Is Crypto Bullshit? Calling My Shots

is crypto bullshit? calling my shots cover image

The harshest critics and strident boosters of crypto-land are engaged in an ever-escalating battle to project the most lurid vision of the future. Nothing in this arena can be taken at face value, which makes it unusually fertile ground for testing your own critical thinking skills.

The discourse is a dumpster fire because a) these technologies live or die by social consensus, and b) everyone is in an entrenched position—holders are incentivised to pump their bags; nocoiners are incentivised to justify their inaction.

I don’t claim to be immune to this dynamic, but I do claim that what started as out as pure naked greed has morphed into some kind of genuine interest.

As a finance geek, it’s been fascinating to watch an alternative financial system spring up in real-time. As an armchair philosophiser, I love stroking my chin and pondering how this will shape the future. As an enjoyer of low culture, I get to inject a constant stream of absurdity straight into my veins.

In other words, I’m ‘in it for the technology’.

In it for the technology dot jpeg

For what it’s worth: I started dabbling in crypto in 2017, and have safely extracted my cost basis. The remainder makes up ~2-5% of my net worth, and is hardly going to make me or break me.

My adventures down the rabbithole have given me a lot of ideas for blog posts, but experience suggests I won’t get round to publishing most of them.

Instead, I want to call my shots right now:

  1. The crypto industry is still massively undervalued
  2. Payments is now and forever the killer app
  3. Bitcoin will never be a currency, but it makes sense as a store of value
  4. Stablecoins will win the payments war
  5. Crypto gives the little guy unprecedented access to asymmetric upside…
  6. …but the median investor is still just exit liquidity for VCs and hucksters
  7. Decentralised projects will avoid regulation
  8. Investors will continue to get wrecked in completely predictable ways
  9. Tokenisation will be a powerful new tool in the fight against inequality
  10. The metaverse is gonna happen, and Zuckerberg has the best shot at it
  11. A sudden shift in social consensus will make crypto uncontroversial

I’ll flesh some of these out into individual posts as and when I have the time. For the short version, read on.

1. The crypto industry is still massively undervalued

Going by the hype and headlines commanded by crypto, how much of the world’s financial assets do you think it represents?

Go on. Take a moment to guess.

OK, mouse over the box:

(The answer is ~0.2%.)

If you owned all the Bitcoin in existence, all the Ethereum, all the stablecoins, all the dog coins, every legitimate project and every glorified ponzi, you could buy… about half of a single tech giant like Apple or Microsoft. There are companies you’ve probably never heard of, like Saudi Aramco, which are bigger than the entire cryptocurrency industry combined.

So: you don’t have to believe that crypto is going to solve all the world’s ills. You just have to believe that if you combine all of its potential use cases—all of the ecosystems, platforms and companies that exist today, along with every innovation that comes in the next few decades—that this entire industry will maaaybe be worth as much as one single fossil fuel company.

It’s not that much of a stretch. Even if almost everything in this space is bullshit and 98% of crypto projects fail—which, to be clear, is not that far off my own opinion—that is in no way inconsistent with the belief that the current market is a fraction of its future value.

There are hundreds of possible use cases for blockchain technology in development. Lots of them are dumb. To justify the valuation, all you need is one killer app.

2. Payments is now and forever the killer app

The big, boring problem is the same as it ever was: to securely send money to anyone, anywhere, without permission from a third party.

Why might rich westerners struggle to appreciate this obvious use case?

  • The costs we incur are hidden or baked into retail prices
  • Our financial intermediaries are less blatantly rapacious than e.g. the foreign workers being taxed 6% on the remittances they send home
  • We don’t live under oppressive regimes where payments are controlled and assets are at risk of confiscation
  • We don’t realise that behind the scenes, the traditional finance system is held together by a kludge of ancient code, chewing gum, and fallible human trust

Even if blockchains are good for nothing except replacing elements of the antiquated finance system, that would be enough.

3. Bitcoin will never be a currency, but it makes sense as a store of value

No-one’s going to be paying their bills in bitcoin. Feeble transaction volumes cop the most criticism, but this will quite likely be solved by the Lightning Network or similar.

The real problem is that bitcoin is hard-coded to be deflationary. If your medium of exchange gains value relative to goods and services over time, then everyone is incentivised to hoard it instead of buying stuff, and your economy implodes.

Noah Smith explains this nicely here:

Consider a world where cash goes up in value over time — where simply because you stuffed some money under a mattress, you can afford more and more of society’s production every year… In this sort of deflationary world, you’re getting wealth for nothing — society is continually transferring you more and more of the fruits of its labors in exchange for you doing absolutely bupkis.

That doesn’t sound fair. And it’s not economically efficient either. Economists argue back and forth over whether the optimal rate of inflation is 0 or some small positive number, but you will find very few who argue that the optimal rate of inflation is negative.

Does that mean bitcoin is useless? No. As I argued in Bitcoin: Not as Stupid as it Looks, it’s basically a better version of gold.

Goldbugs are primarily motivated by the debasement of fiat currency through frenetic money-printing, and the inflation that comes with it. The ‘inflation hedge’ narrative has also been a big driver for bitcoin boosters.

Confusingly, bitcoin was a lousy hedge against the most recent cycle of CPI inflation, but that shouldn’t really be surprising: it can’t possibly do anything about price increases caused by energy shortages or supply chain issues or pandemics. On the other hand, it has been a near-perfect hedge for the actual monetary expansion that the goldbugs are concerned about. This graph overlays it very nicely:

chart comparing year-over-year bitcoin against currency debasement, as measured by m2 money supply

When the Fed rolls out the money printers again, I expect bitcoin will have another great run.

To be clear, gold kind of sucks, and so does bitcoin: it’s not productive, and it costs a lot of energy to mine. But there is real utility in having censorship-resistant money that at least holds value over long periods of time. Anyone who thinks differently might change their mind if they lived in in Venezuela, or had to flee Europe with gold hidden in their teeth.

Gold and bitcoin can also be useful to investors for abstract reasons to do with volatility over time. To the extent that an asset is uncorrelated with the rest of your portfolio, it can improve your longterm performance, even if it has zero or even negative expected returns.

This is not at all obvious, or at least, it wasn’t to me back when I used to dunk on goldbugs, so I’ll make it a priority to correct the record with a standalone post.

4. Stablecoins will win the payments war

…but they sure are trying their best to fumble the bag.

The biggest stablecoin is practically quilted out of red flags, and might yet turn out to be a giant ponzi. The long arm of the US government is elbow-deep in the second-biggest stablecoin, which is currently freezing and censoring accounts. Truly decentralised stablecoins exist, but they have to be overcollateralised, which means they have trouble scaling up to meet demand. Central bank-issued stablecoins are a privacy nightmare. Algorithmic stablecoins have the potential to solve all of the above problems, but they keep blowing up in spectacular fashion.

So I don’t know exactly what this looks like. But I do know that people want to transact in a currency which is pegged to their real-life expenses and income, rather than trying to buy a sack of rice with some constantly-changing fraction of a piece of gold (digital or otherwise).

A stablecoin of some kind will win the payments war, and it’ll very likely be pegged to the USD.

5. Crypto gives the little guy unprecedented access to asymmetric upside…

According to the evangelists, crypto is a great democratising force that allows everyone to participate and profit, as compared to the walled gardens of traditional finance, in which you must be an accredited investor or get invited to the right Country Club.

It’s true that u/itchyscrote73, nationality and gender unknown, has access to the same kind of opportunities as Bradford Chauncer III of the Hamptons. Anyone can filter these opportunities for asymmetric upside: there’s genuine alpha in following founders on Twitter or Discord, hunting for arbitrages, being early to projects that will airdrop users free money, yield farming subsidised token drops, and so on.

These kind of edges are much easier to find than in traditional markets, which are vastly more liquid and combed-over by millions of traders and institutional investors.

If you can find a secret the market hasn’t priced in, that makes you the smart money. The corollary is that if you don’t know what you’re doing, and are punting based on whatever is in the hype cycle at any given point in time, you are the guy who will be left holding the bag.

Unfortunately, the overwhelming majority of amateur investors are in the latter camp.

6. …but the median investor is still just exit liquidity for VCs and hucksters

what is my purpose? you provide exit liquidity

The ‘levelling of the playing field’ narrative is usually pedalled by certain VCs who cannot believe their luck at being able to legally pump up interest in a token, then turn around and dump their bags on retail investors at stupendous mark-ups.

Then there are the outright criminals, who have stolen something like $1.4 billion in hacks so far this year, and god knows how much in scams and rugpulls. It’s the Wild West: every time a major project implodes, the suicide hotline is plastered all over the forums.

I’m not sure where exactly I land on the question of paternalism, but watching a steady transfer of wealth from the poor and naive to the rich and predatory has left me a little queasy. Turns out securities laws exist for a good reason, and us proles probably do need be protected from ourselves.

Of course, every free person can always find a way to light their money on fire by speculating on meme stocks, lottery tickets, trading options, gambling, etc. But at least we have laws to curb the worst of the excesses: the dealers can’t straight-up lie, or insider trade, or run away with the proceeds. Or, you know, they can, but it’s harder.

So regulation is definitely coming. And that’s a good thing. But regulation will not be distributed evenly.

7. Decentralised projects will avoid regulation; ‘trust me bro’ will no longer cut it

Full decentralisation is a pretty stupid and inefficient way to actually run a startup or fast-moving organisation. And so, a lot of early projects tokenly crowdsource some of their governance decisions, while retaining most of the actual power and funds in the hands of a small team of (often anonymous) developers.

Decentralisation is always just a little further around the bend. In the short term, it’s ‘trust me bro’.

One project that I liked turned out to have a convicted serial fraudster in charge of the treasury. Another nuked $10 billion in value while communicating only through sporadic tweets telling his followers to hold the line. Man, I should not have trusted those particular bros.

decentralisation is on the roadmap agnes wink meme

This doesn’t mean that decentralisation is an unworthy goal. If anything, it makes it even more valuable.

In particular, truly decentralised projects have the best odds of avoiding the regulatory hammer. This is partly by design—good luck trying to subpoena the CEO of bitcoin—and partly because they require less regulation in the first place. Think mature smart contracts with a long history of executing, like the DeFi bluechips. There is not much scope for swindling, rugpulls, or treasury mismanagement. The code just runs.

At the other end of the spectrum, the ‘trust me bro’ schemes selling unregistered securities with zero investor protections will be the first to be regulated.

But regulation alone is not going to be enough to stop ordinary folks from nuking their accounts.

8. Investors will continue to get wrecked in completely predictable ways

The speculative boom has made it hard to not make money in crypto, although an incredible number of investors, both amateur and professional, have somehow managed to pull off the impossible.

In almost every case, crypto investors get wrecked by failing to follow the most basic risk management practices. The big three being:

  • position sizing,
  • appropriate use of leverage,
  • exposure to tail risk events.

I am definitely planning to write a post/s on this, as I, too, have learned some very expensive lessons.

9. Tokenisation will be a powerful new tool in the fight against inequality

The Matthew effect describes how the most resources tend to accrue to those who need them the least, while the least resources go to those who need them the most (check out Meditations on Momentum for examples).

This is bad.

We have tools to push back against this, e.g. progressive taxation, but they are blunt. And it’s not just wealth: there are also vast inefficiencies in the allocation of social capital and status, which means that almost all of our attentional resources snowball into blandly popular things.

Web3 and crypto are the first set of technologies that allows us to arbitrage these inefficiencies. Right now, if you are an early backer of a talented person, or a superfan of an as-yet unfamous artist, the only ‘payment’ you receive for being early is kudos, or more likely, nothing at all.

Instead, the incentive structure means we get social rewards for backing things that are already popular and don’t really need our patronage, which means most of our capital (money, attention, status) is poorly allocated.

Social tokens, NFTs, and income-share agreements are exciting insofar as they create micro-markets in everything: if you back a teenager who dropped out of school, a startup with no investors, or a band with few listeners, you maybe get to actually participate in their success in some small way.

There are obvious pitfalls to route around, but on net I think that ‘tokenisation of everything’ is nowhere near as dystopian as it sounds, and might be the best shot we have for a massive redistribution of wealth, attention, and social status.

10. The metaverse is gonna happen, and Zuckerberg has the best shot at it

Meta (formerly Facebook) is currently priced as if it’s a mature business with zero growth prospects, which means you get the whole metaverse play for free. I’ve held my nose and bought a decent chunk of stock, violating all my high-minded efficient markets principles.

I’m not even going to try to justify this without writing a dedicated post. For now, all I’ll say is that a lot of people are acting as if one of the world’s greatest entrepreneurs has somehow failed to consider the most pedestrian objections to something he has spent literally the last decade thinking about. Don’t bet against the Zuck!

11. A sudden shift in social consensus will make crypto completely uncontroversial

To make money in crypto thus far, all you had to do was notice that the main arguments against it were weak, flat-out wrong, or suspiciously motivated. This was possible even if you were extremely late to the party: everyone who invested prior to the last 12 months or so is up on their position, provided they didn’t do anything stupid (OK yes this is a big proviso; see points 6 and 8).

This has rewarded contrarian-types who are low on agreeableness, and punished those who are most in thrall to social reality. On the demographic level, crypto bros are much more likely to be male, individualist, and uh, more into facts than feelings, with everything that goes along with that. But it won’t always be that way.

Rather than a steady trend towards or away from crypto acceptance, I predict we’ll see a lot of volatility, leading up to a sudden shift in consensus. This is a common dynamic with changes in social acceptability: years of furious infighting, then the new social reality changes all at once, and we were always at war with Eurasia. Catalysts here would be a critical mass of ‘respectable’ people, institutions, or countries getting on board.

In the not-too-distant future, people will find it baffling that there was a time when anyone railed against something as innocuous as a distributed ledger. More accurately, it won’t even cross their mind: did you know that the Internet also sparked massive hatred and opposition?

Some of these predictions are a bit vague; I haven’t assigned specific win conditions or confidence levels. Still, I think there’s enough here to provide plenty of humiliation or vindication in the next decade or so.

Feel free to push back on any of this, ask questions, or tell me which claim you’d most like to see expanded upon (I do reserve the right to punt until I’ve written the full post.)

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1 month ago

Great post, and brave of you to lay out so many predictions at once. I always enjoy your writing, especially how you share your thought process. One vote from me for a post on the value of volatility in a portfolio.

1 month ago

Welcome back Rich! Good to have something decent to read in 2022