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Carson Block, short seller and hedge fund founder, made a name for himself more than a decade ago sniffing out suspicious short companies.

Block, boss and chief investment officer of Muddy Waters Capital, sitting with Barron’s Live earlier this month to discuss how he approaches a position he wants to sell short, the problem with ESG, Chinese companies selling short and other topics. Notably, our conversation also focused on cryptocurrency.

“To me, it’s not a real asset class,” he said. “In the sense that it doesn’t have a lot of intrinsic value. It’s almost entirely tulip. And, yeah, I understand that’s when you have this situation where we just have central banks, dumping liquidity, and governments dumping liquidity into economies and into markets, those things can skyrocket in value .

Traditional finance, or tradfi, traders and fund managers have nonetheless dipped their toes. Cryptocurrencies are fragmented – their price differentials can widen between trading platforms, while regulatory scrutiny can vary by jurisdiction. This has created opportunities for arbitrage traders who like to exploit these loopholes.

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“Can you make money from crypto? Of course you can. I’m not saying you can’t. Nor am I going to tell you that the global fiat money system makes complete sense. But to me, it’s just like it’s another bubble.

Block’s views echo those of hedge fund adviser Patrick Ghali, who told me in July that when it comes to crypto: “As long as the market continues to be inefficient and volatile, and you can trade it, there will be opportunities.”

“You have investors who like the idea and see it as an inefficient market, and so they want exposure to it,” said Ghali, co-founder of hedge fund consultancy Sussex Partners in London. “Because inefficient markets are usually synonymous with alpha.”

So how does Block, one of the most visible short sellers in the world, play in this market? By looking for fraud.

“When you get that kind of foam, or you get that kind of attention and money suddenly flowing into space, you’re going to have a lot of bad actors and a lot of things that you would want to short circuit, whatever Regardless of your perspective – where you might think crypto is going to be in 10, 20 years… there are still plenty of bad actors in the space.

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Hear Block’s commentary on crypto and more on the Barron’s Live replay. You can also find the conversation in the form of a podcast on Apple podcast, Spotify Where Barron’s Live.

Was the “merger” important?

The Ethereum merger was highly publicized. It was a software upgrade that boosted the environmental credibility of the cryptocurrency while moving from so-called proof-of-work to proof-of-stake. Under proof of work, Ethereum was secured by miners, a high-powered process that burned an enormous amount of energy. The network is now secured by stakers – ether holders who lock their tokens. The the market yawned.

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This is because the merger was an “information selling event”, Julio Moreno, senior analyst at Cryptoquant, says MarketWatch. In other words, in anticipation of the event, traders have driven up the price of Ether over the past few months. “Then sell orders started to rise as traders/holders sought to hedge ahead of the merger.”

Macro factors quickly took over, driving all cryptos down on September 19th. Most pressing on the minds of crypto traders is Gary Gensler. The Federal Reserve Chairman signaled that the merger could turn digital currencies into a security in the eyes of regulators, just like stocks and bonds and all other major asset classes.

Cryptocurrencies and intermediaries that allow holders to “stake” their coins could pass the so-called Howey test, used by courts to determine whether an asset is a security. It examines whether investors expect to profit from the work of third parties.

“From a coin perspective…this is another clue that, according to the Howey test, the investing public anticipates profits based on the efforts of others,” Gensler said. said on September 15.

If Ether becomes a security, it is “likely to face heavy fines that ETH may not be able to afford, as well as being delisted from 90% of centralized exchanges, causing irreparable damage. both user base and price”. Serhii Zhdanov, CEO of crypto exchange EXMO, says MarketWatch. Ouch.

Biden’s Crypto Game

The US Treasury Department has just released a request for comment, inviting “interested members of the public to provide input” on illicit finance related to digital assets and national security risks. The request is part of the agency’s mandate under President Joe Biden’s March plan to study the development of the crypto industry and its risks for consumers and the financial system.

The process “shows that the Treasury takes public engagement very seriously … from a risk perspective, as opposed to a risk and opportunity perspective,” Alex Zerden, director of the fintech advisory firm and in risk Capitol Peak Strategies, and former Treasurer in charge of the Obama and Trump administrations, said The Wall Street Journal.

The Treasury will then decide how the comments, if any, will feed into any policy, he said.

Submit your grain of salt value by November 3rd.

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To contact the author of this story with comments or news, email Trista Kelley



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