This will not be a post about the markets or investing in crypto or buy this or that coin (though I may write a shorter blog post about investing in crypto in general and some general thoughts and tips). This is more of my intellectual thesis that I've thought about for the past year when I've literally been immersed in cryptocurrency for the past year. (When I say literal, I mean to the point where I flew to Korea for the first time by myself buying a flight 11 hours before departure in order to attempt to arbitrage the stuff). This may even sound like the ravings of a cult member to some. So be forewarned, you're about to go down a rabbit hole of crazy by reading further.
Throughout history, we have depended on centralized authority to protect and govern the people, but ever since the Revolutionary War, American government has provided another model where the people's overall best interests would be served by the government. The idea of free markets and democracy seemed to be the final civic achievement of mankind.
I grew up with a pretty positive view of capitalism, my formative years taking place right around the time of the fall of the Berlin Wall. As Basil Exposition informs Austin Powers, capitalism won. It is not hard to love the idea that all men are created equal, and their rewards were commensurate with the amount of work they put in. As imperfect as our country's efforts have been to achieve this goal, we have progressed closer and closer to it in the past 241 years or so. Perhaps this is why I chose to study economics in college, and have always loved studying American history.
However, since I was laid off almost exactly 10 years ago from a management consultant job during the financial crisis, I have had a bleak and jaded view of the economy and particularly the financial industry. Capitalism without regulation can birth a whole host of problems that have to do with misaligned incentives and profiting off ventures that actually have negative utility towards the public at large. The housing crisis and the last decade since has shown that America and even most countries that consider themselves democracies have turned back progress and have turned into oligarchies, only instead of ruled by politicians, we are ruled by corporations.
Technology has both accelerated and hidden this fact from us. Since the birth of the personal computer and the internet, the American economy has accelerated in productivity at a parabolic rate. The way we produce goods and services is mindblowingly more efficient than they were 20-30 years ago, and so our overall GDP usually is constantly growing. However, the acceleration of technology also has created a problem that is unavoidable: whole swaths of the population are becoming structurally unemployed every year. Education and special skills are becoming paramount in a world where machines can now perform many of the simpler tasks that humans can and much more efficiently. We are ever accelerating towards a future that is Turing complete, where no one will have any real economic use to society, possibly within the next 100 years.
Stephen Hawking doesn't seem to be a fan of the future, predicting everything from a nuclear holocaust to AI computer overlords destroying mankind, to a planet destruction from overpopulation. But one prediction (not that I don't think all of them have merit) stuck out to me, that as machines become more advanced, it won't be a positive for our overall economy, but in fact increase the economic inequality between the haves and the have nots. And it makes sense, if the people who own the machines and the systems of economies are the ones only benefiting from them now, while the people who have no "use" to society fail to find jobs, why SHOULD things look better 10-20 years from now without a solution in place?
I know this sounds hypocritical from someone who's made their fortune and living in his adult life off something that most accurately is a microcosm of cutthroat capitalism, but perhaps it's because I have so much experience with money and how people respond to it that I can make this sort of assessment. Indeed, my experience also with technology and computers as a former computer science student also inform my overall world view. And it's also why when I looked into Bitcoin a couple years ago, I believed it was a revolutionary new invention that could (pause for dramatic effect) possibly save mankind.
Satoshi Nakamoto created developed Bitcoin in 2008, releasing a whitepaper that was today's equivalent of Martin Luther's note that split the Cathloic Church. The key in Bitcoin's invention is not "digital money" or "Paypal 2.0" or that it's a more technologically advanced way of sending value. It's (currently) slower than most traditional payment processing systems. The key is in the idea of trust. For the first time in human history, we have found a way to create a system that two parties can come together and agree to trust without the need for a third party.
No matter what creed or religion or belief system you have about morality, as a normal human, you can probably conclude that people act primarily on self interest. However, we've seen through the development of human society, we are infinitely more productive when we work together. But because we live in a society where trust is never guaranteed, some of the more opportunistic people will cheat the system to maximize their own utility at the expense of others. The world is an infinite array of prisoners dilemmas, unfolding in a variety of ways in our everyday lives.
We've come to build structures in place, governments, organizations, to keep things in check. Think of how much money we spend purely on government, lawyers, banks, police, military just to make sure people don't fuck each other over. We spend money on systems that keep those VERY systems in check. And these structures have never been perfect in their quest in providing maximum utility to its users. What if we could replace this system with something that is more fair and equitable?
Enter cryptocurrency. Without going into too much technical detail (this video does a much better job than I ever could), Bitcoin is essentially a ledger that is a record of every transaction ever spent on its system. The internet is what makes it possible, an always online interconnected group of machines that can record and disseminate data that is immutable and impossible for any one entity to control.
This record is revolutionary. For the first time in history, two parties can refer to a record of proof that requires no (human) intermediary for justice. In Bitcoin's realm, Satoshi aimed first at the injustices of the financial system. Finance has become a larger portion of our GDP, from 10% right after WW2 and clocking in at almost 21% recently. In what was arguably a time when our economy was operating at peak efficiency versus now, why do we need to pay bankers/insurers/underwriters more than twice what we were as a society to "grease the wheels of the economy"?
Finance has become a very opaque and complicated industry where the players of the game are motivated to keep it as opaque and complicated as possible. And the average person in the United States is a financial idiot. And I don't mean idiot as in people are dumb, but more a remark on their ignorance in essentially playing a game of poker against the financial elite without even knowing the rules of the game. And these systems of finance have become so entrenched and powerful, that they've also become "too big to fail". In other words, over the years the financial industry has not only taken more and more of the lion's share of the profits, but have made themselves indispensable, where their fall means total chaos.
Part of this problem has to do with the money supply controlled by a central authority. For political purposes, aggressive monetary policy is seen as a positive. Inflation is good they say, because it encourages spending which is good for the economy. More money also means more investment, which leads to better capital goods and higher efficiency in the economy. More spending in government helps generate more jobs and also yadayadayada multiplier effect, GDP, etc. But the truth is more money in the economy benefits people who, you guessed it, people who use money to profit. The more money that's printed, the more value the majority of people lose from their savings and the more percentage of the money supply that's controlled by banks which leads to making more of the percentage of money made by banks and so on and so forth. In the past 60 years, the money supply has increased around 50-100 times (varies depending on if you use M0, M1, M2). Who does that benefit the most? By using GDP growth as the sole metric of our economy's health our government has misaligned its long term goals for our future to the benefit of the financial industry at the expense of the society.
Bitcoin is a potential solution to this. It's a system where the supply cannot be modified by any one party, and that no central authority has control over. With this basis, the ambition is to create additional layers on top of it that can essentially take over many of the functions that the financial sector has taken on, which is essentially eliminating counterparty risk, a service we pay an inordinate sum of money to do for us.
The power is having a checking account without having to pay ridiculous fees. 24 hour access to your wealth. Decentralized exchanges that cut out brokerage fees. Cheaper access to capital without paying investment bankers or loan officers. Cutting out the middleman.
And if Bitcoin can solve these problems, what else can blockchain technology accomplish? What if we could use it to solve problems in law, government, where people need mediation? What if we could use it to build structures that allow people to work together more effectively and efficiently, without fear of someone acting out in their own self interest? How much more could human society build and make possible?
If this sounds revolutionary, it's because it is. But I much prefer a revolution than one of Hawking's bleak predictions. This revolution will unlikely be without a fight, and I hope that this fight will never become violent. But there will be opposition from the people that benefit the most from the way things are, the people who run shit, politicians, bankers, etc. The powers that be are not stupid, they see Bitcoin as a threat, and they know that it represents a challenge to their power.
Any person who benefits from a system will do anything he can to protect it, to the detriment of the overall society. Which brings me back to the fact that many in the future will be displaced out of their jobs, they are probably the ones most acutely aware of this reality. It's the whole reason Trump performed well, he identified a problem that so many people resonated with, economic displacement. America, has been so comfortable since WW2 being the economic superpower that much of its workforce has skated on by being comfortable in the structures that had benefitted them for generations. Since the dawn of the internet, the displacement has accelerated to untenable rates, and will continue to do so. However, aside from Trump's obvious pandering to the racism that most of the displaced have (i.e. it's the non-whites that are taking "our" jobs), the policies that Trump proposes is like putting a bandaid on a broken leg, bringing back industries that have no long term viability.
The positive thing Trump has done has exposed America for the house of cards it really is. If anything the true ponzi scheme is the government and the corporations that control it; the structures in place are anticompetitive that are causing America to fall behind. A revolution is coming, where income inequality mushrooms to the point where a Paul Ryan's "$1.50 a week" will become our generations' "let them eat cake". Without something organically leveling the playing fields, I can see many dystopian scenarios playing out.
So how will cryptocurrencies change the systems? The basis is in creating systems and layers of trust that make our economies not only more efficient, but more fair, diverting resources more effectively to places that are deficient. To me, it can quite possibly turn our world into a sort of economic "immune system" where incentives would be perfectly aligned in created outcomes with highest utilitarian value.
Are we there yet? Not even fucking close, of course. This is why most people, traditional economists and the like don't understand about Bitcoin and other cryptocurrencies. They point to its lack of use currently or its theoretical nature as proof of its ridiculous valuations. And they're not 100% wrong, the mania has become insane in the past few months, I personally did not believe we "earned" the near trillion dollar market cap we almost hit last month. Investing in crypto is by nature VERY speculative, but if you believe that it indeed is the future, it can unlock untold amounts of value for our society as a whole.
But I'm not only heavily invested in cryptocurrency in the belief that the financial rewards will be great, I believe in the positive future it can provide our world. Already we see in countries with hyperinflation like Venezeula or Zimbwabwe where citizens are using cryptocurrencies in times when their own currencies are worth next to nothing. In developed nations, there is a slight cost to society for inflation, but this is mostly hidden due to rising efficiency in our economy's overall production capabilities and financial engineering. When your currency is inflated at insane percentages per year, it's easy to spot the need for something like Bitcoin, but the inflation rate while rising in our country seems "normal" (until you start examining tuition costs and other types of goods with inelastic demand) and the way things were, a much more insidious tax.
While it may be a while until a computer passes a true Turing test, all technical tasks even as complex as surgery will be replaced by machines in the next century. How will our society manage, if we extrapolate the way current systems and incentives are guiding our future? It's my hope that machine learning and blockchain technology can work in concert in providing for a future where it's possible to automate production for the needs of every human on the planet.
I wouldn't mind driving a lambo though.