Crypto’s new clothes may not prove a good fit

Crypto is playing at dressing-up. This is a largely harmless exercise, but also a cunning disguise.

The mission is to make the world’s wildest and most countercultural market look grown-up. On that front, the true believers have scored some big recent victories. They secured US approval to launch exchange traded funds based on the basic bitcoin price, luring in billions of investor dollars at a record clip. The inflows helped the price of bitcoin — the biggest token of all — strike a record high.

They are also celebrating what they see as a seal of approval for the marketing of crypto-based products in the UK, even though the country’s key regulator has only said that it will “not object” to them. The phrase “gritted teeth” springs to mind.

But the biggest victory for the admirably tenacious crypto maximalists is to have these digital tokens considered, measured and generally talked about as if they are a traditional asset class in the first place. In the most vibes-based industry of all, it is vital to sound important, clever and complicated. You, too, could enjoy its bounty if only you were more “educated”.

This led us to a rather strange juxtaposition this month, when in just one week, three notable things happened. First, some hapless punters apparently lost millions on a new sloth-themed meme coin called Slerf. Second, the caretaker chief executive of defunct crypto trading house FTX pushed back at any possibility that its previous CEO, convicted fraudster Sam Bankman-Fried, could secure a light sentence, labelling his enterprise — once the most powerful in crypto — a “dumpster fire”.

Third, one of the most venerable institutions in global markets hosted an event to explain the sophisticated suite of crypto indices it has launched with all the same rigour, process and seriousness that underpins stocks benchmarks tracked by pensions systems around the world.

FTSE Russell has teamed up with Grayscale Investments, an operator of crypto investment products, to launch five indices with names that would not be out of place in mainstream finance. The FTSE Grayscale Currencies Crypto Sector Index includes “crypto assets that serve at least one of three fundamental roles: store of value, medium of exchange, and unit of account”. I leave it to readers to decide if any of the thousands of tokens truly serves any of these roles at scale.

The FTSE Grayscale Smart Contract Platforms Crypto Sector Index includes “crypto assets that serve as the baseline platforms, upon which self-executing contracts are developed and deployed”. Nope, me neither. Others involve tokens “that deliver financial transactions and services” or are linked essentially to games, or “that aim to deliver practical and enterprise-level applications and functionalities”.

If you’re thinking “wow I’m so ignorant, everyone seems to understand this stuff except me, I must find out more”, then this exercise has succeeded.

At a presentation over breakfast buns in the building that houses the London Stock Exchange in late March, Grayscale CEO Michael Sonnenshein explained that right now, these indices are not investable products. They are simply a “framework”, a way for “investors” too bamboozled by anything in crypto beyond bitcoin and ethereum to grow more comfortable with the broader diversified “asset class”.

Grayscale and FTSE Russell hope the benchmarks will be useful to “active managers” picking tokens and strategies just like a portfolio manager at an investment house or hedge fund. But they have all the usual problems with crypto. Dogecoin, for example, was initially envisioned as two things: a joke and a means of payment. The former of those categories is winning. So the index creators have parked it in the games category, not the currency index.

But most importantly, these indices are all over the place, with no obvious pattern. Looking at the historical performance, any one of them can be down 8 per cent one month, up 34 the next, down 0.5 the month after that and then up 16 again.

My strong suspicion is that they all track pretty neatly with the price of bitcoin. If you want to buy bitcoin, go right ahead, either as a token (which is already up 50 per cent this year, happy days) or as an ETF. Good luck to you. I bear your enrichment strategy no ill will.

There’s really no need to mimic stocks and bonds or force crypto through the complication engine that already powers fully regulated markets. Sophisticated crypto labels still bunch together stuff that varies from well intentioned and potentially socially useful to outright silly. Sounds clever though.

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