Traditional Investment Firms Must Confront the Crypto Hype




Crypto could be one of the biggest and fastest-growing bubbles in world history, but it should not be confused with anything related to investing.

That’s because crypto, in all its various brands, has no fundamental value or investment characteristics that lend it to established, fundamental security analysis. Crypto has no earnings, dividends, PE ratios, management, or company information.

Its value is more in its perception than function. Since there are over 250 crypto issuers worldwide, many of them secretive, it’s almost impossible to discern which one is worth buying compared to another. Crypto’s most exciting feature now is in its branding efforts.  But branding is not investing, so what’s the big deal about crypto?

What’s the Big Deal About Crypto?

The newer online firms touting crypto are selling the sizzle, not the steak. They are vague about what crypto offers, if anything, but praise its hipness, generational exclusivity, anti-bank, anti-government, and anti-establishment stance. Ads for crypto touted by Matt Damon and Tom Brady have no message other than saying that crypto is a cutting-edge new something for bold risk-takers, most of whom have limited assets and minimal investing experience.

The dangerous part is that 80% of crypto buyers are Gen Z and Millennials, with little or no knowledge of traditional investing. They also distrust traditional banks or oddly claim they don’t have access to these institutions.  Interviews with crypto buyers who claim they have some investment knowledge sound like they never heard of portfolio diversification, the role of fixed income, or even high-beta stocks that have more benefits than crypto investing.

Mutual funds and banks have great trading and clearing systems, and innovative low-cost funds and ETFs that trounce crypto hype on any day, but they are too timid to confront the huge wave of young investor stupidity.

This same cadre of crypto buyers is also easily fooled.  Some think crypto is a new asset class, transformational, or a disrupter to traditional governments and big banks. Not really. Crypto is a medium of purchase or a very volatile, easily hyped currency. It deserves the same asset class status as roulette.

Crypto is also coming when the US suffers from the most significant wealth gap in history. There is a declining real economy that produces anything physical. The COVID-19 epidemic has disrupted the workplace and called into question the nature and quality of the work and the role and purposes of traditional financial institutions.

This combination, along with low financial literacy and a desire to be part of the crowd, has propelled crypto to be some magic path to wealth when it could easily be an economic dead end.

Beware of Crypto Scams

And like many fanatics today, this group dislikes having their beliefs challenged. One young crypto investor said buying crypto was part of a “paradigm shift of democratized ownership paired with 24/7 trading.” It’s too bad this guy does not know that 24-hour retail trading started in futures markets in the 1980s and that “democratized ownership” (whatever that is) is what issuing the shares of publicly traded companies is all about, and that started in the early days of the 1800s at the NYSE.

Worse, some of these young crypto buyers (they should not even be confused with investors) told CNBC that they bought “a meme coin” called unisocks, or $SOCKS, which is “a digital token representing a claim on a physical pair of socks.”

While grossly uninformed and easily misled, too many of these young crypto traders entered the markets via no-commission firms, like Robin Hood, which stressed their hip technology (which is no better than the technology offered by Fidelity and Vanguard) over what is they were selling. Firms like Robin Hood, E-Trade, and some robo-advisors preyed on unsophisticated investors by never disclosing the dangers of IPOs, SPACs, or related scams.

These online brokers tested the hyping environment by first touting SPACs (Special Purpose Acquisition Companies) as a way to get in on IPOs, just as the big institutional investors were buying into the same IPO.  However, these firms never mentioned the fine print of SPACs, which said that wealthy insiders got insider prices when a company went public. The novices led by the online firms were attracting small, unsophisticated investors to pump up the post-IPO price in the days and weeks after the IPO’s public listing.

Small details like this were no concern to Robin Hood since these firms were integral to the SPAC frenzy.  But this same model works well for crypto and investors, essentially day-trading unknown names.  The only way these crypto buyers will make money is to sell their crypto to another buyer at a high price. That resembles a Ponzi scheme more than investing.

What Makes Crypto Attractive?

So, what makes crypto attractive to more sophisticated investors?

It is excellent for money laundering, evading taxes, transferring money in record time, and all pump-and-dump schemes. While foreign currency trading is fluid and readily convertible, crypto has regulations that vary from country to country. Grey regulations often attract people who thrive when working in grey areas.

Not unexpectedly, US financial regulators at the SEC, US Treasury, and CFTC have caved in to industry pressure and approved some listed crypto funds. That may happen because they wanted to control a portion of the unregulated trading into the formal investing system. Yet, even with the regulation, there is no consensus about crypto. These three agencies consider it a commodity, security, and currency.

But since crypto’s prominent attraction is its unregulated nature, US regulators have probably lost the battle on taxing and monitoring crypto trading.

But since you cannot argue with success, crypto skeptics should watch the unfolding train wreck. China, a nation more protective of its citizens in many areas than the US, has banned crypto exchanges and mining operations. That may be considered extreme, but how else do you prevent a bubble from developing that can undermine your nation’s financial system?

Crypto’s Lesson to Financial Planners and Institutions

Many financial professionals can see the economic landscape is being challenged by crypto, def-centralized finance, “democratization” of investing, and meme stocks. Most of these shaky activities are fueled by social media hype and misinformation that gains traction with an already undereducated group of investors. To complicate matters, most of these investors have all amounts of capital to invest and live paycheck to paycheck.

This makes Millennials and younger people very susceptible to the bling of the American Dream, but with no way to achieve it. A survey by found that over half of Millennials want to be homeowners, but admit they cannot afford a home purchase.

At the other extreme, Joel Steinmetz, COO of Rialto Markets, is hyping the democratization of the private equity markets because “we’ve already seen the power of the masses in the public securities sector, through incidents like the ‘Gamestop Affair’ where retail investors, aided by social media, challenged the public market status quo.”

Beware of the Crypto Hyperbole

Of course, this is hyperbole. You cannot have democratization of private equity since private equity is only open to people who are accredited or qualified investors. These people have a net worth of $1 million and annual salaries above $200,000 for a single person. This does not include about 80% of Americans, so it’s hard to say how private equity has been democratized unless we missed a vast wealth transfer in the last few weeks.

Also, no one has “challenged the public markets” meaningfully unless you consider blind buying into a marginal fantasy game home entertainment company an investment challenge.

It’s also notable that the hype about crypto parallels the huge boost in online sports betting.

This is no coincidence. Millennials know more about the teams they are betting on than the crypto companies they buy. It’s all about short-term speculation, throwing the dice, and hoping. But throwing the dice is not even close to investing.

But fantasyland, as Disney has shown, is big business. The difference is that Disneyland has a gate around it. Facebook’s entry into fantasyland via cartoon characters is Mark Zuckerberg’s escape from anti-trust actions, misinformation dissemination, and propaganda management.

This means the investment markets are at a critical crossroads. Traditional investment management and retirement planning have somehow evaded too many Millennials and other under-educated investors. This is all bad medicine for the industry.

Mutual funds, RIAs, and banks with sizeable retail investment and planning operations have a big marketing and PR problem. Their great trading and clearing systems, oversight, and innovative stables of low-cost funds and ETFs trounce crypto hype on any day, but they are too timid to confront the massive wave of young investor stupidity.

This inaction is terrible for the traditional financial services industry and the country as many naive and misled younger people think they can day trade their way into retirement financial security.


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