You Should Care About the Crypto Meltdown. Here’s Why.

CHRISTIANE AMANPOUR: And next, we are going to turn to our colleague Hari Sreenivasan who’s going to be having a very, very interesting conversation on the perils of what’s going on in the Bitcoin realm. Imagine that. It’s relevant because the international economy, as we know, is having and taking such a dive that this, apparently, to Hari’s guest is very, very relevant. Take a listen.

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HARI SREENIVASAN, CORRESPONDENT: Christiane, thanks. Stacy-Mari Ishmael, thanks so much for joining us. First, our audience is mixed. They might not own crypto. They probably have seen a Super Bowl ad that has something to do with cryptocurrencies and Bitcoin. But why should we be paying attention to this market? And what’s been happening recently?

STACY-MARI ISHMAEL, MANAGING EDITOR FOR CRYPTO, BLOOMBERG: Sure. Two big questions. I’d — I’ll answer the why we should be paying attention first. I think the main thing is you mentioned the Super Bowl. There’s definitely been a mainstreaming of this asset class. Folks may, you know, they’ve certainly heard of Bitcoin, they might have heard that people have spent $500,000 buying a so-called nonrefundable token that’s a picture of a monkey. So, I think there’s, like, a more cultural awareness of this as a phenomenon. But more consequentially, it’s a phenomenon that is starting to have impacts on what you might consider to be, like, elements of the other financial markets, right. So, what is happening to crypto markets if the price of Bitcoin is really falling dramatically? We’re starting to see that have knock-on effects with broader equity markets and folks might care more about what happens to the Dow than they do what happens to Bitcoin. But we’re certainly starting to see some correlation between those two things. And as this market does get more sophisticated, and as more people are interested, you have large entities like Fidelity saying things like, hey, if you want, you can have Bitcoin in your 401k. So, you know, it’s certainly a helpful thing to understand as we move in this direction.

SREENIVASAN: Bitcoin and cryptocurrencies, in general, have been incredibly volatile over time —

ISHMAEL: Yes.

SREENIVASAN: — when you look back at these massive swings. Was there something different about what happened last week?

ISHMAEL: So, what happened last week is I think a classic example of math gone wrong. There was a specific kind of token called — the complicated name, algorithmic stablecoin. But all that means was — it was that a coin, a token that was really held up by a bunch of programs and formulae, right. So, like, some very smart developers wrote some programs to say, if testing happens, buy, if this other thing happens, sell. And what went wrong is that the ability of those programs to work, given other market conditions really broke down. And when that broke — when that all broke down, other parts of the market got, you know, spooked, right. People were like, oh, why is this bad thing happening? We’re also going to sell over here. And that triggered a real sell-off in what you could consider to be completely unrelated on other parts of the market. Because this thing that was perceived as, you know, relatively stable, relatively free or, I would say had less risk. that was certainly the perception that some folks had turned out to be neither stable or safe. And that had a real impact on how folks felt about crypto overall.

SREENIVASAN: So, these coins or the one coins that — in question, it was supposed to be what? Connected to the U.S. dollar? Meaning it was supposed to — it’s not supposed to go up and down?

ISHMAEL: It’s not supposed up and down. The idea is that it should always trade at about $1, right. And because it’s – -and that’s where the name stablecoin comes from. It’s like — unlike other parts of the market where there’s volatility, this thing is always going to be between 99 cents and $1. And then that dramatically did not happen. And it went way below, you know, into sort of the 60s, and then the 40s, and then the tens of cents.

SREENIVASAN: And I want to make sure that our audience recognizes this, that there isn’t sort of one, homogeneous idea, company —

ISHMAEL: No.

SREENIVASAN: — stock, coin, right. It is an entire marketplace. And — so, there’s a lot of terms that I think people get confused by. There’s NFT, non-fungible token, there’s cryptocurrency like Bitcoin and Ethereum. And you’ve got a whole team of people at Bloomberg that are covering this. I mean, as you see where this is going, how much confidence is there in this becoming and staying real?

ISHMAEL: That is the trillion-dollar question. I think the way that we approach this on my team is we look at a couple of things. What is — what are having effects on either, you know, the so-called real economy or other financial markets? Like, are there elements of crypto, and as you say, it’s a lot of different things that make up this market, but are there elements of crypto that are potentially you know, here for the long term, right? So, the idea of being able to have contracts that are entirely through software and that allow somebody no matter where they are to get a real- time record of what’s happening. You know, that’s like basically a blockchain. And that has very interesting implications for everybody who, you know, people are looking at this in the context of audit trails or compliance or even just shipping records. So, you know, that has nothing to do with Bitcoin. Like, you don’t need Bitcoin to have a solution like that. And so, we’re really paying attention to that as the first thing. And then I think the second thing is, you know, the audience of Bloomberg is like very sophisticated financial investors who are trading tens, if not hundreds of millions of dollars and billions of dollars. But even they are sometimes, like, what is going on here? And so, you know, I do want to give the — just the note that this is a very complicated set of different asset classs. And that folks who are tremendously sophisticated, who are used to looking at spreadsheets of numbers and calculating risks. And, you know, like making big positions, and things are sometimes baffled by the dynamics because, as you said earlier, there are really still elements of this that are extremely unpredictable even for someone who otherwise really knows what they’re doing.

SREENIVASAN: And I wonder about kind of the pluses and minuses of who is getting into this space. Like if you, right now, for example, are speaking to a bunch of well-heeled investors, who have access to tons of information, and who can pay for subscription services in every kind of edge possible. Versus one of the things that have lured people into these markets is the fact that they maybe didn’t have to have that. That there was a way for them to cut out the middleman, so to speak, and go ahead directly to the source. So, it also encouraged people of a younger generation, and sometimes people who weren’t traditional investors, to climb into this pool. I mean, this is a hard lesson to learn if you’ve lost your shirt, so to speak, in over the past couple of weeks, over the past couple of years. But I also wonder about, you know, is — will this have a chilling effect on who becomes an investor and entrepreneur in the space especially women and people of color?

ISHMAEL: Yes, I mean it’s — I feel like everything I tell you is the flip side (INAUDIBLE). But it’s true. Crypto is very complicated. So, you know, there is a notion that it is an asset class that enables financial inclusions. For exactly the reasons that you’re describing, right. You don’t have to be someone who is historically wealthy or has a broker on speed dial or has a personal financial adviser. You really have the ability to — as a person with $10 or $5, you know, start dabbling in crypto. The downside is you don’t have a financial adviser to say, hey, maybe you can’t afford to lose any more money and you should, you know, kind of stop trading or stop speculating. So, there is this and I think that is one of the reasons that questions around consumer protection are so important, right. Because for every story that you hear about a person who, you know, turned $100 worth of Bitcoin into $1 million, like, we’re seeing stories of people who turned $100,000 into $10. And that’s, you know, that’s something that can happen very, very quickly.

SREENIVASAN: So, there are proponents of cryptocurrency for all sorts of reasons and there’s also detractors. I mean, this last week gave the detractors a moment to crow and say, hey, look. I told you so. This isn’t going to work. But there’s also people doubling down right now saying, guess what’s, we’ve got things on sale, and let’s go ahead and pick up cryptocurrency’s while they’re less expensive.

ISHMAEL: That’s absolutely true. And I don’t think it’s a dynamic that we only see in crypto. I think, you know if we think back a just a couple of years during the height of the pandemic when meme coin — meme stocks were all the rage. And people were like, we think we should buy AMC or Hertz or GameStop or whatever those things were. And anybody who says we shouldn’t, like, they don’t know what they’re talking about. Same energy in crypto a lot of the time. And frankly, with institutional investors, if you look at the broader stock market, if you look at something like the really big tech stocks like the Apples and the Metas and the — they’re also having a tough time. And so, I don’t think that it’s necessarily — while I would say there is an inherent belief in crypto that everything will go up all the time, and that a dip is merely a detour from that direction of up. It’s all markets right now that we cover institutionally are really seeing kind of these similar types of sell-off and volatility.

SREENIVASAN: You know, these companies in the cryptocurrency space are literally buying the naming rights to stadiums right now.

ISHMAEL: Yes.

SREENIVASAN: I mean, that’s not small amounts of money. And here we have this, I guess, asset class that’s emerging as a power player, or is it just really great marketing and lots of money in the sort of, hype phase?

ISHMAEL: I think we are somewhere in the middle of those two things, you know. There’s an analogy that is increasingly popular that people compare crypto to the dot-com boom and bust. And coming out of that, you know, a couple of decades ago at this point, we both had, you know, famous companies like pets.com which does not — no longer exist. But you also had Amazon. And I think where we are with crypto is we don’t know who’s going to be the pets.com and who’s going to be the Amazon. And some of these companies may well stick around, may well in 20, 25, 30 years be like the behemoths of the kinds of banks and entire companies that we have now and some of them may not. But it’s very hard to tell. And I think the point you’re making there about these naming rights, this marketing, giving people an impression that it’s more stable than it is, is a fair one. And it’s certainly something that regulators are kind of paying attention to in terms of whether people are being led to believe that there is more sort of stability in this asset class because they see these billboards and they see these company names than there might actually be.

SREENIVASAN: So, let’s talk a bit about the regulation here. I mean, what steps has the U.S. government already taken? What are they planning?

ISHMAEL: I wish we could tell you what they are planning because they haven’t told us yet. However, we do know that a couple of months ago, the Biden White House issued an executive order directing pretty much every federal agency that you could imagine to study cryptocurrency in some form. To be like, hey, everyone get together. Put your heads together. Figure out what the next steps here are and report back. And you know, we can rag on people and be like, they’re always studying something. But that is a very important point because it is a clear directive that came with headlines that said, you need to go off, you know, figure out what is happening. How does it affect your corner of the world and come back with recommendations for what we should do next? So, we’re absolutely paying attention to when those are going to come back. In the meantime, Gary Gensler, you know, sort of the chairman of the SEC, has taken a couple of steps that, you know, critics like to describe as regulation through litigation. So, if they see someone breaking an existing rule, right, like you are not allowed to advertise this thing when it’s actually this thing, or you are misleading investors. You know, they’ve come down with some pretty heavy fines. We’re talking like up to $100 million that we’ve seen so far to try and signal to the market that, hey, we’re paying attention and we’re not going to stand for these certain kinds of things in the absence of a more formal regulatory framework.

SREENIVASAN: Speaking of that. What — every market has speculative plays. There is — there are stocks today on the market that are penny stocks that you can bet on or not. And in the crypto world, we also seem to have a little bit of a — a little bit more of a Wild West environment. In this kind of new frontier, there’s a lot more speculation and there’s also a lot more people, kind of, losing their shirts. I mean, who protects these people or is there any agency that they can go to and say, I think I just got scammed?

ISHMAEL: Currently, no and that’s a big part of the problem. I think the absence of consumer protection is — it really complicates the scenario, you know. If you have your money in a bank and that bank goes under, there are different kinds of insurance that can protect you. If you put your life savings into a speculative coin and the developers of that coin disappear or that coin, as we saw last week, crashes effectively to zero, there’s really nobody that you can call to say, hey, I have just lost everything. And I think one of the things that happened last week, as more people started to realize the downsides of an effectively decentralized and deregulated asset class, right? Like, those two words, decentralization and deregulation are often held up as positives. Like, we don’t want to be operating within the confines of a particular government. We don’t want to have a central bank that’s, you know, setting policy for how these things should work. The flip side is, when there’s a crisis or an emergency of some kind, you also lack those sorts of backstops that you would get if you were dealing with a more traditional asset class.

SREENIVASAN: So, is there any kind of legislation or any kind of investigations that are kind of coming down the pike in the United States?

ISHMAEL: Well, the U.S. is in a very interesting period politically because we’re starting, you know, we’re heading into the midterms. And various candidates on either side of the aisle, both Democrat and Republican, have either come down as like, I am your crypto candidate or I am your regulate crypto out of existence candidate. And I think the fact that we’re starting to see these polarized positions does suggest that at least, you know, the next wave of legislators who, you know, will be elected in are going to come in with ideas on what should be happening. And that’s certainly going to inform the conversation.

SREENIVASAN: And is there — I mean, this is on both parties right?

ISHMAEL: Both parties.

SREENIVASAN: I mean, there are Republicans and Democrats who are pro and anti-crypto.

ISHMAEL: Absolutely. It’s much more bipartisan than folks might expect. There are some notable, you know like Elizabeth Warren is very strongly in the, I am deeply unconvinced that crypto is a good idea camp. And then you have, you know, Senator Lummis, for example, who is much more on the Bitcoin for everyone, there’s strong arguments here. But what we find is that sort of a cross different States, different legislations, different levels of government, it’s not such a black and white picture.

SREENIVASAN: Is there something that’s happening to the architecture of how cryptocurrency’s work that will make it easier for people not just to understand but to transact with it?

ISHMAEL: Well, I think it’ll be easier to transact but not necessarily easier to understand, right. So, you know, you — first, you mentioned stablecoins. And part of the challenge from last week is there’s a couple of different kinds, right There’s like the math-based ones that we talked about which are extremely complicated and, you know, require, you know, probably a Ph.D. to fully understand how they work. And then you have, what are considered conventional stablecoins which are like, hey, we say this is worth $1 and the way that we’ll prove that to you is we’ll buy $1 worth of U.S. Treasuries or U.S. commercial paper or even just U.S. dollars and something else that is a one-to-one backing. So, there are elements of crypto that are more straightforward. To your point about the architecture, I think we’re starting to see a real interesting period in terms of folks are looking at what is the problem I’m trying to solve with this blockchain or what is the problem I’m trying to solve with this particular crypto? And how do we architect it for that? Whereas, you know, for the past 13 years there’s been, here is a solution. Find a problem for this solution. And that’s been hard because it’s really hard to retrofit some of the problems we had in 2022 onto what exists right now.

SREENIVASAN: Stacy-Marie Ishmael, managing editor of the crypto desk at Bloomberg. Thanks so much for joining us.

ISHMAEL: Thank you for having me.