Last week was a rough one for crypto-currency enthusiasts. Just as Bitcoin was staging a return from the dead, news broke of yet another possible fraud at a digital money exchange.
Crypto-currencies plunged US$10 billion in market value after New York’s attorney general announced an investigation into Tether, a digital coin. The case alleges companies behind Tether and Bitfinex, one of the globe’s biggest crypto exchanges, used fancy footwork to hide an “apparent loss” of $850 million of co-mingled corporate and client money.
It’s the latest blow for an asset that since 2014 has ricocheted from crisis to crisis.
But another setback last week deserves even more attention. It involved Masayoshi Son, Japan’s second-richest man. The SoftBank billionaire is the world’s most influential venture capitalist, a man single-handedly shaking up the tech startup game.
And yet this superstar investor lost a jaw-dropping $130 million on Bitcoin. It’s a loss that raises fresh questions about the asset’s readiness for prime time.
Betting on Bitcoin
Son, as the Wall Street Journal tells it, loaded up on Bitcoin in late 2017, just as it was nearing an all-time high just shy of $20,000. He reportedly did so at the urging of Peter Briger of Fortress Investment Group, a company Son’s $100 billion Vision Fund acquired in 2018.
Fortress had been betting in Bitcoin since 2013 and was clearly ecstatic about its meteoric rally.
Yet Son buying into the frenzy near the very top tick dents his reputation as an astute long-term investor. Son gets considerable mileage from his reputation as the Warren Buffett of Japan. His own guru legend has grown since 2000, the year Son bet $20 million on an unknown teacher in the Chinese city of Hangzhou.
By the time Jack Ma’s Alibaba vision went public in 2014, Son’s stake was worth $50 billion.
Since then, Son has tried to recreate that magic. His bet on Bitcoin – how much we still don’t know – seemed a swing-for-the-fences ploy to protect his Buffett-like halo. That legend is part of why Saudi Arabia is bankrolling Son’s Vision Fund, handing him about $45 billion and hinting at more cash.
Son’s Bitcoin loss was with personal money, not SoftBank’s. Still, it’s an embarrassing blow to his street cred. And the timing couldn’t be worse.
In recent weeks, the VC-industry press pulsated with chatter that some Vision Fund backers were skeptical about Son’s huge bets on Uber, WeWork and other arguably overvalued Silicon Valley “unicorns.”
“The story unenviably undermines his reputation as a shrewd long-term investor,” said analysts at Zero Hedge. Son also made a splash on Twitter, where users added the #BITCOINSucker hashtag to his mentions. Adds financial consultant Arun Tikmani, Son “failed to heed Warren Buffett’s advice” about buying low and selling high.
And yet, Son’s loss reflects even worse on Bitcoin. When such a savvy value investor can blunder so stunningly and so quickly without a good explanation, the crypto-currency game has a serious problem.
Value investors are risk takers, sure, but they also appreciate markets having guard rails and clear protocols. The crypto world has few.
The emergence of new crypto-currencies – from Litecoin to Ripple to Ethereum – so vastly outpacing the market infrastructure is a recipe for disaster. As such, says Peter Mallouk, president of wealth manager Creative Planning, “there’s no way that even a fraction of them can survive.”
One mistake Son and his ilk may have made were thinking crypto assets were like more conventional ones. That’s an added level of risk.
“The argument here is that Bitcoin has gone through its bubble phase and is ready to rise phoenix-like from the ashes just as other assets and indices did in the past,” said Kevin Dennean, tech analyst at UBS.
He added that “maybe crypto bull contingents should consider what happens after the bubble. Not every bubble that bursts recovers the old highs.”
The New York investigation into Tether is but the latest scandal to trip up the crypto world. Two of the biggest have been in Son’s Japan – one in 2014 at the Mt Gox exchange, one in 2018 at Coincheck.
Hackers also have reaped havoc at exchanges from South Korea to Thailand. Such snafus have China banning crypto trading, initial coin offerings and mulling a ban on Bitcoin mining.
Bitcoin’s recovery since March is a bit of mystery. Yet it’s rekindled the debate about whether the current price – about $5,000 – makes sense. Count Nouriel Roubini among those warning of irrational exuberance.
“There’s no good reason to turn bullish on crypto,” said one of the few economists who predicted the 2008 subprime crisis.
Leading Bitcoiners beg to differ. Hearing such views, said Los Angeles-based punter Stephen Cole, “helps remind me that Bitcoin is so revolutionary even smart and experienced people can completely misunderstand and miss out on it.”
Count Tuur Demeester, a founding partner of Adamant Capital, among those wondering why Son did not hang tight for a while. In a recent report, his team argues Bitcoin investors should be in a “heavy accumulation” phase.
They say Bitcoin may appreciate to $6,500 where “a new bull market permanently cements” crypto-currencies “as a multi-trillion-dollar asset class.”
Perhaps, but that gets us back to those guard rails. Buffett has long been on record dismissing the crypto boom. At Berkshire Hathaway’s 2018 annual shareholder meeting, Buffett said Bitcoin “is something where people who are of less-than-stellar character see an opportunity to clip people who were trying to get rich because their neighbor’s getting rich buying this stuff neither one of them understands.”
More recently, in February, he told CNBC: “It is a delusion, basically” that “attracts charlatans.” Agustin Carstens, head of the Bank for International Settlements, also views Bitcoin as a “bubble, a Ponzi scheme” that could put global stability at risk.
The same goes for investors – like Son – trying to figure out a market that participants are making up as they go along. In a Match 19 report, Bitwise Asset Management alleged that nearly 95% of Bitcoin trading volume was faked by exchanges to pad fees. “From a lay person’s perspective, that’s a confusing juxtaposition,” said Matt Hougan, global head of research for Bitwise.
Or, some of the world’s wealthiest investors. Look no further than SoftBank’s Son. When the savviest punters can fall so far and so fast without explanation, it’s time for an entire market to look in the mirror.