Here’s my talk at the Friedman Conference 2018 in Sydney:
bitcoin
Your First Crypto Bear Market
I noticed a lot of people whinging about the Bitcoin price – realised from one of my friends that this is probably the first Crypto Bear Market for a lot of people. Here are some thoughts from a guy who has been there, done that:
Samson Mow handles curly questions with poise
Today I listened to the podcast, What Bitcoin Did episode 17 with Samson Mow. Samson did well to present the Bitcoin vision as contrasted with the BCash vision.
Some of the ‘Devil’s Advocate’ questions posed by the podcast host Andrew did come off with a bit of a socialist undertone and to my mind, a false sense of balance. From my viewpoint, it was giving the BCashers too much credit. But maybe that’s just the Bitcoin ‘Core’ maximalist in me speaking. I agreed with Samson’s sentiment that BCashers present BCash in a dishonest light:
The main problem I sensed underlying the questioning was this idea that on-chain layer 1 priority transactions should be affordable to all people, always, and they should have the same level of security provided by cold storage. Even where they are from a developing country with lower income. But Samson was put into a tough situation when answering this, as we generally recognise Bitcoin needs a fee market to survive long term. While we want the fees on layer 1 Bitcoin to be accessible, there can be no guarantee or central planning of this.
Optimistically, here are different ways this could play out instead:
- As spelled out in this fascinating Lightning Labs post, Lightning User Experience: A Day in the Life of Carol
Ideally, users like Carol will manage balances, payments and deposits without having to understand the underlying technology, and the experience will be cheaper and more convenient than existing payment technologies (checks, credit cards, physical cash, etc.)
- People might rely on their retail crypto-bank app to run the bitcoin wallet and lightning node ‘behind the scenes’ for them – thus rendering the layer 1 transaction fee less of a problem as it would be batched up for spending by the crypto-bank.
- People stay on ‘layer 1’ Bitcoin, running their own full node and using Bitcoin for the large transactions only, such as buying a house or a car. Bitcoin kept in a vault / deep cold storage as a family store of value.
Sound money and capitalism is the mission. There’s not an obligation to make everyone equal or to give them equal right to the high priority fast transactions. This is the simple reality of designing Bitcoin to be government-resistant. Attempts to naively scale on-chain will risk the centralisation, and eventual co-opting of Bitcoin by government.
To me, this expectation for everyone to have the best level of convenience and security with no cost trade off is almost reminiscent of when socialist people blame capitalism for needing to work to live. In their view, they are ‘wage slaves working for the man’ so they can get food, shelter, clothing etc. But really, this is the problem we are in due to nature. It’s not the fault of the capitalists, and if anything, the capitalists are helping alleviate the problem. They’re the ones making us wealthier overall to have enough food, shelter and basic necessities like Wi-Fi and social media to shit post on.
So too with nature, it’s not the fault of Bitcoin, Bitcoin core developers or Blockstream that the government is out there, and if given a chance to co-opt Bitcoin, it will do it.
If you’re interested in further discussion on Bitcoin’s future and fees, I recommend you see Rusty’s post: The Three Economic Eras of Bitcoin. I think Rusty shows great foresight in the discussion, to show that once this current subsidy era ends, there may come another battle to inflate Bitcoin beyond the original supply. For this reason, a fee market should develop.
Ultimately, Bitcoin will not bend to the will of people who say ‘gib me’. It will continue being the hardest money to ever exist. We will all have to adapt to that.
How Bitcoin is invading your mind
Bitcoin is rapidly normalising in all of our minds. A 9 year old has never known a world without Bitcoin. And the longer Bitcoin survives, the more likely it is to continue. This is the Lindy effect, the concept Nassim Taleb popularised:
The Lindy effect is a concept that the future life expectancy of some non-perishable things like a technology or an idea is proportional to their current age, so that every additional period of survival implies a longer remaining life expectancy.
Notice how we’re seeing it more and more in pop culture.
We’re seeing it in Marvel comics:
We’re seeing it used in modern TV shows, like Billions:
We’re even seeing it in school exams:
What happens as this continues to normalise and people think of using cryptocurrency as a way to and store and transfer money anywhere globally in a low friction, unstoppable way? The feedback loop will be immense once it really kicks off.
I don’t think it will take much to kick this off. Imagine if people started putting 1-5% of their portfolio into Bitcoin? Or if there were a banking crisis and bail-ins, with Bitcoin holders unaffected? Or if a central bank bought in and announced its position in BTC holdings? Or just the continual buying and holding of bitcoin over time, slowly but surely building upwards pressure on the price.
The people who win will be the ones who can buy and wait patiently.
Bitcoin 1.0 vs Shiny Object syndrome
Don’t fall victim to Shiny Object syndrome like the Ethereum huffers and ‘magical blockchain dust’ people. At the CoinDesk Consensus 2018 conference today, there was an exchange between Jimmy Song and Joe Lubin:
A back-and-forth among Baldet, Lubin and Song ensued. Lubin sarcastically predicted that the next five years of cryptocurrency innovation would see nothing but “bitcoin 1.0.” Song doubled down, saying “I don’t really see much of this stuff gaining much traction,” he said. Bitcoin, he argued, is “the real innovation here.”
See some of the back and forth quoted here:
Some bitcoin history for newcomers: The term “bitcoin maximalist” was initially coined as a derogatory term by Vitalik Buterin. This term was later re appropriated by bitcoin bulls as a descriptive term. ‘Bitcoin 1.0’ will become a new catch cry amongst bitcoiners for similar reasons.
This comes down to Bitcoin 1.0 vs Shiny Object syndrome. Shiny Object syndrome is the child-like tendency to just chase after things because they’re ‘new’, rather than rationally sitting back and analysing where the value is. Many enterprises are foolishly chasing after ‘blockchain technology’. These enterprises could more likely achieve a better technological result by using standard database, access management, and backup technology. Blockchains are an inefficient design, unless you specifically need censorship resistance. Blockchain overhype is real.
Second, as it has been pointed out before – much of this is ‘cargo cult‘ thinking. Even if the inventors of these enterprise blockchain technologies are sincere, it’s likely that many investors will be tricked into investing. They may think “Oh I missed the boat on Bitcoin, but maybe I can replicate the immense investment gains of hyperbitcoinization by buying this ICO/altcoin token”. They are not paying attention to the economic principles driving bitcoin vs all other tokens. Remember, the global market for wealth is around $280T USD. The global market for smart contracts could only be a smaller percentage of this number.
Third, as my friend Michael Goldstein points out: in the literal sense – this is actually very bullish. The current version of bitcoin is v0.16. So if in 5 years time, we’re all using 1.0, that’s great news!
We don’t need to sprinkle magical blockchain dust.
Don’t fall victim to ‘Shiny Object’ syndrome. Instead, see that Bitcoin 1.0 as sound money is incredible.
The Crypto Over-reach
Today I was shocked to see the CFO of the Commonwealth Bank of Australia suddenly resign to go join a crypto start up called Block.one, the seller of the EOS token. This is an unusual step for a senior executive of the 13th largest bank in the world by market capitalisation. We’re starting to see more and more of these high profile resignations from traditional financial institutions.
At first, I thought, “OK, this must be the start of the big brain drain” into cryptocurrency and blockchain companies. Which might be true, but it also makes me think back to the stories of the dotcom bubble in the late 90’s.
To be honest, we’re probably still early in the mania. One way to know when you’re really in the midst of mania is when everyone is starting to talk as though “this time is different”. There will start to be a false sense of security that ‘this really is the next big thing’. We will see many people quit their boring day jobs to go work at ICO-money backed start ups. Many of these projects will simply never pan out.
A tiny portion of them might end up having real long term value. But it’s almost impossible to tell in advance. So we’ll probably see investors indiscriminately putting money into ‘the crypto market’ without really taking the time to distinguish the wheat from the chaff.
Referring to the dotcom bubble, Fred Wilson, venture partner has commented:
“A friend of mine has a great line. He says ‘Nothing important has ever been built without irrational exuberance’. Meaning that you need some of this mania to cause investors to open up their pocketbooks and finance the building of the railroads or the automobile or aerospace industry or whatever. And in this case, much of the capital invested was lost, but also much of it was invested in a very high throughput backbone for the Internet, and lots of software that works, and databases, and server structure. All that stuff has allowed what we have today, which has changed our lives … that’s what all this speculative mania built.”
Except, I think these irrational exuberance examples were mostly caused by fiat credit expansion. These caused the market to ‘overreach’ before it was truly ready, thanks to the false signals sent by fiat credit expansion.
I suspect that we’re seeing a similar pattern play out again, this time with cryptocurrency and ‘blockchain technology’. Murray Rothbard had remarkable insight in his explanation of the Austrian theory of the business cycle:
Invariably, the booms and busts are much more intense and severe in the “capital goods industries”—the industries making machines and equipment, the ones producing industrial raw materials or constructing industrial plants—than in the industries making consumers’ goods. – “Economic Depressions: Their Cause and Cure”, p.106 of The Austrian Theory of the Trade Cycle and other essays
Notice how many of these start ups are not producing immediate consumer goods for consumption today, but rather they are promising esoteric things like smart contracts, and dApps. These could be understood as a kind of ‘futuristic capital good’. Except I believe that the market is over-reaching for these technologies due to the credit expansion brought on by fiat money. This ‘artificial’ availability of savings for investment has brought about extremely speculative long-term future capital goods.
If I had to speculate, I believe the big valuations and rally are yet to come. The big cryptocurrency market rally in November and December of 2017 was just the warm up.
Why we HODL
One of the world’s top bitcoin maximalists, Pierre Rochard, is launching an advisory service, Bitcoin Advisory. See this tweet in response to a related news article, “Maximalist for Hire” @ Coindesk:
The simplicity is deceptive
I think at a simplistic level, yes it is “Buy and HODL”, or even better, just regularly keep buying more Bitcoin. But the real skill in this comes in articulating why we should HODL. There is so much altcoin and ICO trash with multi million dollar budgets devoted to distracting you into these tokens of questionable value.
The question then, is: why HODL bitcoin and not be drawn into the latest ‘flavour of the week’ trash ICO/altcoin? That is where the skill of articulating bitcoin’s advantages comes in. This saves us from multicoiner absurdity and chaos.
What it takes
It takes an understanding of monetary economics plus at minimum, a basic level understanding of the technology behind bitcoin, with a sprinkling of HODLer resolve. These things are not easy for the average person to obtain and maintain. Even among those who do, some sell out on this vision to become an ICO/altcoin pumper.
Listing out some of the points you have to grapple with:
- What makes a good money.
- How sound money drives out easy money.
- The history of money and how it got co-opted by governments, how gold failed, and why bitcoin changes the game.
- Why deflation (correctly understood), is a good thing.
- The prudence of the conservative approach to Bitcoin development rather than the “move fast and break things” approach that is typical with tech start ups.
- Why with new altcoins, all that glitters is not gold – they may have fancy marketing budgets, booth babes and luxury conferences. But they don’t have sound money.
- How to run a full node and secure your bitcoins.
- Your desire to have nice things now, versus delayed gratification behavior enabling you to have more nice things in the future – not just for you, but your descendants also.
What happens if you do it wrong
It’s one thing to have bought Bitcoin early at $20. But without a sophisticated understanding of why we HODL, you would probably have sold out at $200, rather than holding on and waiting for the real pay-off: Bitcoin in the millions of dollars.
An adviser can help you ‘stay the course’ and avoid your own bias
People who sold out of the stock market during the crash of 2008 missed the great recovery rally in 2009. People who thought it was all ‘going to hell in a handbasket’ were stuck in cash, perhaps because of ‘recency bias’ making them not pay attention to the long term trend of growth.
Just like how a financial adviser can help you ‘stay the course’ with your investment, so too does it make sense to have bitcoin advice.
Ultimately, we should attune ourselves to what really matters in this market.
