HSE professor, financier Evgeny Kogan on the future of cryptocurrency

Sergei Medvedev: The future has come for bitcoin. 2020 was a tough year for all of us, but not for this cryptocurrency: its growth has almost quadrupled this year. Bitcoin is currently trading somewhere between 35 and 40 thousand dollars per coin. What caused this growth? What is cryptocurrency in general in relation to fiat, the main currencies of the modern world? Has Bitcoin become the new gold, a haven for free money in times of trouble? Or is it "new tulips", a kind of global bubble that will collapse sooner or later?


  Correspondent: Over the past few months, the bitcoin rate has almost quadrupled, breaking the $ 35 thousand mark. Analysts are confident that its value was primarily influenced by the coronavirus pandemic, the volatility of global stock markets and the decline in oil prices. Many investors say that Bitcoin will become a widely used means of payment very soon. It is perceived as a defensive asset against inflation, and in order to obtain super-profits, more and more investments are flowing into cryptocurrency. However, the currency is still in the "gray" regulatory area, has practically no official status and is an alternative to fiat currency in many countries. Undeveloped legislation largely blocks the way for investors to enter this market, but macroeconomic instability has helped the cryptocurrency market gain attention, and the faster it attracts new investors, the more the asset will grow. Bitcoin is limited to 21 million coins, and more than 85% of the total supply has already been "mined", including forever lost wallets.

Mining is designed so that the more coins are created, the more difficult it becomes to mine new ones. Manufacturing takes place on computers and requires significant processing power. If a few years ago it was possible to mine bitcoin at home, now it makes no sense. Many corporations build gigantic mining farms, which are simply impossible to compete with.

Mining is designed so that the more coins are created, the more difficult it becomes to mine new ones

Bitcoin was created as an alternative to any currency due to doubts in governments and the global financial system. It rests on the trust of the participants in the system. Since 2016, the exchange rate has grown by 1500%, many got rich on cryptocurrency, the fear of not making a profit from the growing exchange rate appeared in society in time. Investments in cryptocurrency generate demand for the remaining amount of coins, which in the future may lead to new rate records. Experts are already predicting a rate of half a million dollars per coin. Will cryptocurrencies be the money of the future, and when can we pay with Bitcoin for coffee?

Sergei Medvedev: Let's discuss these problems with our today's guest - this is Evgeny Kogan, professor at the Higher School of Economics, investment banker and financier.

Indeed, in times of volatility, in times of coronavirus, bitcoin becomes an unexpected refuge? How do we explain this explosive growth at the end of 2020?

Evgeny Kogan: Is Bitcoin a kind of haven? Of course not. This is a kind of speculative asset that is in demand today. There is no connection between bitcoin and real life. There are no mechanisms for determining the value of bitcoin. What is Bitcoin? This is a kind of formula. Yes, indeed, the number of coins is limited, which is why everyone said: oh, this is great, this is some kind of digital gold, some kind of new entity that will replace gold for us. Is it true or not? Does this coin have consumer properties, is it a wrapper? No, not at all.

Sergei Medvedev: There are many "gray" transactions in bitcoin. How is bitcoin different from gold? This is how we agree.

Evgeny Kogan: Then it can be called silver or platinum - these are already details. Bitcoin is a great way to transact money. Their number is really limited. In a sense, a crypt can be conventionally considered inflation protection. But can you invest in it? For example, I am disgusted when I hear: some experts talk about what will happen ... Excuse me, is there at least one person who can be considered an expert in this area? An expert is someone who says: based on such and such formulas, such and such data, I can build such and such a model and say that, obviously, it will be. But in this case it is nonsense, it is impossible, today there are no such models.

Is there a demand? Yes. If, for example, you wrote a book or article for me, I liked it, and I want to pay you with bitcoin - please. Today no one will ask me a question, why am I paying you, where is the contract, where did I get this money. This is a way out of the global compliance system. Here we need to talk in more detail about what is happening with money today. I remember 2007-2008 very well. If I wanted to enter into a deal, I simply transferred money somewhere, made contracts, and the banks accepted this money, asking very few questions. Today, if you want to translate somewhere or

get money, then, in fact, it's like going to the police, undressing and labeling everything from "a" to "z". Crypt is a kind of civilized response of people to the lawlessness that is going on today in the field of compliance, when you need not only to prove any transaction, its meaning, but also to explain what color your grandmother's panties were at the moment when she was just about to get married.

What is a crypt? This is a kind of formula. Where did it come from? In essence, this is a side element of the blockchain. Blockchain is a kind of technology that has a fundamentally different philosophy than traditional banking. We are two bankers, we have made limits: you - on me, I - on you. I transfer money to you based on limits. I am a client of your bank, I open an account with you, transfer money. As a matter of fact, account is a certain function of my trust, liability is your obligations to me, that is, everything is based on trust. Bitcoin is a new philosophy: everything is based on distrust, on confirmation. I want to make a certain record (it doesn't matter, a depositary record, a record about the presence of some real estate) - this is confirmed by certain transactions. No confirmation - no entry. I want to transfer real estate to you, and I do it very simply, this is confirmed by the records.

Sergei Medvedev: Actually, this is a distributed register, the whole world knows about it. We make some code that is generated by computers, this code is available to everyone. A billion users can see that I own ownership of this property.

Evgeny Kogan: Quite right, objective data. No confirmation - you have no property. What is a crypt? Formally speaking, this is some kind of payment for confirmation. And then it is mined. Questions arise: how, when?

Sergei Medvedev: Are you saying that a crypto has a consumer value, that is, it has a function in the global economy, in world transactions, simplifying exchange in the global economy?

Evgeny Kogan: Naturally. We remember that money has several functions - a measure of wealth, a measure of value, transaction capabilities, and so on, accumulation, a medium of exchange.

Bitcoin was created as an alternative to any currency due to doubts in governments and the global financial system

Sergei Medvedev: Bitcoin now meets all the criteria.

Evgeny Kogan: No. Bitcoin gives you and me the opportunity to exchange among ourselves: you give me some goods and services, and I give you bitcoin for it. Will you keep all your savings in bitcoin? Probably not.

Sergei Medvedev: But this is part of the investment portfolio, like a kind of risky investment, something that a person is ready to lose, what he is willing to risk for the sake of this completely explosive growth.

Evgeny Kogan: I am over 50 years old. In the traditions of our generation: we have earned some money - something in bonds, something in real estate, something here and there, something in gold. Someone keeps ingots, someone - coins, someone - paper gold, someone - shares of gold mining companies, which is also reasonable. And we understand that gold is a way to protect ourselves from inflation and, by the way, from geopolitics. Something very unpleasant is happening in the world tomorrow, and gold is always growing - this is a kind of refuge. Is Bitcoin and cryptocurrency in general a haven for inflation? I doubt it. This is a kind of model. You and I have built a model: we believe that this is a defense against inflation. Probably. Or maybe not, because the number of crypts is limited. The formula is that we cannot invent a new crypt. Probably, in a certain sense, it is a protection against inflation.

For me, the most important thing here is to understand the risks. There are several of them. The first risk. We may love crypt three times, but no one likes any non-systemic things: neither the state, nor the regulators. How is it that they completely control everything, Big Brother must clearly see everything and understand where the money comes from, where taxes are paid! And here - the guard! And we think that the regulators will sit and tenderly watch competitors being born before their eyes? I don’t believe it, it’s impossible. By the way, we can see perfectly well that recently regulators have been talking more and more about the systemic crypt.

Sergei Medvedev: Everyone wants their own digital currencies: yuan, euro, ruble.

Evgeny Kogan: This is a systemic crypt, in fact, systemic digital money.

Sergei Medvedev: This has nothing to do with bitcoin.

Evgeny Kogan: Technologically, this is also a kind of blockchain product. The regulator comes and says: no, guys, this is unsystematic, but this is systemic, it is possible. Today they are simply not able to fight it. There are two options for dealing with something that is difficult to fight: Either try to fight or try to lead. Regulators are trying to eat the fish and ride the tram. That is, first of all, they try to fight, but they understand that it is useless. Moreover, in some countries you can pay with crypto.

Sergei Medvedev: As I understand it, the past year 2020 was the year of the arrival of large systemic investors. Very large investment funds began to channel part of their portfolios into bitcoins. Has there been any partial whitewashing of the cue ball?


Evgeny Kogan: No. With players, everything is very simple. If you and I know that there is a demand for a certain thing, we know how to produce it, how to work with it and how to make money on it, then we will do it, if it is not prohibited by law. Likewise, large players: they saw that there is a demand, it seems that they don't beat for it, it is not written anywhere that this should not be done, so they started working with it. And if tomorrow the regulators say: guys, from tomorrow - no, believe me, all the major players will turn around and say: well, sorry.

Sergei Medvedev: And just get out of bitcoin? It is very easy to invest in Bitcoin, but it is very difficult to withdraw money back to the "white" zone, to the cash.

Today, in most countries of the world, we cannot buy milk or sausage for cue ball.

Evgeny Kogan: Today, it is quite easy to get out of cryptocurrency into fiat currency, the fees for this are relatively small: both for entry and exit. But it is at this point that all the risk is concentrated. Today, in most countries of the world, we cannot buy milk or sausage for cue ball: practically everywhere, with rare exceptions. And we have money as a result, so that, for example, in old age we do not run around and look for how to get rid of it, but simply have money in our pocket to pay for everything we need. We have accumulated a certain amount in a crypt, and tomorrow we want to turn it into money, we come to the bank and say: here we have a crypto wallet, will you accept? And the bank says: "Guys, wait a minute, where are the taxes paid for this? And we don't work with the crypt," and so on. If the regulators also take it and outlaw all this officially and legally (and this can happen), then at that moment all these large players who began to overclock the goods, will they not start dumping them at any price?

Sergei Medvedev: Denis Smirnov, blockchain consultant, cryptocurrency researcher, thinks.

Denis Smirnov: We say that bitcoin is secured by the trust of all its users. If you think about it, then a fairly large number of fiat currencies are backed by nothing more than the trust of their owners in the states that issue these coins. The main advantage of bitcoin is that there is no centralized person who could, for example, take control of the printing press or in some way influence the emission of the main cryptocurrency. There is only code, and this code in this ecosystem is the only law, moreover, this code is almost impossible to change.

Bitcoin is based on blockchain or distributed ledger technology, that is, in fact, a fairly large distributed database that is simultaneously stored on computers of a huge number of participants and changes at the same time, while containing information about the completion of any transactions. It differs from traditional centralized databases in that a blockchain, a blockchain is several pages of an electronic granary book, each of which contains not only data on all transactions that have occurred over a certain period of time, but also a conditional link to the previous page. This is a special number that is calculated using the data contained on the previous page. Thus, we get like beads strung on a single thread, holding each other: several blocks containing information, for the calculation of which it is necessary to know all the information that was before. Today, almost 80% of all central banks in various countries are, to one degree or another, considering the possibility of integrating the traditional economy into the blockchain. The European Central Bank does it; there is a digital dollar; China is ahead of the rest: the digital yuan is already being integrated into everyday life.

Such a centralized model will allow not only to optimize all this bureaucracy, but also to fight corruption, because one of the main and, probably, the most important functions of the digital ruble, according to the Central Bank, will be the ability to tag this money, making it possible to spend it only on some target things. For example, when receiving maternity capital within the framework of state payments, it will be possible to spend it only on those activities for which it is intended. Or, for example, budget funds allocated for the construction of a hospital cannot be stolen for the simple reason that these digital rubles simply will not be suitable for any other spending, except for the construction of this hospital itself. The centralized use of blockchain technologies opens up a sufficiently large range of opportunities for the economy and in order to make it much more efficient.

Sergei Medvedev: I can't imagine what a digital ruble, a digital yuan is. After all, bitcoin is a distributed, not a state system, but here are central banks that say: no, guys, we will play the same technology. How is this possible?

Evgeny Kogan: This is the whole paradox that the entire system was originally built on absolute freedom.

Sergei Medvedev: Bypassing the state.

Evgeny Kogan: There is even a speech

It’s not about bypassing someone, there is a systemic question: what does the state have to do with it? This is a supranational thing. Bitcoin belongs to nobody, nobody is its regulator. This is a kind of free form of movement of some information.

Sergei Medvedev: Like the Internet that does not belong to anyone.

Anyone who says that tomorrow the crypt will cost so much is just crazy

Evgeny Kogan: Now the servers will be shut down - and we will find out who owns it. It turns out that the owners of life are Google, Amazon and so on. Many have the illusion that we live in a very free world, in which the crypt is something free, there is no regulator. In reality, all these transactions are visible, if desired, they are all rolled back and verified. The crypt is really built today on the principle that there is a certain code, and it exists besides us on hundreds of thousands, millions of computers, servers, and so on. This is really so, this is a kind of phenomenon. If you like, this is today's element from the movie "The Matrix". When they come to me and say: Eugene, do you invest in crypto? - I have wool on end. As a classical investment banker, I do not understand what it means to invest in something that does not give a cash flow, or in something that depends on some regulatory issues, in non-market things that we cannot predict.

I can just predict. When they tell me that Bitcoin will be 150 thousand or half a million, I ask the question: in some ideal world in which all the good guys, everyone loves each other, it would be worth zero, because there would be no need for it? In our world, where everyone has to think about how to live, yes, indeed, it has some consumer value. If tomorrow regulators declare a crusade to this whole system, they will just close the moment of fiat-crypt first. In other words, if you want to receive money to any of your accounts in the payment system, in the bank, you will be immediately asked about the source of their origin. You say: here, I had two bitcoins, I honestly earned them. They will answer you: very good; please go to the Central Bank, get personal permission from them. It is clear that I am exaggerating, but in the modern world this is possible.

Sergei Medvedev: Let's say they introduce a 50% tax.

Evgeny Kogan: Easy. By the way, the population will applaud, because they are outraged: how is it, a small handful of the world eaters have earned, but the children have nothing to eat, the old people have no pensions! Here is our pension - in cue ball. I understand that this is demagoguery, but it is always easy to find the enemy.

Sergei Medvedev: And these risks are growing as the cost of bitcoin is growing exponentially: the larger it is, the more the envy and appetites of central banks and regulators will be.

Evgeny Kogan: Moreover, today crypt is a factor of certain market instability. Imagine a good mood on the markets, they printed a lot of money (the same Americans), and then everything is very simple: the cost of a crypt is inflating, and soon it may already be comparable to one trillion. It's a thrill for young new billionaires. They have it for fun, they throw this money one by one, which is why the crypt is growing. Besides, big players are coming. Then a reasonable question arises: will the regulators sit and look at this matter? Will not. This means that some kind of war will begin again.

Sergei Medvedev: So, in this sense, it is impossible to predict anything at all? Bitcoin could crash in 2021, or grow to one hundred thousand?

Evgeny Kogan: That's right. Anyone who says that tomorrow the crypt will cost so much is simply crazy.

Sergei Medvedev: Is this not related to the high volatility of 2020? More liquidity - look at how governments are pumping up the economy: in the US, giving out money, Biden will give out money. After all, there is liquidity, zero profitability, a lot of free money, and this money is just looking for new instruments.

Evgeny Kogan: Quite right. That is why money is printed and printed, and this money goes to the crypt, because it is a fan of young billionaires. Now imagine the situation: at some wonderful moment, a correction begins. People are scared, start selling crypto. And then a chain reaction can go, a crypt panic can suddenly cause panic in ordinary stock markets - and off we go. When a crypt by its capitalization was 100-200 billion dollars, this is a penny, this is zero, and when a crypt already becomes a trillion, this may already be a factor in destabilizing world markets. You rightly said that regulators begin to crawl out of their holes the moment they see a certain destabilizing factor. And then there are officials whose task is to take all this under control. And they will take as they can, they have such a job.

Sergei Medvedev: I won't say that there is any clarity about the future of bitcoin, but in any case it is an interesting element of the modern world, the world of the Internet, the world of networks, the world of 2.0 or 3.0, where everything is decided not by some central servers, central regulators, central governments, and distributed solutions, distributed systems, matritza. And Bitcoin is an interesting case in this regard. So we continue to observe his fate, his rapid growth. Who knows what it will turn out to be in 2021 ...