Current Groupthink of the Crypto Faithful

by Robert J. Schiller for more. Crypto investors are no exception to group think, and they're in group behavior comes with a lot of catch phrases like the famous GM and the infamous have fun staying poor, or the tongue in cheek that coin will fix this, where this is

basically any social or economic issue you can imagine. In this episode with Bloomberg Senior editor Mike Gregen, common sense, but humans, uh, you know, traditionally aren't the best practitioners of common sense and Bloomberg reporter Emily Nicole's it seems crazy. Why would you store your money on an exchange where it's really difficult to get access to it or you don't own the rights to it, Like, isn't that bon because we'll tackle the mood among the crypto faithful and

why some of them are now evangelizing cold wallets. Emily, you have written probably more than any of us on the team about the culture of crypto, and one of the elements of that I think is really reflected in the phrase not your keys, not your coins. For the people who don't obsessively compulsively read your newsletters on a

regular basis, can you just explain what that means? So, not your keys, not your coins means that if you are storing your crypto with a third party online, typically there may be something in the terms of service that says that while your assets are with that provider, they actually own the rights to those assets and not you. And it's typically actually the most popular way that at least the terms of service act for many of the

largest providers of crypto custody. So, if you think about platforms like Celsius that went by craft earlier this year, when you put your assets on Celsius, you didn't actually have any claim to those assets once they're in celsius possession, because that is how Celsius was able to do things with those assets once they had the rights or generate

the yields for the loans that they were creating. But conversely as well, if you think about even the banks that offer crypto trading alpha some customers, like in the UK, we have an app called Revolute. It's also pretty big in Europe any assets that you buy with Revolute. So if you can buy bitcoin, you can buy ether. You're actually just putting your name attached to a bit of bitcoin in revolutes big bitcoin pile, and you don't own

any rights to that. So it also makes it very difficult if you then want to be able to withdraw that bitcoin and take it somewhere else. Now, first of all, that seems wild in the sense that when you talk to crypto folks, and especially when you talk to people who describe themselves as bitcoin maximalists, the idea that you would knowingly willingly hand over, you know, the right to

your crypto seems bonkers. But you know, Mike, something that you have addressed kind of similar to the idea of you know, culture, is kind of this idea of like convenience, Right, it is really hard actually to hold onto your own stuff, and so you've got people who are like one, surely they'll give me back if I ask demonstrates it not necessarily and too well, surely they're not doing anything nefarious with that. Also tvd SO, on the podcast that you host with vill Donna What Goes Up, you had a

guest Leo Wold recently who started talking about cold wallets. Now, cold wallets emerged as this idea of Okay, people may do nefarious things, people may go bust, here's how to keep your keys safe. What is that like in practice? Well, you know, I think it gets to the heart of the fact that people trust the blockchain itself, especially with Bitcoin. They don't trust all these other intermediate mediaries who are working on top of the blockchain. And I think that's

really a lesson that's come back home. You know. There seems to have been a complacency that had grown around the likes of a huge exchange like f t x H and all the others. And in practice, it's it's really getting back to that notion not your keys, not your coins. People want to hold these private keys somewhere safe offline. And if you look at the data, there's a website crypto quant that tracks a whole bunch of things.

But one of the things I'm fascinated in is how much bitcoin is being withdrawn from exchanges and put presumably in cold storage. And in the middle of November, something like half a billion dollars worth of bitcoin a day, something like twenty nine thousand bitcoins a day, we're getting

yanked off of exchanges. The problem though, is that, you know, you put those private keys on a hard drive, and we've all heard the hilariously sad stories of people losing their hard drive forgetting the passwords of their hard drive, or you know the one poor guy I think it was in Wales, we threw it out and was trying to bribe the people at the dump to let him go dig dig around for his hard drive because the value of the bitcoin had had gone up so much.

So there are companies that offer this service as well. But I think you know, this emoil we've seen in the last month or so has really revived that whole notion of you wanted those private keys as close to possible and as safe a place as possible, and for many of that is simply on a hard drive that you can put in a safe, put in your closet, put wherever there's one. A few interesting ones have come out recently to regarding n f T s, there's now

cold storage. While it's where you can store your n f T s but also show them off to your friends. It looks like a little iPhone, so you can sort of scroll through your n f T collection, but it's in cold storage, meaning it's not connected to the internet. No one can sort of reach in through the internet. Somebody could steal your little device. Someone could yeah where you could put it in the dump and and have to drive a trashman to get one of the things.

I always remind people that, in addition to the joke that you know will kind of make where it's like ha ha, underlying technology crypto is also just tech, right, and so getting people to memorize passwords very different. Cold problem. Getting people to back up there are hard drives, very difficult problem. Like the number of people in my own family shout out to my family who are like, well, you know, I know you said to back up these files,

but I didn't. Are they gone forever? And I'm like, oh my god, I could be a member of your family. I feel like, so you you layer on top of shall we say, the default stands of human beings which is not to do the right thing when it comes to tech because it's annoying. And then you say and make that potentially be worth tens of thousands, if not millions of dollars. How do we solve that tension? How are people trying to solve this tension? You know, I'm

not sure you do. And I think what happens is um, you know, maybe you put your coins in cold storage when the coins at dollars ethereums at three thousand and prices collapse and then you kind of forget about them, you know, and then five years goes by, ten years go by, and a wait a minute, I I'm a bitcoin millionaire. Where is that hard drive? What is the password? So I think it's at your point, I think it's human nature. There is no simple, elegant solution for it

other than the things you're talking about. You know, back it up, don't leave it somewhere in the sun, if it's a hard drive, if don't let your kids. Yeah, I mean it's common sense, but humans, uh, you know, traditionally aren't the best practitioners of common sense. So you know, the one thing I would say is that when a lot of these coins get moved off the exchanges. It used to be considered a very bullish thing, right, Oh, people are pulling them off the exchanges. That means well,

at least they're not trying to sell them. If you see an influx of coins back onto exchanges, the thinking is, well, they're all getting ready to sell. But I think that signal might be broken at the moment. I don't think you can, you know, assume that because people are so paranoid about every company involved in crypto, that it's a bullish thing that they're they're moving their coins into cold storage.

I think it's it's just survived at this point. And Emily, you know, you pay a lot of attention to shall we say, the sentiment negative or positive of folks in and around crypto, not just institutional investors, but also you know, like retail investors on crypto Twitter. What have you observed

to Reagan's point about what folks are doing. I think the one thing that stood out to me a lot is that in this particular cycle of people moving money back and forth between like cold wallets or online exchange wallets, hot wallets, is that during this period of tumult a lot of the typical resort um last resort for crypto investors is that it's time to build it. Is what you hear a lot of companies say during this time is that okay, well, okay, no one's trading and everyone's

moving their coins off the exchange. Is there's time to figure out how to build something coolse they come back and in that one of the top things is how do we make it easier for p or to interact with things like cold wallets or interact with things that there are on exchanges, because it's like, at the beginning of this episode, we said, it seems crazy. Why would you store your money on an exchange where it's really difficult to get access to it or you don't own

the rights to it, Like it isn't that bonkers. But the reason they do that is because it's really difficult to stow it on a cold wallet. You're going to forget your password. And so one of the biggest challenges I think that crypto investors talk about is how do we make it more palaceable for the masses, Because it's not just that you know, bitcoin goes up and down

and you might lose all your money. It's also that the digital literacy is a thing, and it's not even that you have to be digitally literate not to get crypto. You can be incredibly digital litteral and still not get crypto. Well, you know, in traditional finance tradfy as it were, the way that folks have solved this is with regulation and legal precedents. Right, Like, if you put your money in a bank and the bank goes under up to US

or an amount, you will get your dollars back. It's not even any kind of a well did city but no, So if you had up to two hundred fifty dollars in the US and the bank goes onto you're gonna get your money back. And so I find it a little bit challenging to square this idea of folks in crypto saying we want to make it more palatable for retail investors while simultaneously saying we don't want any additional

government interaction with our asset class. There's a big elephant in the room here in that no one knows legally if a company like FDx files for bankruptcy, where the people who had deposited coins, where they stand in sort of the hierarchy of who gets paid out in a bankruptcy filing. You know, there are they secured creditors, so they get paid out ahead of non secured creditors. That hasn't been tested in the bankruptcy courts. And if you read coin bases, I'm one of my hobbies is reading

risk factors of public companies. If you read coin bases risk factors in their sec filings, they'll say fingers crossed.

You know, they don't really say fingers crossed. I'm atting that, but it's it's implied that we think in a potential bankruptcy and no one saying coin bas is gonna go bankruptcy, but these risk factors you have to give every possible dire scenario, and they're saying, you know, in the event of bankruptcy, we think that people who have come to us for custody of of their coins, which is not just you know, mom and pop traders, that could be you know, funds, big time players, we think that the

courts will decide that they will get paid back their crypto holdings. But it's not It hasn't been really tested and appealed and everything in courts, so no one really knows. As a depositor in one of these exchanges were lenders or any other crypto company. What's to become of those coins in a bankruptcy? How you'll get treated by the bankruptcy court as a client of of one of these companies.

I feel like because all roads seem to lead back to Matt Levine somehow when it comes to this, it's it's very much the this isn't actually a trust less ecosystem. Like the amount of faith you have to have in different things working in order to navigate the system right

now seems to be at an all time high. Up next, more from Bloomberg's Mike Reagan and Emmelin Nicole on the crypto faithful Emily or maybe you, Mike, in your you know, the time that you've been reporting on crypto, even just in the past twelve months, do you think there's been a shift in like the level of kind of aggression around you know, some very straightforward types of reporting that's happening because the market has gone down because of this

collapse of trust, Like what are you seeing? Yeah, for sure, I Mean there's kind of two prongs to it, right in that on the one hand, the aggression is stemming from now, especially in a post FTX world, even though is at the very top of these companies like Finance Yo s e Z say, Okay, I'm going to be more proactive in calling out what I think could be fraud because maybe it'll give everybody the warning clients they

needed to have spotted FDx before it happened. Actually reflect on the SCS situation, and I kind of blame myself for tweeting that too late. I think as the industry, we let fts got too too big before we started

questions someone those things. So I'm taking the approach where we ask questions much earlier, and that has already resulted in several instances of him tweeting something and then having to delete the tweet because actually it caused more fear and uncertainty and doubt than it was supposed to do. The opposite um But on the other hand, there's also more aggression around trying to be more stable with what

you're putting out there about your own company. But if you're an investor and you have your own portfolio, you want to make sure that the tokens that you hold aren't coming under dress unnecessarily, and so you'll sit, you'll jump in quickly when you hear someone saying something that you think is inaccurate to say, actually, hold on, here's what I think. And the finance example you gave of the two billion is a great example of that, because we see this spot tweet out that two billion in

bitcoin is moving. Um Zi rapidly says, this is just you know, us doing something for our orders Too who asked it for our proof of reserves. But then we've already heard from others like Mirror Cristanto, who works for a digital currency group, saying that actually, an Orders Too would never ask you to do that because that's a financial liability for them, And then you don't really know who's trust right, and it leaves you in the in

this limbo. And in a way, I think this all to me looks like the market is trying to do what regulators would do if if they could wrap their hands around this, which is sort of force some accountability on these companies, force more transparency with the proof of reserves.

And it reminds me of something we wrote a while ago, that notion of crossing the chasm, you know, going from early adopters who are you know, comfortable working with private keys and and that sort of thing to sort of a more mainstream adoption where you have these big, you know, centralized exchanges and players and sort of being forced to mature and provide the type of disclosure, the type of

transparency really build. The type of confidence that you know, decades of regulation did in the radifi world is really being forced on them now, not by regulators but by the market itself, by the players in the market who are like, enough is enough. You know, you need to do this, that and the other thing to really have

our confidence going forward. Yeah, it reminds me of a phrase in kind of sociology called context collapse, right, which is what happens when a conversation or a set of idioms move from the people who have a really sophisticated understanding what's happening into into kind of the mainstream. And I really think that a fascinating dynamic has been the rate at which and actually going back, crypto hit the

mainstream on an upswing. It was, you know, Matt Damon and Tom Brady are telling you to buy to buy crypto and buy n f T s and then it hit their downstream really really fast at the same time, and folks have a kind of a cultural whiplash, as in, is this thing good? Is this thing bad? Is it the worst thing ever? Is it the best thing ever? I just can't felt um. And you don't really get the impression that the industry itself was like prepared to

navigate all this, but you're right, absolutely not. And you know, the due diligence was in a bull market is something that seems to have been deferred. Oh, this company is invested in that one. I I can trust that they've done the due diligence. No one really seemed to do the homework they should have done, because if you waited too long to do it, you missed out, You missed

the rallies. So you know, these periods of market destruction can be creative destruction in a way, and that they will cause an outcome where, you know, problems get fixed, confidence restored, one would hope, but you know, you never know how long it's going to take to to sort of really get it back into the full swing of things like we saw in Alright. Well, thank you both

of being on the show. Thank you, thank you. You can find more of Mike Reagan and emilin Nicole's work on the Bloomberg Terminal and on Bloomberg dot com, and of course, check out Mike's podcast that he hosts with friends of the show Bill Donna, called What Goes Up. This is Bloomberg Crypto, a daily podcast from Bloomberg and I Heeart Radio. For more shows from I Heeart Radio, visit the I Heart Radio app, Apple Podcasts, or wherever

you get your podcasts. Send us your comments, questions, or suggestions for the show to Crypto at Bloomberg dot net. The supervising producer of Bloomberg Crypto is Vicky very Galina. Our senior producer is Janet Babin. Our producers are Mohammed Farruk and Sharon Barriro. Our associate producers are Ty Butler and Moses on Them. Desta wonder At is our engineer. Original music by Leo Sidron. I'm Stacy Maria Schmal. We'll be back tomorrow.