The Aura Of Cryptocurrencies (and The Death Of NFTs)

A Case for Crypto (via Walter Benjamin)

I had a brief insight into what those on the frontline of the crypto live through every day when I made what I felt was a fairly uncontroversial post on LinkedIn about the speed (or lack of it) with which cryptocurrencies had been adopted into mainstream commerce. The response to my post contained a wide range of different viewpoints, but it was notable that the defenders of Bitcoin were more vociferous and on occasion outright aggressive in their tone, accusing me of either a deliberate attempt to scupper their blockchain revolution, or a blindness incurred by being so long in the pocket of Big Fiat Currency. It was a shame as I tend to be one of the more enthusiastic voices when it comes to discussions of crypto on the trading floor.

It feels symptomatic of our age that positions when it comes to cryptocurrencies have become so swiftly entrenched – you’re either violently pro or committedly anti – that very little room is left for nuanced discussion of the benefits and detriments of this revolution to the world of money. At Man Group, we approached crypto as we approach any new asset class, undertaking a huge amount of research, carrying out extensive studies into potential risks and how to mitigate them. We then moved to live trading and now have incorporated Bitcoin and Ether into a number of our systematic strategies.

One of the champions of crypto within the firm is Tarek Abou Zeid, Partner and Senior Client Portfolio Manager in Man AHL. Tarek spoke eloquently about Bitcoin and Ether at our Unconventional Investing Conference at the Whitney Gallery last week. He drew a comparison between NFTs – much chuckling about the sums paid for Bored Apes and real estate in virtual worlds – and crypto.

Tarek’s argument centered around the relative price action exhibited by these speculative assets and that of cryptocurrencies. He showed that NFTs followed similar price paths to any number of historical bubbles, from tulips to railroads to South Sea stocks. They spiral upwards as the excitement builds and then, when the bubble bursts, they crash spectacularly.

Bitcoin, Ether and the other most liquid cryptocurrencies, however, have behaved rather differently. In Tarek’s words: “A bubble is a persistent deviation from fundamental value… there is one distinguishing characteristic between the price behavior of coins and the classic historical bubbles: crypto drawdowns have been (so far) always followed by recoveries.”

Their price action tracks more closely any other number of developing asset classes in their early days – from EM equities to high-yield debt, or, looking further back, to the volatility exhibited in gold prices as it became accepted as a financial asset in the early years of the last century. What is different about these assets is that, notwithstanding the significant drawdowns that they have experienced as investors moved through cycles of greed and fear, acceptance and rejection, they have always staged a recovery. It’s a thesis that gives significant weight to the notion of crypto as a nascent asset class moving through the initial stages of a path to maturity.

After his talk, I pointed Tarek towards a 1935 essay by the great Walter Benjamin: ‘The Work of Art in the Age of Mechanical Reproduction.’ In the essay, Benjamin speaks about the way that the arrival of the mechanical printing press changed the way that people thought about works of art. Benjamin writes about the “aura” of the original painting – the Mona Lisa, for instance – which is connected to its place in time and space, its unimpeachable authenticity. Rather than diminishing the aura, he goes on, the mass printing of works of art merely served to accentuate the power of the unique status of the original.

It feels like a useful model for thinking about the divide between NFTs and cryptocurrencies, both of which, I’d argue, attempt to use blockchain technology to establish a source of value. Benjamin says: “that which withers in the age of mechanical reproduction is the aura of the work of art.” The Mona Lisa on the wall of a college dorm room lacks all but the smallest shred of the power of the work hanging in the Louvre. The original retains all the power. NFTs simply didn’t manage to overcome this fundamental observation. Their problem was that they attempted to create a virtual aura in a world of near-perfect replicability. No one could tell just by looking if your Bored Ape is different to the copy I’ve just snipped on my laptop.

I would argue that cryptocurrencies have achieved something different through removing any physical manifestation of their unique status and instead concentrating entirely on the concept of scarcity and its link to value. Unlike NFTs, which attempt to imbue digital assets with an aura through provenance but fail because they remain easily reproducible, cryptocurrencies derive their digital aura from the abstraction of their creation: complex mathematical processes and decentralized verification mechanisms. This abstraction not only ensures that each individual cryptocurrency maintains its share of the aura of authenticity, uniqueness and scarcity, but gives the whole crypto world an air of ritual and quasi-religiosity, something that Benjamin said mechanical reproduction had stripped from the world of art.

Crypto as an asset class is of particular interest to our systematic strategies: they are increasingly liquid, move in recognizable patterns that work well within a trend framework, and are more and more the focus of institutional interest. They also offer genuine diversification, showing little correlation with other assets.

Benjamin’s essay, linked here, is a nice example of the way truly first-rate thought can be adapted and applied to new worlds unimaginable to their authors. So next time you check your crypto wallet, spare a thought for one of the great minds of the twentieth century and the aura that seems alive and well in digital currencies.