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June 2021 | Issue 235
Opinion Credit derivatives
In the afternoon I awoke from a pile of willow leaves to discover we had created a Welsh ether-based token
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A localised crypto-currency boom and bust cycle teaches Welshcake (again) that everything becomes correlated in a downturn
My latest tale of woe arises from the world of digital currencies. And since I gather this is an area in which some of you may look to supplement dwindling credit returns, let it be a cautionary one.
Things escalated rapidly. A rare sunny Saturday and growing confidence in the easing of the Welsh lockdown prompted me to drop my usual misanthropic pastimes and agree to meet two old friends from way back when — let’s call them Paul and Scott — for a dinner catch up.
Paul is something of a crypto-currency guru, so there is a ring of inevitability to what unfolded, but the evening began serenely, with home-made curry and a beer next to a camp fire in Scott’s garden. We admired his domestic projects, such as pruning back a willow tree that would otherwise have blocked the sun. Scott’s daughter performed improvised songs about trees on a ukulele and everything felt wholesome.
But once the kids had gone to bed the beverage-fuelled banter found its way to the hot topic of the month: Wales’s plan to trial universal basic income. Schemes involving ‘helicopter money’ have become a talking point for politicians and portfolio managers alike as governments look to reinvigorate the real economy. Considerations of how central banks will eventually use the same ledger tech as crypto-currencies are never far behind. A global tussle over monetary sovereignty is surely on the way, between centralised and decentralised power, from China to the US.
Even so the Welsh plans are bold, given the UK government has called them ‘a petri dish for failed left-wing policies’. But such objections worry not us warrior poets, and we began debating how private enterprise could get ahead of the move to help ensure its success.
By 2am I was reduced to a long gaze into the embers of the camp fire as Paul stood over it shouting: “If Bitcoin is gold, etherium is the internet!” That should have been our cue to wrap up, but onwards we marched into the digital wilds.
In the afternoon I awoke from under a pile of willow leaves to discover we had somehow created a Welsh ether-based token, the ‘Myfanwy’, purpose built and ready to service the UBI scheme. I shouldn’t have been surprised, given Paul’s insistence this could be achieved in five minutes. But none of us could recall doing it.
Nevertheless, the coin was in circulation and rising fast on exchanges, having somehow been promoted in the village post office. We could not suppress gasps on viewing our 10% digital wallet holdings. Visions of mega yachts loomed large over the coming days, I’m ashamed to admit.
By Monday, Myfanwys were on every villager’s lips when I went to get my paper and eggs. Even some teenage oik cried, “Get yourself some Myfanwy, butt!” as I passed. By Tuesday, Dai Bread the baker would no longer accept cash for a baguette, and Reverend Jones was using digital collections to pay for a renovation of the church roof. By Wednesday, Elon Musk had tweeted about taking Myfanwy to Mars.
Up to their eyeballs in Myfanwy futures
Right about then came the crash. Environmental concerns around Bitcoin resurfaced, China got heavy and crypto-currencies went to the cleaners. We returned to our former, non-oligarchic state, and the local council found itself up to the eyeballs in worthless Myfanwy futures. But at least they’ve stopped complaining about the asymmetric derivatives I persuaded them to buy in ’06.
And with that, a crushing reality hit many a blank canvas on which millions, perhaps billions had projected their hopes and dreams. To say this bore echoes of previous steroidal pump and dumps is an understatement.
For all the thousands of crypto assets available to buy, May’s downturn provided a painful lesson well learned from our own credit crises — that everything becomes correlated. Not that there was ever much diversification in the crypto universe, just as there wasn’t in subprime mortgages. When push came to shove it’s much more about who holds this stuff and for what reasons rather than any fundamental differentiation.
I’ll put my hand up for my part in this one, but do me a favour. When you hear about the crypto debacle being fuelled by the unwind of highly leveraged latecomers, just hold in mind that they are talking about whales and not Wales.
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Global credit funds & CLO's
June 2021 | Issue 235
Published in London & New York.
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