, noting the urgency to have a safe and secure network online for exchanges and transactions. Blockchain technology has based the foundation and legitimacy in the crypto space. The 3 pillars contributing to its success have been the fast & low-cost transactions, digital scarcity through a limited supply in cryptography and customisable exchanges, through programmable money and contracts. Central Bank Digital Currencies are already being worked on, most notably the Peoples Bank of China, who have been testing the idea since 2014, as a way of the government and central banks to monitor and keep tabs on exchanges, taxes and illegal activities. Santiago also touched on the Swedish E-Krone as well as the E-Euro.

The fiat currencies narrative has been challenged by crypto investors as these traditional currencies are littered with global liquidity, fiscal deficits and public sector debt, giving the impression that they are damaged from a longer-term perspective. However, given the cryptocurrencies reliance on fiat currencies, this ultimately means that fiat currencies will not become obsolete for the foreseeable future. That said, global negative yielding bonds have helped turbocharge cryptos, which have emerged as anti-fiat, anti-government and anti-central bank currency alternatives. In any case, bitcoin’s volatility is compared to the VIX Volatility Index, with macro forces and risks that lie ahead leading to uncomfortably high volatility for institutional investors. Santiago moved onto the macro headwind that has moved in over the past 30 days which has seen a decline in cryptos across the board, including regulatory problems, a crackdown in China and environmental concerns. The limited supply argument of cryptos is becoming less important, as over 9,000 exist presently, an oversupply in the space. Looking at previous Bitcoin cycles, the first 2 years are speculative, gaining credibility and year 3 has the catalyst that propels the asset to new highs, leading to heavily overbought status. According to its history, it will be tough for Bitcoin to hit those early 2021 pandemic highs without a substantial macro catalyst.

Santiago touched on Bitcoin being talked about as the digital gold, as a way of protecting against inflation and uncertainty in the market, however there is a lot more data points to come up with before this assessment or conclusion can be made. As we exit the pandemic, demand for cryptos will become less prevalent compared to 2020s. In case of a crisis, the responsibility falls on oneself. There is no insurance against fraud, governments hold the power to ban crypto at any time and increased competition could devalue the price – there is no safety net like insurance or a bank. El Salvador was used an example, as they hope to attract bitcoin investors with their no property or capital gains tax and making Bitcoin a legal currency, helping for Salvadoran nationals living in the US to send remittances home without the need of a financial intermediary. This has led to the IMF and World Bank concerns over legitimacy, environmental and regulatory aspects.

Regulatory risks include over-leveraging from increased non-financial intermediaries. The PBoC has become the most aggressive and proactive central bank against the crypto risk, saying the prices are manipulated and not protected by Chinese law. However, Chinese concerns are also due to the environmental costs of energy consumption within cryptos, and putting China at risk of breaking their pledge to peak carbon emissions by 2030.

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