No Smart Money

Charlie Munger made an appearance on CNBC this week.

98 years old, blind in one eye, but still sharp as hell and going strong. Munger had some thoughts he wanted to share on the FTX debacle. He's been a long time crypto critic and never been shy about his disdain for the asset. 

You can see a collection of his famous anti-crypto quotes: 

With the crypto world engulfed in flames, Munger took the opportunity to spike the football.

On his CNBC appearance, Munger didn't beat around the bush. In his own words:

"Nobody's gonna say I got some shit that I want to sell you. They say, it's blockchain! High-octane blockchain. Blockchain is a new good thing that's come up like fairy dust." 

The clip below:

There's been a narrative building the past few years that the value-oriented approach to investing is dead. Or at the very least, how "value" is determined needs to be refined. Even fans of Munger and Buffett weren't shy about mentioning they "graduated" from their way of thinking. That "way of thinking" being profit focused and ignoring fads.

Berkshire was buying energy stocks while the rest of the world was buying software stocks and Bitcoin. What the hell was the point of oil stocks? Oil prices went negative in 2020 and the world was moving in the other direction. 

**Lee Corso enters the chat** 

Berkshire has now outperformed Bitcoin over the past five years. 

Last November, Bitcoin had a 500% total return over the previous four years. Berkshire only had a 50% total return in that time. One year later, the entire lead is gone. 

Crypto's certainly been one of those fads that Berkshire ignored while the rest of the world went crazy. Crazy is relative but there were ungodly sums of money spent (invested?) to own pictures of rocks, gorillas, and buy coins named after dogs. I feel dumb just writing that sentence. 

It wasn't exactly a secret a lot of funny business was happening in crypto. But and now an outright fraud has come to light and the eyes of the world are paying attention.

And the fraud was flush with cash from some of the "smartest" investors in the world. One of the top venture capital firms in Silicon Valley (Seqouia), the largest asset manager on Wall Street (BlackRock), and the talking heads on CNBC (Mr. Wonderful, Mike Novogratz, The Mooch, etc.) all fell into the FTX trap.

In effect, there was no smart money - that term fails to exist in crypto. 

What all this means for crypto's future, who knows. Morgan Housel summed up crypto in one tweet.

To be fair, one bad actor doesn't mean it's all a fraud. 

There are unique things happening in crypto with potential to create a better financial system. One example is the Lightning Network. The Lightning Network is a Layer 2 payment network "layered" on top of Bitcoin, with the purpose of enabling faster payments. 

What problem does the Lightning Network solve?

One example would be remittance payments, or money that is being transferred from one country to another. If you're a housekeeper in Manhattan and you want to send money back to your family in a foreign country, the options available to you are basically Western Union.

One issue is Western Union takes a portion of the money you want to send. Another issue is many recipients of these money transfers live in remote places far away from a Western Union location. In some cases, you might have to travel a long distance to pick up the money. And in some places, it's not uncommon for local gangs to shake you down after you come out of a Western Union with your money.

With the Lightning Network, money can travel quickly, settles instantly, and remove a lot of the hassle. 

The problem is for every unique thing happening in crypto, there's five to ten things that are completely useless money grabs. 

In the wake of the FTX bankruptcy, the chorus of people saying "this isn't crypto's fault, this is human error and the fault of centralized entities" is quite loud. 

James Block of Dirty Bubble Media spoke about this on the Odd Lots podcast today:

"Regardless of whether this is crypto's fault or those centralized exchanges fault, the fact is most of the people involved in this ecosystem are transacting through centralized exchanges, all the prices are determined by centralized exchanges, centralized exchanges hold most of the assets, and in effect, control the entire market. There's a very big problem here that's defining the market."

It's an interesting point. The FTX meltdown wasn't crypto's fault (per se) but can the asset class ever actually separate itself from central entities? 

If crypto wants to be small asset class hidden from the masses, that seems possible. If crypto wants mass adoption, it seems unlikely. How many institutions are ready to take their coins off exchanges and self custody? I imagine the number rounds down to zero. 

To use an old Charlie Munger quote:

"I like people admitting they were complete stupid horses' asses. I know I'll perform better if I rub my nose in my mistakes. This is a wonderful trick to learn."

Crypto has a lot of mistakes to own up to if it wants to get back into the spotlight.