Fintech Files: Carson Block on Shorting Crypto, and Did Ethereum’s “Merge” Matter?
Short seller and hedge fund founder Carson Block made a name for himself more than ten years ago sniffing out suspicious companies for short.
Block, president and chief investment officer of Muddy Waters Capital, sat down with Barron’s Live earlier this month to discuss how he approaches a position he wants to short, the issue of ESG, short-selling Chinese companies and other topics. In particular, our conversation also turned to cryptocurrency.
“To me, it’s not a real asset class,” he said. “In the sense that it doesn’t have much in the way of intrinsic value. It is almost exclusively tulip. And, yes, I realize that when you have this situation where we just have central banks, dumping liquidity, and governments dumping liquidity into economies and into markets, these things can shoot up in value.”
Traditional finance, or tradfi, traders and fund managers have nevertheless dipped their toes. Cryptocurrencies are fragmented – their price differences can widen between trading platforms, while regulatory scrutiny can vary by jurisdiction. It has created opportunities for arbitrage traders who love to exploit such loopholes.
READ US Treasury asks if crypto poses national security risk
“Can you make money in crypto? Of course you can. I’m not saying you can’t. And I’m not going to tell you that the world’s fiat currency system makes total sense either. But to me it just seems like another bubble. »
Block’s views echo those of hedge fund adviser Patrick Ghali, who told me back in July that when it comes to crypto, “As long as the market continues to be inefficient and volatile and you can trade it, there will be opportunities.”
“You have some investors who like the idea and see it as an inefficient market, and so they want to be exposed to it,” said Ghali, co-founder of hedge fund consultancy Sussex Partners in London. “Because inefficient markets equal alpha, usually.”
So how does Block, one of the world’s most visible short-sellers, play this market? By looking for the scams.
“When you get that kind of froth, or you get that kind of attention and money all of a sudden pouring into space, you’re going to have a lot of bad actors and a lot of things that you want to short-circuit regardless of the fundamentals. Regardless of your views – where you may think crypto is going to be in 10, 20 years… there are still a lot of bad actors in the space.”
READ All of Financial News’ crypto coverage, all in one place
Hear Block’s commentary on crypto and more on Barron’s Live replay. You can also find the conversation in podcast form on Apple Podcast, Spotify or Barron’s Live.
Did the “merger” matter?
The Ethereum merger was much hyped. It was a software upgrade that increased the cryptocurrency’s environmental credibility as it transitioned from so-called proof-of-work to proof-of-stake. During proof-of-work, Ethereum was secured by miners, a high-consumption process that burned a huge amount of electricity. The network is now secured by stakers – ether holders who unlock their tokens. The market yawned.
READ Why “The Merge” Matters to Institutional Investors
That’s because the merger was a “sell-the-news event,” Julio Moreno, senior analyst at Cryptoquant, told MarketWatch. In other words, in anticipation of the event, traders sent the price of ether higher in recent months. “Subsequently, sell orders began to increase as traders/owners appeared to hedge ahead of the merger.”
Macro factors soon took over, sending all cryptos lower on September 19. Most pressing on the minds of crypto traders is Gary Gensler. The Federal Reserve chairman signaled that the merger could make digital currencies a safety in the eyes of regulators, just like stocks and bonds and every other major asset class.
Cryptocurrencies and intermediaries that allow holders to “stake” their coins can pass the so-called Howey test, used by courts to determine whether an asset is a security. It examines whether investors expect to earn a return on the work of third parties.
“From the coin’s perspective … it’s another indication that under the Howey test, the investing public expects profits based on the efforts of others,” Gensler said on Sept. 15.
If ether becomes a security, it is “likely to face large fines that ETH may not be able to withstand, as well as being removed from 90% of centralized exchanges, which will cause irreparable damage to both the user base and the price.” Serhii Zhdanov, CEO of crypto exchange EXMO, told MarketWatch. Ouch.
Biden’s crypto game
The US Treasury Department just released a request for comment, inviting “interested members of the public to provide input” on digital asset-related illicit finance and national security risks. The request is all part of the agency’s mandate under President Joe Biden’s plan in March to study the development of the crypto industry and its risks to consumers and the financial system.
The process “shows that the Treasury Department is taking public engagement very seriously … from the lens of risk, as opposed to risk and opportunity,” Alex Zerden, principal of financial technology and risk advisory firm Capitol Peak Strategies, and a former Treasury secretary. official in the Obama and Trump administrations, told the Wall Street Journal.
Treasury will then decide how the feedback will work, if at all, into any policy, he said.
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To contact the author of this story with feedback or news, email Trista Kelley
