Crypto is chain-letter technology
Buying Bitcoin is sending your money to Michael Saylor
The “float” — i.e., the amount of TRUMP that actually gets traded on the open market — is very small compared to the amount that Trump owns. Trump reportedly has over $50 billion of TRUMP (at January 19th prices), while the publicly traded portion was only around $13 billion. The smaller the float, the cheaper it is for one rich guy to come in and pump up the price.
For Mr. Trump, launching a crypto-currency works like starting a chain letter. If I start a chain letter, I send a letter to ten friends. At the top of the letter I have a list of three spaces. Space number 1 is blank, as is space number 2. Space number 3 has my address. Below this are instructions. The instructions read, “You must do two things. First, send $100 to the address in space number 1, unless it is blank. Next, copy this letter, but with the address in space number 1 replaced by the address that is in space number 2 and the address in space number 2 replaced by the address in space number 3. Then put your address in space number 3. Send this copy of the letter to ten of your friends. Soon, your address will be in space number 1. When it gets there, one thousand people will have gotten this letter, and you will receive $100,000!”
Note: this is illegal. Do not try it.
Also, it is bound to collapse. Very soon, people will stop playing along. Maybe the first thousand people play along, and I get the $100,000. And maybe my initial ten friends get a little money. But the thousand people who pay me $100 never get paid anything, because the chain letter collapses before they can get any money.
Suppose you are a naive downstream participant in my chain letter. You pay $100 to the person in the top space. And you believe that the chain is going to keep going. So you walk around daydreaming about what you will buy with the $100,000 you will soon receive.
That is how Bitcoin works. As long as new speculators come along (the equivalent of people playing along with the chain letter), the price goes up. Early speculators who have sold some of their Bitcoin are like the person who starts the chain letter and gets his $100,000.
Later Bitcoin speculators are like the naive downstream participant in the chain letter, daydreaming of how they will spend their Bitcoin. But at some point, the scheme will collapse, and the later speculators will be holding worthless Bitcoin, just as the downstream participants in a chain letter will never see any money.
In the case of TRUMP coin, it is obvious who started the chain letter. It is Donald Trump. He will be able to cash out some of his holdings, and perhaps so will some early speculators. The downstream speculators will end up losing money.
In the case of Bitcoin, the scheme has been running for so long, with so many generations of participants, that the question of who first started it is no longer relevant. But as of today there is a single individual, Michael Saylor, who is at the top of the chain letter. His company owns a lot of Bitcoin. Speculators bid up the price of its stock as the price of Bitcoin goes up. That enables the company to raise capital to buy more Bitcoin, raising the price of Bitcoin.
If Bitcoin were to collapse to its true value ($0), then Saylor’s company would go bankrupt. Its creditors would end up with nothing, other than what they might get by suing Saylor.
Uncle Sam’s Chain Letter
The American dollar is fiat currency, meaning that there is nothing backing it. It used to be backed by gold, but not since I was a teenager (and even before then, there was not enough gold to really back every dollar), and I’m now 70 years old.
When the American government spends a newly-printed dollar, it is like Uncle Sam starting a chain letter, and the rest of us are downstream participants. Fundamentally, that dollar is worthless, and if you were to hold onto today’s dollars for a few generations, they probably will have lost most of their value, due to gradual inflation. Or the dollar could—God help us—lose most of its value quite quickly. But meanwhile, the dollar has “use value,” because everyone around the world accepts dollars as a means of payment. Uncle Sam’s chain letter succeeds as a consensual hallucination.
So American money is Uncle Sam’s chain letter. And Bitcoin is Michael Saylor’s chain letter. Some people who are worried about American inflation believe that Bitcoin is a hedge against that. I don’t. Getting out of one chain letter into another is like going from the frying pan into Pacific Palisades on January 7.1 I discussed alternative inflation hedges in another essay.
Have a nice day.
substacks referenced above: @
Sorry about that sick joke. My wife and I happened to have a long-scheduled visit to Los Angeles on January 7—which we took—and as we spent our vacation cooped up inside to avoid the foul air I kept muttering that we had gone out of the frying pan into LA. But it was not funny for the people who lost their houses and everything in them.
It's unusual for me to disagree with such a high % of Arnold's content. I'll start with the agreements: 1. The dollar is a mess and losing value gradually - I hope to avoid the suddenly part. 2. 99.99% of the 'crypto' industry is a scam like he describes above. Trumpcoin is a perfect example. Insider sales to a greater fool.
I disagree strongly on Bitcoin, however. Comparing dollars to bitcoin is central to this piece. Let's continue that. Over the last 15 years, holding bitcoin has increased your purchasing power, while holding dollars has dramatically decreased your purchasing power. This has nothing to do with various evangelists like Michael Saylor. He is the loudest holder of bitcoin, but not the most significant. (I recently wrote a piece concerned about his machinations as well - I just don't have as strong a negative reaction to the person himself as Arnold does.). Bitcoin's performance as a store of value has been driven by its fundamental properties that make it a better monetary technology. Scarce, durable, divisible, recognizable, and portable.
A money independent of nation state control with a hard cap on supply (>93% already circulating, <1% annual inflation rate and dropping programmatically every 4 years), no central person or organization controlling or censoring transactions in it, allowing individuals to send value natively over the internet across borders for fractions of a cent,... whole books have been written and the adoption/price curves are showing the progress clearly. The concept of money itself is a shared illusion (question 1: do you believe in the concept of money?) - once you agree to its utility, "which is the best money?" is question 2. People constantly focus on question 1 for bitcoin "there's nothing there", then switch to question 2 for their preferred choice - gold, U.S. Dollars, etc...
If you had to put half of your net worth in dollars in a savings account and half of it in bitcoin then not touch either for 10 years, which one would you be most worried about? If you even pause here, that's some level of probabilistic bet on Bitcoin. I'd love to have some kind of friendly bet with Arnold on this if he's game.
Agree on commodities especially if you trend follow as many ETFs now do. Disagree on the dollar. I think having a navy makes it more “backed up” than either gold or bitcoin. The dollar is backed up by the US ability to extract taxes or go take things from other countries/make them take dollars. Feels more real than people thinking gold is shiny. Of course that subjects it to political preferences which will always mean it’s mildly declining in value over time.