Confidence in Cryptocurrency | David Reibstein and John Zhang (Part 2)

When Does Fraud Impact Cryptocurrency?

Dan Loney: How then, do some of the instances of fraud in and around cryptocurrency factor into the perceptions of the public and then potentially impact either their buy-in, stay out, the pricing component? I mean, we’ve certainly seen a few instances that you would think would move people away from it.

Dave Reibstein: So you would think, whenever there’s any hint of fraud — you know, the big arrest of Sam Bankman-Fried, you would anticipate this is just going to crash the market. I actually have been surprised [by] how resilient the market is. That there’s been these sorts of instances that have happened, and yet, the market has been surprisingly stable through all of that. And so it sort of says people believe in this overall concept more than this individual or that particular individual. It hasn’t affected the overall industry.

Loney: Well, that’s the interesting thing as well, is that we’ve seen this absolute surge in pricing, especially around Bitcoin, in the wake of FTX and all these concerns, obviously it’s more tied to, as you said before, the results we saw in the presidential election, the Trump family maybe being a close advocate of cryptocurrency now. So it is reactive to a lot of different factors.

John Zhang: I actually agree with what Dave just said. I think that if you look into the cryptocurrency market, and that market is so big today, and there are so many people who are involved in this particular industry. And it’s almost like the U.S. dollar, for instance. You have scandals here and there. You basically have the dirty money. You have the tainted money. All kinds of different scandals going on there. But it doesn’t really, overall, affect the value of dollars.

But I think for cryptocurrency, we probably have gotten beyond the point, I think certainly in the last couple years, we go beyond the point where a small scandal somehow is going to sink the whole boat. And that probably is not going to happen. I think that I would imagine that going forward, the market can easily absorb a lot of other scandals.

Loney: Dave?

Reibstein: On a small scale, that’s totally true. I mean, we haven’t seen anything big that’s going to happen. And I think it’s pretty resilient.

Zhang: It’s hard to have a big one. I think it is hard to have a big one, simply because the market is so distributed and so many people actually hold the cryptocurrency. And not only that, in fact, it’s very difficult for any institution to unilaterally change anything in the marketplace. I think given that, I would imagine going forward, that scandals will probably have less and less impact in the marketplace.

Loney: Because they know that there’s a component of that kind of built into what you’re getting into in this marketplace anyway?

Zhang: Exactly. Yeah.

Reibstein: I mean, part of it is this whole notion of distributed trust. And it’s one of the things we’re looking at, is people that believe in distributed trust are those that are more likely to be investing in crypto, and take it away from the major institutions. So there’s no one institution that holds so much power in the overall system. And that’s what has attracted a number of people to the currency.

Loney: How do you think that impacts finance in general then potentially? Because a lot of people have talked about, you know, are we starting to round a curve in terms of the importance of cryptocurrency in the investing landscape?

Reibstein: There’s no question. What we see is some of the major banks are investing in cryptocurrency, just to balance their portfolio. And so we’re going to see that this distributed amongst the institutions. It was supposed to be this non-institutional entity, and now the institutions are really investing in it.

Zhang: I definitely agree with that. I think that certainly — there is still a way to go, right? So you have some of the financial institutions that get involved in this, but you don’t really see a lot of pension funds, for instance, that want to invest their money into the cryptocurrency. You don’t see the sort of sovereignty funds for some of the countries that will begin to invest in the cryptocurrency. Once those things happen, I think that you’re going to see that the market potential is huge.

Loney: What’s, then, the key driver to start to see that occur, do you think?

Zhang: Well, I think number one, that you have these young people who are very enthusiastic about the cryptocurrency. And these are the future of the country, right? So you never bet against the young people. I think once those people basically go out there and push for the sort of regulation, push for the technology change, and cut down the cost of processing Bitcoin and so on and so forth. It will become a widely spread currency. I think that’s one part of it that will happen. I think that secondly, once you have more of a certain regulatory environment, you can imagine the institutions will see the potential and they will jump in. Once they all start jumping in, of course, then I think that we have a really bright future there.

Loney: Dave?

Reibstein: I mean, I can’t argue with that at all. I think it’s absolutely the case. And as it spreads more and more to more of us individually owning them, it’s going to be hard for it to falter.

The Future of Cryptocurrency Ownership

Loney: That then kind of leads me into my next question. Where is the future larger-scale ownership in and around cryptocurrency? Is it going to be through 401(k)s and different accounts? Is it going to be individual? Where is the path potentially leading us? Where do you think?

Reibstein: I think we are going to see it more and more in our 401(k)s. It’s basically — you could think of it as, this is just another one of my stock holdings that I have. It’s part of my portfolio. I’m going to have it in my retirement fund, I’m going to have it in my speculative fund. More and more, that’s going to end up happening. And we can just treat it like we would any other investment.

One of the things, by the way, I find humorous — we’ve asked people, “Would you want to be paid in crypto or would you rather be paid in cash?” And people say, “I want to be paid in cash.” However, if you have crypto, I don’t feel bad about paying with crypto. So I don’t fully trust it yet, but we’re going to get to this stage where people say, “Pay me in crypto.” And, “I want to invest in crypto, just as I would any other stock.”

Loney: It’s interesting because you’ve seen different companies kind of dip their toe in the cryptocurrency water in that realm of accepting cryptocurrency for payment on different services — which is an interesting pattern, obviously, that it’s so different from what we’ve seen in the past. Because the company that’s accepting the crypto is also, to a degree, speculating on what the value of that currency is going to be as you move forward down the road.

Zhang: Absolutely. I think that if you feel really optimistic about the future, that probably is something that you want to do. And obviously if pension funds begin to get into it, I think that that particular asset class will become a whole lot less risky for sure. And I think one of the things that in this context I want to add is that as marketing professors, obviously, we really think that the marketing will play a huge role in this whole process of actualizing the value of the cryptocurrencies. The reason is because they all use, more or less, the same kind of technology, right? They all don’t have an intrinsic value. So ultimately, I think that is the marketing efforts you’re making. And that probably will make a huge difference in terms of whether or not the whole industry is going to consolidate on you, versus somebody else.

Reibstein: I’m really glad you brought that up, not just because we’re marketing professors. Of course, we want to bring that up. But one of the industries that invest a lot in advertising is actually financial institutions. And why? Well, I want you to have confidence in us. What it is that we’re going to see — and it relates back to the earlier question of all these different brands — [is] you need to have confidence in our brand. And while these other fraud or scandals are going on here or there, you need to have confidence in us. And so there’s more and more marketing effort that’s going behind trying to create a brand, and in particular just the trust that people have.

Loney: Well, and doesn’t, then, cryptocurrency gain a level of security by being connected with financial institutions? Which in many cases are relied upon by the public in general. Those institutions are basically bridging a gap along the way.

Zhang: They do.

Reibstein: Which is so ironic. Because part of the reason for the cryptocurrency is to decouple from the financial institutions. So there’s that irony that’s there as well.

Loney: Where do you want to take this research? Where do you think are the next areas that need to be investigated?

Reibstein: It’s so funny. We just came from a meeting where we were going over where do we want to be taking this. And one of the things that we’re thinking about is the “crypto creep.” That more and more people are starting to use it. We’re trying to track and predict retail acceptance. You mentioned some places starting to take it. We at Wharton took [it] — you could pay for a course.

Loney: Oh, really?

Reibstein: In crypto. We did that. And you see it — movie theaters are accepting crypto. We’ll see it in all sorts of different stores. And so, can we anticipate which stores are going to end up taking it? That distribution and what types of stores is one of the next things that we’re going to be looking at. And which types of people. We have looked at what types of people are the most likely to own crypto right now and sort of seeing where that diffuses. An interesting finding that we see — I should quiz you, because I’m a professor. […] Do the East Coast, West Coast, or the Midwest own more crypto?

Loney: Oh yeah. I’m gonna say West Coast.

Reibstein: Okay. You’re wrong. And if your next guest was East Coast, you’re wrong.

Loney: Really? The Midwest.

Reibstein: That was most surprising to us. And part of that is, they are opposed to that centralized control. When you pause and think about it that way, that’s another way of— Can we anticipate and predict who are going to be the people most likely to be investing in crypto?

Loney: John, what’s still piquing your interest?

Zhang: Obviously this is a very, very complex topic. I think every one of us is really trying to feel the elephant. And I think this is really at the very beginning stage of our research on the cryptocurrency. I think that the bite we are taking essentially in not only looking at the consumer confidence, what are the determinants of the consumer confidence in Bitcoin, whether or not the confidence index will predict the Bitcoin price changes, and so we can predict where they’re going, and so on and so forth. Most importantly, this whole idea of distributed trust is really new. I think [with] personal trust, we know what it depends on.

But for distributed trust, for instance, we don’t know. And so that’s why, in fact, a lot of research we can do [is] in terms of figuring out, what are the determinants of distributed trust? That’s definitely one big topic. And also — most importantly from a pricing point of view, of course — that we want to know what underlines the changes in prices. Is there any way that we can get a hold of the price changes in some way, and then predict how they would change? There is a lot of modeling and data collection and processing to do.