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The cryptocurrency industry has a penchant for repeating the mistakes of the traditional finance industry, and the treasury company trend could be one such mistake, according to Zero Knowledge Group founder Austin Campbell.
Campbell told FINTECH.TV on Tuesday that the cryptocurrency treasury trend held an eerie resemblance to the mortgage-backed securities trend of the 2000s.
“There are these cycles when you see bubbles that start with very grounded forms of finance, where people can pay their cash flow and finance all the debt, no problem. And then you get into ones where basically they’re just rolling debt to finance operations. And then you get into ones where price appreciation is the only way they remain solvent,” Campbell said, citing economist Hyman Minsky‘s ideas on financial bubbles.
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According to Campbell, many of the digital asset treasury firms are showing characteristics of the tail end of the bubble, where they need the underlying asset to keep appreciating to stay solvent.
“If you have a vehicle that needs to have price appreciation to continue to exist and function properly, eventually there’s going to be a problem,” he said.
Mortgaged-back securities were popular in the early 2000s as home prices kept appreciating, fueled by easy but risky loans in the form of subprime mortgages. The bubble started to burst in 2006 as home prices began to decline, and defaults on subprime loans piled up. This housing market collapse was one of the major drivers of the 2008 financial crisis.
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While Campbell fears a similar crisis will unfold with cryptocurrency treasuries, he expects it to be more contained.
“Digital asset Treasury companies cannot crash the economy,” he said. “They’re not systemic enough.”
Campbell’s recent remarks echo recent warnings from Standard Chartered Global Head of Digital Assets Research Geoffrey Kendrick. Kendrick told investors that several Bitcoin treasuries were at risk of selling off their holdings in a sharp market downturn, which could in turn further escalate the downturn.