Short-seller and hedge-fund founder Carson Block made a name for himself more than a decade ago sniffing out suspicious companies to short.
Block, boss and chief investment officer of Muddy Waters Capital, sat down with Barron’s Live earlier this month to discuss how he tackles a position that he wants to short, the problem with ESG, short-selling Chinese companies, and other topics. Notably, our conversation turned as well 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’s almost entirely tulip. And, yes, I get that it’s when you have this situation in which 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 been dipping their toes in nonetheless. Cryptocurrencies are fragmented — their price gaps can widen between trading platforms, while regulatory scrutiny can vary depending on jurisdiction. That has created opportunities for arbitrage traders who love to exploit such gaps.
“Can you make money punting 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 it’s 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 therefore they want to be exposed to it,” said Ghali, co-founder of hedge fund advisory Sussex Partners in London. “Because inefficient markets equal alpha, typically.”
So how does Block, one of the world’s most visible short-sellers, play this market? By looking for the frauds.
“When you get that kind of froth, or you get that kind of attention and money suddenly flowing into space, you’re gonna have a lot of bad actors and a lot of things that you’d want to short regardless of the fundamentals. Regardless of your views — where you could think that crypto is going to be in 10, 20 years’ time… there are still a lot of bad actors in the space.”
Did the ‘Merge’ matter?
The Ethereum Merge was much-hyped. It was a software upgrade that boosted the cryptocurrency’s environmental cred while transitioning from so-called proof-of-work to proof-of-stake. Under proof-of-work, Ethereum was secured by miners, a high-consumption process that burned a massive amount of power. The network is now secured by stakers — ether holders who lock up their tokens. The market yawned.
READ Why ‘The Merge’ matters for institutional investors
That’s because the Merge was a “sell-the-news event”, Julio Moreno, senior analyst at Cryptoquant, told MarketWatch. In other words, in anticipation of the event, traders sent ether’s price higher over the last few months. “Then, sell orders started to increase as traders/holders looked to hedge before the Merge.”
Macro factors soon took over, sending all cryptos lower on 19 September. Most pressing on crypto traders’ minds is Gary Gensler. The Federal Reserve chair signalled that the Merge may turn digital currencies into a security in regulators’ eyes, just like stocks and bonds and every other major asset class.
Cryptocurrencies and intermediaries that allow holders to ‘stake’ their coins might 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 from the work of third parties.
“From the coin’s perspective… that’s another indicia that under the Howey test, the investing public is anticipating profits based on the efforts of others,” Gensler said on 15 September.
If ether becomes a security, it is “likely to face heavy fines that ETH may not be able to endure, as well as be delisted from 90% of centralised exchanges, which will cause irreparable damage to both the user base and the price,” Serhii Zhdanov, chief executive at crypto exchange EXMO, told MarketWatch. Ouch.
Biden’s crypto play
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 March plan to study the crypto industry’s development and its risks to consumers and the financial system.
The process “shows the Treasury is taking public engagement very seriously… from the lens of risk, as opposed to the one of risk and opportunity,” Alex Zerden, the principal of financial technology and risk advisory firm Capitol Peak Strategies, and a former Treasury official in the Obama and Trump administrations, told The Wall Street Journal.
The Treasury will then decide how the feedback will work its way, if at all, into any eventual policy, he said.
Submit your two cents’ worth on or before 3 November.
Sign up for Fintech Files and other Financial News newsletters here.
To contact the author of this story with feedback or news, email Trista Kelley