CPM Group’s position regarding digital currencies has always been clear and constant.

• Private crypto currencies are the antithesis of gold and silver, of precious metals. They are totally intangible, can vanish instantly, are created by anonymous entities that holders of crypto currencies cannot hold responsible, and their value is based on holders’ faith in that anonymous creator of crypto currencies and the belief that there will always be a ‘bigger fool’ willing to pay a higher price than the holder of the crypto currency had paid. Think of the Pet Rocks of the 1970s. Cryptos are less valuable than tulip bulbs, which at least can be planted to make beautiful flowers.
• Consequently, CPM has always stated that the private crypto currency fad will end with investors losing all or almost all of their wealth invested in these sham ‘assets.’
• Nationally issued digital currencies using some future form of distributed ledger protocol is the future of digital currencies, as it is the next phase of a centuries-long arc of technological changes in the form of currencies used around the world.

CPM has eloquently laid out this analysis and conclusion since the arrival of crypto currencies. One place where CPM did this was a great debate at the 2018 PDAC convention, the link to which is below.

Gold vs. Bitcoin – A Munk Style Debate at the PDAC 2018 Convention

A Pocket Full Of Dreams

Since they first emerged in 2009 CPM has contended that the private crypto currencies were worthless, empty shells. Seeing them as nothing more than a legal Ponzi scheme, we have predicted that the ‘market’ for cryptos would be littered with scandals and inappropriate losses, ultimately disappearing.

Our view has been and continues to be that the best historical analogy for cryptos was the internet stock boom and bust of the late 1990s. In that earlier delusionary ‘investment’ mania outrageous valuations were given to virtually non-existent companies’ stocks. Three college students literally raised $100 million or more with a five-page ‘business plan’ that was nothing more than a concept, or a pipe dream.

Ultimately the ‘internet’ companies of the late 1990s tech stock boom went bust. It led to investors losing around $5 trillion dollars, it crashed the stock market, and along with various financial corporate scandals pushed the economy into a recession in 2001.

Looking to see where else one sees the sorts of volatility of valuations and ‘returns’ on cryptos supports this conclusion: The returns are comparable to slot machines in casinos, and not at all like those of stocks, bonds, real currencies, or commodities.

In relation to gold and silver: Cryptos are the antithesis of gold and silver. They are totally intangible, in contrast to the tangibility of precious metals. Their value is entirely predicated on the willingness of someone else to pay something for them.

Think of it this way:

• When gold bubbles burst the gold price declines the decline may last a year or two, or a decade or two, but the investor owning gold has the gold, and the value of it may be redeemed, even if it is lower than the value at the time individual investors bought the gold.

• When national currencies collapse the holders of those currencies have recourse to the national government that issued it. The paper may prove worthless, but there may be claims that can be made successfully based on them.

• When a crypto currency collapses, the holders are holding nothing. There is not even a piece of paper, as with a national currency, and there is no one to turn on to seek redress.

• •  In one of the earlier crypto scandals Japanese investors who lost US$500 million in 2018 gathered at an intersection on the Ginza district of Tokyo, standing around wondering to whom they could appeal their losses. There was no one.

The Current Scandal Is Not The First, Or Last

People now are sorting through the numerous inappropriate actions that have led to the FTX collapse. There is no clarity at present as to how large the losses are; they appear to be somewhere between $5 billion and $50 billion.

In this environment commentators are making various analogies. In reality the current scandal is similar to a combination of the tech stock bust (madness of crowds buying worthless garbage), Bernie Madoff’s Ponzi scheme, and MF Global’s appropriation and misuse of client funds.

As in the tech bust, this is just the most recent blow up. Already there are investigations into other crypto entities’ seemingly malfeasant and fraudulent financial activities.

It is important to not paint an entire industry, market, or asset with a brush based on a single company’s bad behavior. However, the FTX scandal is not the lone example of inappropriate behavior in an unregulated market for assets with no book value or other value. The FTX scandal is an opportunity to discuss the broader security issues of cryptos and contrast them to commodities, currencies, stocks, and bonds. While malfeasance and misfeasance occur in each of these markets, the incidence is a fraction of the occurrences in these other markets. Partly that reflects greater regulatory oversight, at least in stocks and bond markets. It also is an irrefutable consequence of the lack of regulation and the lack of ‘real value’ in cryptos.

The current scandal is not the first and will not be the last.

• There have been dozens of scandals, from fraud to scams to thefts.
• The U.S. Federal Trade Commission estimated that $1 billion was lost in crypto scams just in 2021.
  • That was up 60-fold from 2018 reported crypto fraud.
  • It was 25% of the fraud reported to the FTC last year.
  • This is due to outright fraud and theft. It does not account for the losses due to wild declines in value.
• Chainalysis estimates that more than $3 billion in crypto value was stolen in the first nine months of 2022.
• Glassnode estimated that 40% of Bitcoin holders were at losses in their Bitcoin holdings as of May 2022. Bitcoin has lost another 41% since then.

The incidence of losses, through malfeasance, misfeasance, and other issues, is far higher in distributed ledger protocol (DLP) systems than on SWIFT. This should not be surprising, since SWIFT has been operating for decades and resolved security and other performance issues long ago. DLPs are in their infancy and have not had years of operations during which risks and weaknesses have been identified and rectified.

Where Are The Regulators

Regulators had taken a hands off approach toward crypto currencies for most of the 13 years since they first started trading. Part of this reflected the need to determine responsibility for oversight of these new markets.

A larger reason behind the hands off approach – until recently – was that regulators assumed cryptos would blow up and investors would lose billions, but the regulators did not want to act to protect the investing public lest they be accused of causing the crypto schemes to burst.

In this way the crypto market has been a lot like the real currency markets in the 19^th century. Only England and France had central banks. Other countries had no central, national banking regulatory authorities of any real use. The United States, Germany, Italy, and most other countries relied on private banks to issue currencies, with no real or effective regulatory oversight. Many bank owners would print more currencies than they had assets to cover – gold, silver, and the currencies of other banks. This massive, widespread fraud led to numerous disastrous bank runs when depositors realized the private currencies they held were not backed by anything other than an unethical banker’s word. That is where the crypto market is today. Possibly the best book on the subject of the U.S. currency system in the 19^th century is Stephen Mihm’s A Nation Of Counterfeiters. The counterfeiters were the bankers issuing more currency, bills, than they had assets to back.

With cryptos, things have begun to change in the past two years. There were several reasons for the changes. One of the most important is that the crypto market size went from around $500 billion to $1 trillion, then $2 trillion, and then $3 trillion. The losses investors were facing became more dangerous to the public and to the stability of the broader financial system. Also, mainstream banks, brokerage houses, institutional investors, and others became more involved in cryptos. It was not just the investing public that was facing the potential risks of major losses.

Another factor is that Gary Gensler became Chair of the Securities and Exchange Commission. Mr. Gensler has had a much stronger view that the government needs to do more to protect the investing public and regulate financial market entities than many other Washington people, and he has moved more assertively to bring regulation and oversight to the crypto markets.

About the same time, in September 2021 the Chinese government banned all crypto currency transactions. (That said, some crypto currency transactions continue in China seemingly bypassing the ban.) China is not the only country to ban cryptos. At least eight others have.

More recently, in the past few months the European Union and United Kingdom have become more serious about regulation and oversight in cryptos.

It remains to be seen if these moves are too late.

The Chinese move bears some further comment, since it is interesting in several ways.  The Chinese government and Communist Party always have said that China cannot afford the untested theory put forth by the pseudo-laissez faire U.S. oligarchy of ‘creative destruction,’ that some people have to be allowed to fail in order for the overall economy to grow in a vibrant fashion. Chinese leaders have been more cautious and diligent in trying to protect their citizens and investors from sham investments that are designed to cause financial losses for some or many.

The concept of creative destruction is of dubious veracity, although there is more empirical evidence to support it than existed for the humorously nonsensical Monetarism of the 1970s and 1980s and the equally laughable Modern Monetary Theory of the 2010s.

What Does This Mean For Gold And Silver

Again, CPM always has been clear and unwavering in its view of the likely effects of cryptos on gold and silver investment demand and prices.

• In the short term cryptos have distracted very little investor money away from gold and silver, The much larger ‘distraction’ or competing asset that has vacuumed up multiple times more money has been the U.S. stock market. So, contrary to what is commonly believed, in the short run cryptos have not generated much concern for gold and silver investment demand and prices.

• In the long run we always have held that cryptos will be very good for gold and silver investment demand and prices, because they seem destined to fail and lead to heavy investor losses.

• Private cryptos are designed to collapse and explode, leading to massive losses by investors, possibly on the magnitude of the $5 trillion in losses in the tech stock bubble bust of 2000 – 2001 and the $7 trillion in losses due to the collateralized mortgage obligation bust of 2008. The size of the losses will depend on how large the private crypto market will grow to be before it implodes.

• National government issued digital currencies, which will not be crypto currencies, will arrive. They, too, will benefit gold and silver investment demand and prices. This will happen as more investors choose to hold a portion of their wealth in tangible assets not dependent on government digitized finance and an electrical system and grid that are massively at risk and challenged today, and face an even more problematic future. A billion people, around 13% of the world’s population, do not even have electricity now, and electricity demands are projected to grow around 30% over the coming two decades, even before factoring in the needs of electric vehicles.

As mentioned earlier, markets for precious metals, commodities, stocks, bonds, and currencies are not immune to fraud, theft, misfeasance, malfeasance, diversion of client funds, and other improper activities. They are, however, less prone to these than crypto currency markets. Scandals happen, but with far less regularity than in the crypto markets. And, given the ‘empty suit’ nature of cryptos as not having any real tangible value, they stand in stark contrast to the tangibility of precious metals, commodities, stocks, and bonds. They are, as mentioned above, the antithesis of the tangibility of gold and silver.

All of this is good for gold and silver investment demand and prices.

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