Money Rehab with Nicole Lapin - The Crypto-pocalypse? with Stacy-Marie Ishmael (Bloomberg Crypto)

Episode Date: July 6, 2022

If you have been listening to Money Rehab, you will know just how chaotic the crypto world has been in the last few weeks. Crypto prices have been trending downward— and as a result, faith in crypto is also trending downward.  To catch-up on crypto news and help investors plan, Nicole chats with Stacy-Marie Ishmael; Managing Editor, Cryptocurrencies at Bloomberg News and Host of the podcast Bloomberg Crypto. You can listen to Bloomberg Crypto here: https://www.bloomberg.com/podcasts/series/bloomberg-crypto 

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Find a co-host at Airbnb.com slash host. Hey guys, are you ready for some money rehab? Wall Street has been completely upended by an unlikely player, GameStop. Are you ready for some money rehab? Wasting our time. I will take a check. Like an old school check. You recognize her from anchoring on CNN, CNBC, and Bloomberg. The only financial expert you don't need a dictionary to understand. Nicole Lappin. If you've been listening to Money Rehab, you know just how chaotic the crypto world has been over the last few weeks. And there seems to be a new flavor of chaos

every day. Over the weekend, for example, the news broke that Three Arrows Capital, a cryptocurrency hedge fund, filed for Chapter 15 bankruptcy. Crypto prices have been trending downward, and as a result, faith in crypto is also trending downward. Anyone who's invested in crypto needs to face the facts and make a plan for what to do next. So that's what we're going to do today. And we're going to do this with Stacey Marie Ishmael, journalist and host of Bloomberg Crypto Podcast. Stacey Marie, welcome to Money Rehab. Thank you for having me. What a pleasure. It is such a pleasure to talk about the cuckoo banana story of our time. Ah, crypto.

Ah, crypto, indeed. And it's been a wild few weeks in particular. You know, the whole wide world is watching as Bitcoin's price was, what, below $18,000 in mid-June? That's not to the moon. Oh, well, indeed. What is the opposite of to the moon? Under the sea. That's right. Not to the moon. Oh, well, indeed. What is the opposite of to the moon? Under the sea.

But it's had a pretty interesting set of ups and downs since hitting all time records and last fall, for sure. So let's start there. Can you explain why Bitcoin's price dropped so much? I can tell you what people tell us because that's what journalists do. But I mean, I think there's a couple of things to understand here. The first is that in the months toward when we had those all-time highs, a couple of things were all happening at the same time. There was a lot of optimism across all financial markets, right? This is before everyone rediscovered inflation. And we were, yes, we're still in the pandemic, but there was a sense of, okay, we may be coming out of this. There were a lot of developments financially that suggested labor markets were stabilizing. And in that overall macro environment, when people feel

good and positive about things, anything that's perceived as risky looks less risky because you're like, well, everything else is going great. This highly risky part of the market, that should be going great as well. That dynamic really, really shifted when we started getting a lot of reports about significant inflation. And as a result, the US government and the Federal Reserve making noises about having to make everything more expensive by raising interest rates. And that was a significant trigger for the Bitcoin markets because all of a sudden, that dynamic is reversed where you're like, ooh, these things that were risky now seem very risky and I'm not sure I want to be exposed to them if everything else starts to go in a different direction. That is one of the biggest contributors to why we've seen price declines

recently. It's like investor sentiment really shifted across all asset classes, including crypto. But there were some crypto specific things that happened, like some, you know, some weird and in some cases quite bad events happened in the market that, again, really hurt how folks think about it. think about it. Many of your listeners may be familiar with or more familiar than they were six months ago with something called a stable coin, which was supposed to provide a little bit of certainty, an escape from volatility. And one stable coin in particular, something called TerraUSD, turned out to be not at all stable. And a lot of people lost quite a lot of money who had believed in the value of this thing and the stability of this thing. And that again, set off a wave of selling because what happens is if you're losing money over here, what you'll sometimes need to do is take money from other places to make up

for those losses. And so you get kind of this contagion effect that was related to this one, pretty specific corner of the market that's now really fed into other parts. Okay, you bring up two really important drivers for this drop. The first is inflation, interest rates, and the macro environment. The second is all the crypto-related stuff. Coinbase's bankruptcy disclosure, Celsius Network's freeze, the TerraCoin situation. So let's dig into the first one just briefly a little bit more and then move over to the more crypto specific issues. So for inflation, this was supposed to be the time when crypto was the bell of the finance ball. Exactly. This was supposed to be when it shined. Yes. One of the

most fundamental theories of Bitcoin is that it's a fantastic inflation hedge. It should really shine when everything else is going completely pear-shaped. Even if you don't believe in the dollar, if you think the US government doesn't know what they're doing, Bitcoin is here to save you. That has not quite played out. That theory is not looking super fantastic at the moment. And when I talk to the reporters here at Bloomberg or when I talk to people in the market, there is a real, almost like a sadness about the fact that this hasn't played out quite the way they were expecting.

There's a sense of sort of disappointment that certain of the dynamics in crypto have become more like every other asset class, you know, what we'll call like correlated with every other asset class versus really providing this area of differentiation. Yeah, I'm sad about it, too. And, you know, the people that lost money thinking that it would be this hedge against inflation, I'm sure they're more than just sad. I mean, it's devastating to so many people who really banked on it being this hedge for inflation. But I suppose

we never really put that to the test until now. That's a super important point, right? Like this, this entire asset class is less than two decades old. Like the whole thing, you know, from 2008 to now, what happened going into 2008, a devastating financial crisis. What's happening right now? A lot of similar dynamics in the market that are out here. But this is really like the first big stress test of all of the theories of Bitcoin and all of the theories of all of the other tokens. And what we're finding is not everybody is passing those tests in the way that their biggest boosters were hoping they would. Sure. And when interest rates are low and inflation is low, like you said, everything is rocking. People have more money and so they're down to take more risk.

OK, so we now put crypto in the bucket with a lot of other investments. However, we also saw some crypto specific issues. Of course, it's only two decades old. So we saw 2008, which wouldn't totally be analogous because the plumbing of the financial system was all fucked up. Now, it seems like the plumbing of the crypto system is clogged at least. Yeah. What would you make of some of these more intrinsic issues that were crypto specific? Sure. So you mentioned a couple of them. I want to talk about Coinbase first. And I think this is a classic example of what people who love crypto will describe as FUD, which is fear, uncertainty, and doubt. And that's a word that gets thrown around a lot. They're like,

oh, stop FUDing me. You don't know what you're talking about, blah, blah, blah. But it was interesting what happened with Coinbase. So Coinbase had to make a series of required investor disclosures, right? So they are a regulated financial entity. And as part of being a regulated financial entity, they're supposed to tell people stuff about risks. And one of the risks that they're required to disclose is like, hey, if really, really, really, really, really bad things happen, there is a risk that we, like any other company, might have to file for bankruptcy. And if we, in the event of these really bad things, file for bankruptcy, you might lose all your money because that's how bankruptcy filings work. And when that message went out to the markets and Coinbase CEO Brian

Armstrong did a kind of a long tweet thread about bankruptcy, people just saw the words crypto Coinbase, and sort of flipped out. And what happened is sort of this death spiral almost of news where people were like, oh no, is Coinbase going to file for bankruptcy? Like, is my crypto safe? Do I need to get out of this asset class? Not because anything fundamental had changed about Coinbase, right? It was just this sort of this perception that something was going wrong. And it's very hard, and I speak as that that starts having in other parts of the crypto markets. Because while a lot of individual investors lost money on crypto, a lot of big players have also had a hard time navigating these markets. They are exposed to other kinds of risks.

They might have taken a position that turned against them. They might have bet on something that actually went in the direction they weren't expecting. And as a consequence of that, we've had people say, hey, we're going to have to lay off between 10 and 30% of staff. Coinbase is one of them. And you have more extreme examples like Celsius, which you mentioned. Celsius is, you could think of them like a crypto bank. They're not a bank, but they are a lender. They allowed people to deposit certain crypto tokens and to receive yield or kind of interest on those crypto tokens. And they would then take those crypto tokens that you deposited and lend them out to other people. And that is a fairly traditional kind of business. I take some money from you. I give that money to other people.

I charge interest rates. Everything's great. What happened with Celsius is people wanted to start withdrawing the crypto that they had deposited because they were like, I don't know. Everything seems kind of shaky. I want to get out of this market. And Celsius was unable to meet all of the withdrawal demands at the same time. And in traditional finance, you would describe this as a kind of a classic liquidity crisis or run on the bank where under normal circumstances, you sort of have a good sense of how many people are trying to withdraw or make a deposit at any point in time. These are not normal circumstances.

time. These are not normal circumstances. And so Celsius said on a Sunday night, pretty late New York time, that they were going to pause withdrawals because they couldn't meet all of those requests. What did that do? Freaked people out. So it was kind of like when Robin Hood couldn't fulfill all the GameStop stuff. Not dissimilar in the sense that people that are supposed to be providing this like infrastructure function, I want to do a thing, I pay you for the privilege of doing the thing, you do the thing, and then they're like, oh, we can't do the thing. You know, it's a problem. Yeah, it's definitely I mean, you freak out when when the thing you need done is not happening or is not possible with the Coinbase bankruptcy disclosure and the perception

around it, do you think that some of the freak out there was because investors viewed Coinbase similarly to a bank, but for crypto in the analogy that you would have FDIC insurance at a bank. And so if something happened there, you would be first to get your $250,000 or whatever it was insured for back. I think the point that you're making is really important. And I want to sort of zoom back into the past and think about the Super Bowl. And what happened during the Super Bowl is you had all of this advertising being like crypto. It's for the brave. You know, if you have a spirit of adventure you should get in on this well those ads didn't have were disclosures or disclaimers

right it's like if you had pharmaceutical advertising but then they skip the really fast talking at the end where they tell you all the ways it'll kill you and like regulators were super not happy with the fact that these complex financial entities who are engaging in different kinds of transactions that have really high risk were sort of presenting themselves as a mainstream safe option. And it is absolutely the case that consumers out there have some beliefs about the relative safety of this asset class that, again, don't always line up with the fundamentals. And a big one is the idea that they have deposit insurance, which they don't because most of these entities aren't banks and they aren't providing those kinds of backstops.

And the government, the US government, is not providing that kind of backstop. So if you have $250,000 worth of crypto in Coinbase and something really terrible happens, there isn't a government entity that's going to be like, here's your money back. Hold on to your wallets, boys and girls. Money Rehab will be right back. I love hosting on Airbnb. It's a great way to bring in some extra cash, but I totally get it that it might sound overwhelming to start or even too complicated if, say, you want to put your summer home in Maine on Airbnb, but you live full time in San Francisco and you can't go to Maine every time you need to change sheets for your guests or something like

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guest-friendly. I guess that's the best way to put it. But I'm matching with a co-host so I can still make that extra cash while also making it easy on myself. Find a co-host at Airbnb.com slash host. Now for some more money rehab. And with the TerraCoin fallout that happened around the same time, it turns out, of course, it wasn't so stable. But do you think there are better stablecoin alternatives? Why do you think that happened? Well, one of the things about the Terra stablecoin is a very useful adjective, which is algorithmic. Because there are a couple of different kinds of stablecoins.

And algorithmic stablecoins are on the riskier end of the stablecoin spectrum. On the perceived as less risky end of the stablecoin spectrum are the traditional ones. And the idea of it being traditional is if we say there is one traditional stablecoin in circulation, let's use one of the biggest ones, Tether, traditional stable coin in circulation, let's use one of the biggest ones, Tether, what that should mean is there is an equivalent amount of some other kind of very boring, predictable financial asset, like a US dollar or a treasury or something else that if they really had to sell stable coins and get you back your money, they would have another asset that they could do that with. And so for that reason, those traditional stable coins are perceived as less risky because there should be stuff there that's like a dollar or a treasury that's going to back you. So there was a complex arbitrage mechanism with Terra and another token called Luna. And then there was the sense of, well, all of these other really big investors who are sophisticated and we trust are out there.

They're saying like this stablecoin is a good thing. They're advertising on other people's websites. And so you get this idea of confidence, like, OK, other people are doing it. I trust those people. This must be fine. Confidence is a very easy thing to lose. And then when the confidence broke down, the maths are doing it. I trust those people. This must be fine. Confidence is a very easy thing to lose. And then when the confidence broke down, the maths also broke down. And that's one of the things that really led to that collapse. I'd love to talk more generally about best practices around crypto investing in the light of all of this. You know, I typically say that

people shouldn't put more than 1% of their net worth in crypto because it is super duper risky and speculative. What advice would you give new investors on crypto? Well, I'm categorically not allowed to give anybody investing advice. What I always say is how much money can you afford to lose with anything? Right. And I think that is sort of across the board. And the other thing that I say about crypto is it is riskier than you believe, because no matter how sophisticated an investor you are, this is an asset class that, as we've discussed, has barely been around for a generation. And when you have something that has very small amounts of like ability to be stress tested, how has it ever weathered a crisis? And then you layer on top of that a macroeconomic environment, a war between Russia and Ukraine, an ongoing pandemic, a supply chain crisis, like things will go wrong in ways that you could not possibly anticipate. And so even if you are a professional hedge fund manager, this isn't something that you want to take lightly. Yeah. And there's always something at the markets, by the way. There's always some sort of chaos. Would you say, though, that best practices would be that you should have

an emergency fund in place? You should have a traditional brokerage or traditional investments and your credit card debt paid off and all that other stuff before even thinking about getting into crypto. I think being in a position where whatever you lose isn't going to hurt you is really important. You know, some of the saddest stories that we published about what happened with Terra and Luna, the related token, was around like who had really been hoping this would be their way out. They would be able to pay for school or this would really fund their families and they quit their jobs. And that just was not true for them. And that was really, really heartbreaking. And I think the other thing with crypto that is, if it looks too good to be true, it definitely is. That is, if it looks too good to be true, it definitely is. So, you know, if somebody is saying, we will give you a 10,000% return and your bank is like, we will give you a 0.05% return,

somewhere in between is probably where you should be playing. But maybe closer to the latter. You're right. Because at the end of the day, a lot of newbie investors are looking for this quick fix. And there's no quick fix. Isn't one to long term wealth. There's this old dad joke that's like, if you want to double your money, fold it in. But it's true. You know, there's really no quick, easy way to get rich. And as much as journalists or pundits or experts will talk about that, for some reason,

there's still this desire, this like almost new age lottery ticket that you're just going to find the cheat code or like the golden ticket or the magic beans or whatever to all of a sudden get that 10,000 X return or whatever ridiculousness. Yeah. I mean, from a human psychology basis, we love a deal. We love to think we're the smartest person in the room. And so that comes up in crypto a lot. And for investors who are already in crypto and they're seeing their net worth shrink, what are some best practices that they should think about? Oftentimes we talk about equity investors not getting off the roller coaster

in the middle of the ride, meaning don't take all of your money out in the bear market, especially if you have a long time horizon. Does the same general philosophy apply to crypto or when is it time to cut your losses and liquidate? I think, you know, when we talk to folks about risk and how they think about risks, one of the biggest ones they identify is leverage, right? Or have you borrowed money to fund any of those positions? And what we're definitely seeing in the market right now is deleveraging. People being like, I actually don't want to be exposed twice. I don't want to have a position and I don't want to have a loan that's out there that's funding this position. And so certainly in times of stress and in times of crisis, one of the kind of risk management best practices that

we've seen and reported on is just getting back to a point at which you are not so overextended across your entire portfolio that you're having to borrow money just to keep going. Another thing that we've, you know, we've seen people do is they really start to look for and prioritize relative safety and relative stability. You know, so that's why we have seen there are absolutely flows into certain kinds of stable coins on the more traditional end not so much the algorithmic end we've also seen people get out of certain more speculative positions so you know non-fungible tokens or nfts that were like super buzzy and every celebrity seemed to have one some of those have really fallen in price quite a lot because people are like,

oh, actually, this image of an ape is probably not going to still be worth $250,000 at the end of this year. So they're going to switch into something else. And so we've seen folks look across their portfolio and start to identify what seems like something for which there's long-term value and what are the things that I was really exposed to that were more speculative. And you know what has long-term value if it's not the stable coin that's tracking the dollar or treasuries? Could it be the dollar? The dollar or treasuries, right? I mean, am I missing something? Yeah, just the whole ecosystem of crypto and everybody being super invested in it and absolutely convinced that the dollar is going to go to zero and the US is going to default on its obligations.

Those are two of the underlying core philosophies of folks who really are invested in the crypto and Bitcoin ecosystem. Some of the other folks who are invested will use the phrase, you know, it's almost a joke at this point, underlying technology, right? The idea that concepts like the blockchain are truly potentially transformational, that they have the ability to have entire industries be reshaped because of what they enable. And so for them, crypto is more a play on tech, right? It's a bet on their equivalent of like railroads or streets because they think that this is a technology that's really going to reshape the world. I'm here for the technology. I am here and I'm long the blockchain. As far as taking over the

US dollar, the world's reserve currency, I don't think so, crypto bros, but thanks for playing. There are many people on Twitter who will fight you. so crypto bros, but thanks for playing. There are many people on Twitter who will fight you. Bring it. I'm here for that fight. I'm glad you brought up NFTs because we also have a longer episode about why I think the art based NFTs are a front for money laundering. What have we seen as far as the transformation of money out of the art-based NFTs into other uses for the technology? Retailers are getting in on it. You know, what have you seen as a more stable or legit, I would say, investment than like the APE NFT? I generally hesitate to describe anything in crypto as stable.

Even like the word stablecoin, I have to say, because it's in the name, but like the performance of the asset class is still up and down. I think with NFTs, the thing about NFTs is, I like what you said about art-based, because what these are basically is like a software, a piece of software. It's a computer program.

It's a smart contract. It is a way to encode certain actions into a blockchain. And right now, one of the most popular use cases is this thing is going to code that I have the rights to this image and this image is of like something like an ape or whatever. But what we're starting to see is, you know, things like collectibles coming to nfts so like the equivalent of baseball cards or you know or like nba top shot is one or or so rare is another like france-based um company that's doing interesting things with nfts and fantasy games and fantasy sports they just signed a big partnership deal with major league baseball we're also seeing what I would describe as like artist and creator friendly

applications of this technology, where you're a musician, you think about how you want to sell your songs. You're like, okay, I can go through, you know, a record label, or I can do something, I can post it directly to YouTube. How am I going to monetize that? People are starting to design NFTs that allow you to collect royalties on your songs or that, you know, even if somebody sells that song on, you still get a cut of that payment. People are kind of using NFTs to crowdfund books and art or comedy. So I think these are at the very, very, very early stages of development. Like nobody has had a hundred million dollar blockbuster funded by NFTs. But that is certainly the direction that some folks hope to be going in. Yeah, I think we should separate the underlying NFT technology and then

the blockchain, which is the underlying crypto technology, away from the more buzzy uses of them. What do you think? I think only ever focusing on the buzz is going to be an interesting story, but not always a predictable one. True words have never been spoken. For today's tip, you can take straight to the bank. Take a beat on making any more crypto investments. I never want to sound like a broken record, but I cannot repeat this enough. Crypto has not proven to be a good investment, so put it on ice. But if that

changes, you can be sure I'll be reporting on it right here on Money Rehab. Money Rehab is a production of iHeartRadio. I'm your host, Nicole Lappin. Our producers are Morgan Lavoie and Mike Coscarelli. Executive producers are Nikki Etor and Will Pearson. Our mascots are Penny and Mimsy. Huge thanks to OG Money Rehab team, Michelle Lanz for her development work, Catherine Law for her production and writing magic and Brandon Dicker for his editing, engineering and sound design.

And as always, thanks to you for finally investing in yourself so that you can get it together and get it all.