One of the few financiers who sounded a warning bell before the global financial crisis believes today’s cryptocurrency “meltdown” was predictable, and that “nobody is taking much notice” of a broader financial market problem.
In an interview with ABC’s The Business, former financier and author Satyajit Das said the cryptocurrency market had been propped up by rampant liquidity and cheap cash pumped into the financial system by central banks.
“I can understand why people went into crypto. It was populist anger,” Mr Das said.
“There is a whole bunch of people who are very skilled in terms of exploiting investors’ desire for rapid riches.”
Mr Das’ comments come as the fallout continues from the spectacular collapse of cryptocurrency exchange FTX.
The Bahamas-based company set up in 2019 by tech wunderkinds – Sam Bankman-Fried and his partners Zixiao “Gary” Wang and Nishad Singh – failed after revelations about its business practices led to a surge of customer withdrawals.
FTX allowed people to trade in cryptocurrencies – a form of non-centralised, non-state backed currency – in a centralised way.
The best known cryptocurrency, Bitcoin, had already been on a steady decline this year but it is dropping further as the FTX fallout continues.
Bitcoin is down more than 60 per cent this year and it is now below $US16,000 ($24,000).
Overall, the market capitalisation of the crypto market has dived from roughly $US3 trillion this time last year to around $US800 billion.
“That’s a loss of over 70 per cent,” Mr Das told The Business.
“It’s a monetary loss, as well as a loss of confidence. But I think you’ve got to put it into perspective. Cryptocurrencies have always been plagued by problems.
“In one sense, it’s nothing new.”
As administrators clean up the “complete failure” of FTX, cryptocurrency proponents still in the game are urging for “smarter regulation” in major market the United States.
In an op-ed in CNBC, the chief executive of one of the world’s biggest crypto exchanges, Coinbase, said there needed to be rules that “protect consumers”.
“Coinbase doesn’t have any material exposure to FTX, but I have a lot of sympathy for everyone involved in the current situation,” Brian Armstrong wrote.
“It’s stressful any time there is potential for customer loss in our industry, and a lot of people are losing a lot of money as a result of FTX’s struggles.
“Despite the prevailing notion that crypto companies don’t want to be regulated, many — if not most — companies have been working with policymakers for years.”
Coinbase has also lost almost 40 per cent of its share price in the past month, as fears of a sector contagion abound.
Satyajit Das said it was “amusing” that a movement “predicated on displacing governments” through non-traditional currency now wants regulation.
He said it was a “wait and see” whether the current woes facing cryptocurrency – and the system of Blockchain on which it relies – will bleed into the traditional financial market system.
“The crypto space may not be as contagious as, say the mortgage collapse in 2008 was, and (that’s because) the cryptocurrency space is not integrated into the financial system,” he said.
“One way to think about the cryptocurrency problems at the moment is it’s part of, essentially, the great financial bubble of every bubble being pricked.
“And that’s being pricked by higher interest rates, and the general move to somewhat greater degrees of financial sanity.”
This is where Mr Das pointed to the financial sector issue that “nobody is really taking much notice” about.
Broadly, traditional financial markets have also been selling-off all year.
The tech-heavy Nasdaq on Wall Street is down 30 per cent in a year. The broader S&P 500 is off around 18 per cent.
“The losses in cryptocurrencies pale into insignificance when you compare them to the $30 trillion worth of write downs in assets,” Mr Das said.
“Which are going on in equities, they’re going on in bonds, they’re going in private market assets in housing. So it’s part of an overall adjustment in valuation.”
Mr Das said the woes hitting the tech sector – such as Twitter, Meta and Google’s owner Alphabet – have some “commonality” to those hitting cryptocurrency.
However, he said tech was being more obviously hit by rising interest rates globally.
After keeping cash rates at pandemic lows and pumping the market through quantitative easing, central banks globally including here in Australia are now hiking rates in a bid to tackle inflation or price hikes.
Mr Das said that’s dampening economic activity – which is especially hitting tech – as well as hitting their advertising revenue.
And it’s more broadly making investors wary, he said.
“People are now basically having a cold shower,” Mr Das said.
“This has been coming for four or five years. It’s not a surprise to anybody who’s been actually looking at it carefully.”
Mr Das said how badly this will hit economies globally depends on how much it dampens consumer confidence.
“There’s going to be a wealth effect. People have lost money,” he said.
He believes the push to raise rates to tackle inflation may not have its intended impact because prices are surging, in part, because of global forces outside financial market control, such as the war in Ukraine.
Which led Mr Das to his final thoughts on broader issues confronting the global financial markets that he thinks even fewer people are considering.
“I think there’s two runaway trains, which have been running away for a while,” he said.
“One is geopolitics. And the other one is de-globalisation, particularly in the form of sanctions and trade restrictions, which are accelerating around the world.
“And that has a tendency historically to de-stabilise growth and economic prosperity fairly radically.”
Satyajit Das is a former financier and author of Banquet of Consequence and Fortune’s Fool.