I was recently asked to speak as part of a panel on CSE TV about cryptocurrencies and blockchain technology.
One of the questions we were asked was about billionaire Charlie Munger’s view on cryptocurrency.
The argument that the stock market is somehow more legitimate than the cryptocurrency market is false if one understands how the current financial system works.
People like Charlie Munger who have profited greatly from the traditional stock market like to portray crypto investors as lowlifes and bottom feeders while Wall Street brokers and hedge fund managers as pillars of the community and are shining examples of capitalism.
To understand Munger’s comments we need to first take a brief look at those who profit the most from how the financial system operates – the hedge fund managers.
A hedge fund manager operates the private investment vehicles that typically only America’s wealthiest people can afford. Hedge fund managers try and control and often manipulate the stock market for their own gains.
They often anger the middle class and average investors when they squeeze profit out of a company for short-term gains, regardless of the long-term consequences – often causing layoffs, mergers, and or bankruptcies such as in Sears or Trans World Airlines.
While one couldn’t predict the future of these companies – there are only a handful of Sears left in the United States and Trans World Airlines went out of business in 2001 – hedge fund managers and corporate raiders do nothing to try and build the economy.
To achieve high returns on their investments for both themselves and their clients, hedge fund managers often participate in questionable financial practices such as selling junk bonds, short selling, and subprime mortgages as was the case in the 2008 recession.
While governments half-heartedly pretended to clean up Wall Street during the subprime crisis, these dubious, sometimes-illegal practices are largely still practiced today.
The true difference between the stock market and the crypto market is when people steal in the crypto market they are labelled as scammers and thieves but when people steal in the stock market, there are almost no consequences.
During the entire subprime crisis, no CEO went to jail and only one banker was ever put behind bars. In fact, the white-collar crime prosecution rate seems to be dropping along with the number of reported white-collar crimes.
In the 80s and 90s, there were around 10,000 prosecutions a year in the United States. But in 2019 the number of white-collar crime prosecutions was only 5,000 – the lowest it’s been since 1986, according to Bajoka Law Group.
Because of the lack of accountability, there has been increasing anger against hedge fund managers and the inequity in the stock market in general. So much so, that a bunch of Reddit users decided to band together and teach hedge fund managers a lesson.
When the hedge fund managers decided to short a stock called GameStop, the Reddit users decided they would keep buying the stock, driving the stock up causing the hedge fund managers to lose billions of dollars. Some major brokers like Robinhood and Webull panicked, halted trading on the stock.
The stockbrokers cited ‘extreme volatility” as the reason for suspending GameStop trading when in fact it was to protect the hedge fund managers.
There have been cases in the past where trading has stopped because a stock had dropped suddenly which is called a circuit breaker; this is to prevent panic selling, but rarely – if ever – is it used when a stock goes up in value. Investors everywhere rightly cried foul when GameStop was halted.
But as per usual nothing ever changed to level the playing field for the average investor. When a few powerful brokers can halt trading to protect hedge funds but not small individual investors, the system is no longer fair or equal and it becomes increasingly hard to argue otherwise.
Charlie Munger is defending a system that is designed to keep making money for the rich and those who have no money or power from taking advantage of the system.
One way that Charlie Munger has made a profit from a scam was during the Wells Fargo fraud scandal in 2016. The bank created millions of fake savings and checking accounts on behalf of their clients without their knowledge. Wells Fargo clients began to notice unauthorized fees being charged to their accounts. In addition, lines of credit and credit cards were opened up without authorization.
The initial blame was given to branch managers but later shifted to executives who pressured account managers to open as many accounts as possible. The regulatory bodies found out and fined the company $185 million as a result of this illegal activity.
The company faced civil and criminal suits. However, nobody went to jail. As for the Wells Fargo Stock? It took a little hit but kept climbing, unaffected by the scams.
Charlie Munger is also an investor in Bank of America. In August 2014, Bank of America agreed to a near-$17 billion deal to settle claims against it relating to the sale of toxic mortgage-linked securities including subprime home loans, in what was believed to be the largest settlement in U.S. corporate history.
Now to be clear in no way did Carlie Munger orchestrate any of these scams or schemes and most likely didn’t know about them but regardless he was able to profit immensely from them. And when he criticizes crypto he is either disregarding his own profiteering off the companies that have either acted unethically or committed illegal acts.
And what’s more, he continues to invest in these companies (As of this writing he owns 1.59 million shares of Wells Fargo worth roughly $76 million and 2.2 million shares of Bank of America worth just over $100 million.) voting with his money that it’s okay for these companies to disregard the law.
Cryptocurrency is not perfect but Web3-enthusiasts and those working ethically within the blockchain ecosystem are aiming to create a better more fair system.
However, there are plenty of bad actors trying to take advantage of the lack of regulations and the anonymity that comes with the space, but is it any better or worse than the stock market and fiat currencies in general? Unfortunately, greed is a human trait and it will be present in any system we create.
There are plenty of great crypto and blockchain projects out there – far more than bad ones, just like the average person who invests in the stock market isn’t trying to lie, cheat, or steal.
But in the crypto space, there are no regulatory bodies so you have to be extremely careful when choosing to invest in a project; there is a good chance you’ll lose money.
As for the accusation that crypto companies are just out to make money and do not care about the economy?
It only takes a quick glance to realize there are plenty of amazing crypto projects that aim to form online robust communities that can support creators in building amazing games, art, and platforms, among other things.
These communities do not just benefit those who have money to invest but anyone can make money – and a living through what has been built.
In business as in the crypto space, people lose their way; either people become too greedy, they lose sight of what’s important or the business just becomes too unmanageable.
The eventual aim of crypto and blockchain is that it will democratize investing so you don’t have to go through a broker and that a few brokers can’t halt a trade on the platform just because it’s not good for their business.
It’s not that cryptocurrency offers something better than the stock market, it’s that it has the potential to offer ordinary people more control over what they invest in.
While we clearly aren’t there yet, we can hope that one day we won’t have to worry about another recession because banks, hedge fund managers and other investors try to game the system.
That the system won’t be one-sided towards the wealthy and powerful. But for this to happen cryptocurrencies will need to be regulated, but it needs to be done thoughtfully while still allowing the ability to innovate.