The case for crypto is as simple as it is ancient
Thou shalt not steal
I came to the thought-world of economics after the Great Financial Crisis as I watched this happen to my parents’ retirement accounts.
What happened to ours (my wife’s and mine) was bad, but we were still relatively young, with time to recover. I have always been tuned-in to current events, so I recalled all of the assurances things were “contained” in the sub-prime world, only to learn the truth was directly opposite the lies we were told. I have never believed the Ruling Class since. Their words and actions have consistently reinforced that sentiment.
I want to tackle this larger subject of ‘crypto’ by remaining focused on that word: sentiment. Economics is basically what people do with money over time. I chuckle at how the Ruling Class behind the curtain slices up the discipline to make it seem too complicated for ordinary people. Especially funny is the idea of ‘behavioral economics’. As if there is any other kind?
We will never escape the role of sentiment in economics. It is especially important - and advantageous - to start with sentiment when explaining crypto. The advantage is found in how it speaks to ordinary people - the ‘unbanked’ in particular. It is my opinion that the only people who truly understand crypto are those who can explain it to the unbanked. I'll try to do that here. Let’s start with a sentiment that is as ancient as it is simple: No one likes a thief.
Protecting my labor from theft: The intrinsic value of gold and crypto
The unbanked will likely understand what follows better than everyone else. For me, I can substitute wages with a credit card if I want or need to pull forward earnings. The unbanked cannot; for them the link between labor and basic needs like rent, utilities, and food is mediated directly via cash money. The problem with cash money, however, is staring them in the face as they look at what’s left for food after rent and utilities, and then at how much less of it they can buy with that leftover cash. This immediacy can teach the unbanked why ‘sound money’ is so important; it preserves the value of their labor. And watching as the value of our labor dissipates (read: is stolen) creates an opaque sentiment of frustration and anger. The best explanation of crypto, then, will take this opaque anger and clarify it: no one hates a thief more than the victims of his theft.
But to do this, we have to go through gold and the idea of intrinsic value. Warren Buffet criticizes gold as something we work to dig out of the ground only to bury it again, not earning any yield on it. So why is it that gold has held its value over thousands of years? The answer lies in the Periodic Table we learned from in high school. Gold (Au) is a Noble Metal which does not rust. It is that simple. If I trade labor for a one ounce bar of gold and then put it in a safe, years later that bar will still weigh one ounce. If I do the same for a one ounce bar of iron? Years later oxidation will have dissipated the iron and it will no longer weigh one ounce.
What is at work here is how a ‘price’ always combines two units of measure. If I trade labor for gold, my time is one unit of measure and the weight of the gold is the other. With gold, both units are immutable. An hour of labor spent will never be dissipated; it will always be one hour spent. If I exchange that hour of labor for gold of a certain weight the same is true. The weight of that gold is immutable because it will not dissipate due to a chemical reaction with the oxygen in the atmosphere.
Gold and silver (Ag) both have utility in their ability to retain the value of that for which they have been exchanged. If I exchange my labor for other non-Nobel metals, the value of my labor dissipates as the metal reacts to oxygen and loses weight. This is why precious metals have ‘intrinsic’ value. The value is intrinsic to the chemical properties of the metal - which preserve the value of my labor (or whatever else I might have exchanged for the metal).
But does crypto have intrinsic value?
So now we come to crypto. But my argument really isn’t going to be about crypto, per se. It is about the nature of the underlying technology called the Blockchain. To return to the underlying concept of sentiment - which underlies all economic decisions - we cannot understand crypto as money until we understand the sentiment which gave birth to Blockchain technology.
There are two related events that are important here. The first, but not the most important, is the bank bailouts from the Great Financial Crisis. Among crypto enthusiasts it is well know that the first block in the Bitcoin Blockchain contained a reference to a news article about bank bailouts. The creation of money out of thin air to bail out the banks had the effect of devaluing the dollar. Remember that all labor transactions have two units of measure. Here it is time and the Dollar. If I accept someone else’s dollars in return for my hours, and then the Dollar is devalued, so has been my labor.
But the second and much more important event was the foreclosure crisis associated with the Great Financial Crisis. David Dayen, in Chain of Title, accounts for the tireless work of three ordinary Americans in revealing how Wall Street systematically corrupted property records systems across the U.S. - some of which predated the Declaration of Independence. Dayen correctly notes how property ownership is the foundation of capital formation. Or to put this more simply: If you want to grow a crop, you need land on which to grow it. If you want to make a widget, you need a place to set up the equipment. There is no creation of wealth or formation of capital without land ownership.
The rules which govern money are only worth the willingness of the Ruling Class to enforce them. The same is true of the rules governing the recording of property rights. The Great Financial Crisis showed us the Ruling Class is neither willing nor capable of enforcing these rules on themselves. This explains the fundamental sentiment behind the creation of Blockchain technology. It replaces the Ruling Class with mathematics. It replaces trust in governmental oversight of records with a ‘distributed consensus’ model which makes corrupting the records essentially impossible. If one entity centralizes control over a Blockchain by controlling over 50% of the participating computers, another Blockchain can quickly replace it.
The Blockchain replaces the Ruling Class with mathematics. It replaces trust in governmental oversight of records with a ‘distributed consensus’ model which makes corrupting the records essentially impossible.
On the Blockchain, the truth about my ownership of something is essentially immutable. No one can “bear false witness” to who owns what on the Blockchain. And therefore no one can steal what belongs to others as recorded on the Blockchain. The use of gold and silver to ‘store value’ employs the immutable chemistry of Noble Metals; the use of crypto-currencies to store wealth relies on the immutable laws of mathematics. (Your high school chemistry teacher might rightly claim there is no difference between these two.)
In my next installment I will explain a property of money that departs from the academic definitions of the Ph.D. set. Their definition comes in three parts: Money is a unit of account (or measurement); a store of value (see the discussion of gold/silver above); and a medium of exchange (my labor for what?). I'll add to this a basic fact about money and sentiment:
Money is an incentive to work.
Disclaimer: I am a cyber security professional, not a financial advisor. I hold no licenses in the financial sector. I have relatively small positions in ETHE and GBTC which hold Ether and Bitcoin in trust on behalf of shareholders. I am weighted toward ETHE for reasons that will become clear in this series of essays. It will also become clear in these essays why I believe crypto currencies are not an investment. This does not mean there is no case for owning crypto. It just means the current case has nothing to do with traditional investment theses. In any event, do not - under any circumstances - make investment decisions on the basis of anything I write.
You are making me stretch.