Why Your Dad Hates Bitcoin.
Mr. Roubini rants his way through his case — casually tossing around the terms bitcoin and crypto interchangeably.
For anyone looking to better understand crypto and bitcoin, Roubini’s article is less than helpful.
I will try to be more so.
Bitcoin is a cryptocurrency, all cryptocurrencies are blockchains. Not all blockchains are cryptocurrencies. It is sloppy to mix them without distinction.
If Roubini were writing this FT piece in 1999, we would have a leading global economist telling us that Pets.com and the Internet-in-general are exactly the same thing and since one is over priced and won’t scale, it’s all worthless and we should ignore it.
It’s undisciplined thinking. It makes us dumber.
Why we’re having this discussion — blame Elon Musk
Nouriel Roubini is a busy man and cryptocurrency is complex. So we can forgive him for not taking the hours of time needed to understand how it works, and how challenges in scaling and applications are being addressed.
And forgive him for not distinguishing that bitcoin itself is both poster-child and outlier amongst crypto. Perhaps even an anachronism.
Forgive him, if indeed he truly has not taken that time.
But if he HAS taken that time and instead chose to gloss over details because he was outraged at Tesla, then we readers who look to his expertise may be rightly annoyed.
I do get his outrage. It seemed to be sparked by Tesla announcing this week it is putting about 8% of its cash reserves into bitcoin.
Tesla. A company whose business is selling electric cars at a loss in order to manufacture profits from government subsidies, while its stock has made fortunes for many with its magical thinking. And magical rising price.
If I were Nouriel, that would piss me off too.
More enraging still I am sure, the bitcoin purchase will likely make money for Tesla in the near term — and what else matters anymore? Their endorsement (and their vain founder’s twittering) will certainly pump up the price of bitcoin to Tesla’s advantage.
But lest anyone get too excited, nor too dismissive about crtypto, I offer this counterpoint to Mr. Roubini, in good humor, with respect:
Mr. Roubini’s arguments in his FT editorial play the role of “dad.” I play the role of the “smart-ass kid, ” let’s hash this out.
Dad: The fundamental value of bitcoin is zero.
Smart-ass kid: The fundamental (whatever you mean by that) value of many things is zero. Value is assigned by the buyer. What exactly does ‘fundamental’ mean in this context anyway? Does it mean the value if there were no buyers? Good grief, you’re an economist, dad! The fundamental value of the dollar bills in my wallet is also zero if there’s no market for them.
Dad: …And that zero value would be negative if a proper carbon tax was applied to its production.
Smart-ass kid: And what industrial good would not suffer irreparable economic harm if a “proper carbon tax” were applied to the cost of its production? Is this a ‘selective application of a hypothetical carbon tax’ debate? If so, we can go lots of places with it.
Dad: I predict that the current bubble will eventually end in another bust.
Smart-ass kid: There is literally no living person on earth who won’t predict bubbles will pop. So, I agree , O Wise One, Bubbles will pop. This bubble will pop. The real estate bubble popped. Does that mean real estate has no fundamental value? You’re using ‘truthiness’ to string together a bunch of unhelpful statements. The fundamental value of your line of reasoning is zero.
Dad: Referring to bitcoin or crypto as a currency is a misnomer. Nothing is priced in them and there is no scalable means of payment, bitcoin’s network does five transactions per second, Visa’s does 24,000.
Smart-ass kid: Hey now. You don’t get to start a sentence calling something a currency and end that sentence calling the same thing a payment network. As if they are the same thing.
If you live in a high inflation country, you’d gladly think about bitcoin as a currency. You might — justifiably — be frustrated that there is no fast, scalable payment network for it. Just as you’d be frustrated if you had to snail mail dollar bills to Seattle to buy a cheese grater from Amazon.
Visa is a payment network. Dollars are a currency. Two different things.
Dollars do not inherently move efficiently from one holder to another. Someone has to carry them.
You are correct, dad: If you think of bitcoin or other cryptos as as both currencies and payment networks rolled into one then yes, no one has built a crypto that also functions as a scalable payment network.
But you are behind on your reading if you think one isn’t in the works and even if you think that’s how crypto is supposed to work.
Bitcoin doesn’t have to be its own payment network and it doesn’t need a 3rd party guarantor. It just needs a layer — likely provided by another type of crypto — to offer speed and easy user access. Smart people are working on this.
Dad: Crypto is not a stable store of value.
Smart-ass kid: That’s a pretty broad statement. Are you saying there is no crypto, not even crypto pegged to the US dollar, that is stable? What’s your argument there?
I think you’re being lazy, dad. I think because bitcoin itself has historically been volatile you’re just sweeping all crypto together and haven’t even done basic homework on how lots of smart people are addressing the stability issue with alternate crypto solutions.
And, by the way, dad, just one example — I’m guessing you would have called the Venezuelan Bolivar both a currency and a stable store of value 40 years ago? Lots of stuff was priced in it. How’d that work out for the Venezuelans?
If you took the time to really understand them, I think you’d realize that while there may be stability questions around many cryptos today, they have a much better chance of evolving as currencies than, well, most currencies.
Dad: (Exasperated, rambling) But bitcoin isn’t an asset! It doesn’t provide income like gold — wait never mind, not like gold — but gold has industrial uses and is an inflation hedge, even though it’s not easily tradable and doesn’t have a payment network at all. It’s, well, it’s gold!
Never mind how much energy it takes to produce gold each year or what it does to the environment. It’s gold! I AM FAMILIAR WITH IT!!
Bitcoin’s price is highly volatile and it’s not proven as a hedge against tail risk (read: Unlikely, Unnamed, But Possible Bad Things that Could Happen. Against which, nothing is, never was, nor ever could be, proven as a hedge in advance of the event.)
And also, there are bad people who have used bitcoin and created bad bitcoin knockoffs. That’s bad. So bitcoin and crypto are bad.
Smart-ass kid: Are you finished?
Dad: No! Bitcoin is mostly mined in China and other countries far away, by a few companies which means crypto isn’t decentralized and it won’t make the poor rich because only a few people control most of it sometimes. I think.
Smart-ass kid: OK, that’s a lot and I can tell you’re close to hyperventilating. Breathe into this paper bag, and let’s just walk through this as best we can.
First, dad. Bitcoin and cryptocurrency are not the same thing. Please stop using them interchangeably.
Bitcoin really needs to be its own conversation. It was the first of its kind, a way to create a digital token that is unique, can be stored, can be exchanged and even saved and hidden in the mattress for use later.
You really have to admit bitcoin has at least some properties of a nascent currency. It has at least one quality that should make fiat currencies jealous. More on that later.
Let’s talk for a minute just about bitcoin.
Yes, bitcoin processing (aka: mining) is an epic energy hog. And yes, mining is concentrated in a few countries by many people of questionable repute. But bitcoin is only one type of crypto. Some others can use a fraction of the energy. Why is bitcoin still big when it’s an energy hog? I don’t know. Early days.
But if bitcoin itself falls out of favor tomorrow, crypto won’t stop working and evolving.
The brute force computing that makes bitcoin work is expensive but, while difficult, is done on an open standard. And it works. People started doing it and well, here we are. Bitcoins are selling for nearly $50,000 each at this writing. Nothing succeeds like success.
If you wanted to start mining bitcoin the only thing stopping you would be the cost of the equipment. There’s nothing proprietary or patented.
It does seem unlikely to me given its resource requirements — bitcoin mining globally consumes the equivalent of about 3% of total US annual electricity use currently — that bitcoin will persist in its current form.
But, currency snobs like Nuriel Roubini should remember that bitcoin by design, does not inflate. It cannot inflate. Only a fixed number of bitcoins can ever be created. If it survives, and wins wide acceptance. It could thrash the daylights out of many weak countries’ currencies.
Some think bitcoin could persist by assuming the role of slow, inefficient, digital backing standard (digital gold) while other, more efficient cryptos handle daily transactions. We shall see. It’s not unreasonable.
So, in the world of crypto, bitcoin is a bit of an outlier. It is the original. Boldly inefficient, mostly unchanged from the original, widely held and easily understood (at least, when compared with its progeny.)
Ethereum, blockchains, payment networks, and the long term.
Blockchain computing is taking off everywhere. Some blockchains are public, like bitcoin, some are cryptocurrencies and can be traded and assigned value. Some are private, used for other purposes, and only work on their own private networks.
All provide a way to do something we could never do before them: keep an immutable record of activity and exchange a digital token which can be validated as authentic, and be trusted without the need for a third party. That token can be assigned monetary value or, it can be used as a form of digital permission to do all sorts of things.
Everyone always wants to talk about the Visa payment network when they start talking crypto. Why? Because the nature of crypto means that if we did start using crypto for money, Visa and its ilk are not needed at all.
Yes, payment networks — or payment layers — for crypto are not ready to compete with Visa. But unlike other currencies, crypto has all its transaction security built in. It needs a layer for speed and for easy user access. But no need for a 3rd party guarantor with a proprietary secure system and high processing fees.
Sure, there’s years of regulation hurdles, and market acceptance, and technology tweaking to be sorted through. But crypto will eventually kill Visa. Or force its evolution. Bank on it.
Ethereum is a blockchain protocol designed to be used by software developers to create digital contracts. Ethereum’s digital, token, Ether (ETH) has much in common with bitcoin. However, it does not have the same inflation cap and it’s not really intended to be used as money the way bitcoin is. ETH is more about powering decentralized transactions. Ethereum is the system upon which many other cryptos are built.
But the most interesting thing about Ethereum is that since its beginning, it’s founders have been keenly aware of its energy hog problem — which is also its scaling and speed problem (akin to bitcoin but smaller because ETH is smaller.)
Ethereum has been on a slow path for years to replace the energy hogging validation scheme it uses with a more efficient one. For that change to happen, over half the users need to adopt it. It’s already later than hoped, but is starting. We should know by the end of 2021 if the new Ethereum 2.0 has legs.
I’m grossly simplifying here, in order to make the high-level point:
If/when Ethereum changes its validation scheme (it’s called changing from Proof of Work to Proof of Stake but we won’t get into that here) a whole lot of things in crypto get way faster, way cheaper, and way more efficient.
Con artists love complexity.
Three years ago my crypto currency writing focused on the proliferation slimy schemes called “ICO’s” (initial coin offerings.) These schemes have mostly dried up and blown away.
At that time we had people — some naive, some nefarious — using the complexity of crypto to lure others into a ‘big idea.’ Always they sounded good on the surface, and got super confusing when you lifted the veil.
Many people believed the hype and lost their money.
Today is no different, but the cons are more subtle. Con artists love complexity. And con artists love boom markets. Crypto is nothing if not complex and booming. So rest assured, con artists are out there and caution is advised.
I’m not sure yet which areas of crypto today are most suspect, but count on more research from your roving reporter as things unfold.
So back to my argument with Mr. Roubini (which admittedly, is really just an argument with myself.)
Should corporate treasuries and conservative institutions be putting money in bitcoin? No, or at most a tiny amount, in the very highest risk tier. Most of this stuff will likely burn out. There is much puffery.
But we can’t ignore new technologies just because they are puffed up and full of risk. Heck, what new tech wasn’t?
This was the problem during the dot.com boom. We knew the companies were crap, we also knew the underlying technology was game changing.
Let’s not forget that lesson.
The opinions expressed here are just that — mere opinions. I am an individual and I neither give, nor seek, nor profit from, investment advice. This opinion column is to encourage thought and debate. Nothing more. Any decision you make to buy, sell, not buy, not sell, or do otherwise are yours and yours alone. You alone are responsible for the consequences of your actions. As always.