This morning I went back through the archives to find and listen to "The Cryptocurrency Fraud in 4 Slides" that was linked to here. - https://www.youtube.com/watch?v=xXDMzSZ409w
Everything besides Bitcoin is a speculative bet on some as yet unproven application for the blockchain. “Use our great software that for some reason needs its own money!” Just doesn’t make sense to me. I know why you would want to print your own currency, but I have no idea why I would want to use it.
Bitcoin is holding up well because it has one purpose only - digital monetary asset. It has performed this function very well and continues to grow in attractiveness in the QE infinity world.
Arnold is correct - one hurdle is the perceived difficulty of self custody. Self custody is critical because it removes counter party risk which is a key feature of Bitcoin. It is now much easier in the past, but needs to improve further. Big gains have happened here this cycle and they will continue. (See unchained capital, swan Bitcoin, casa)
I’m not sure why a fidelity or BNY Mellon providing custody services wouldn’t be attractive to some large portion of the investment community. The investment community doesn’t custody their own stocks, why would they be immediately hung up on this for Bitcoin (the only thing they should be buying as a digital asset)?
I'd like to see Arnold review The Bitcoin Standard. I expect he'll remain skeptical, but at least he would gain clarity on the distinction between Bitcoin and the rest of the ecosystem.
Agreed. I love to have honest skeptics to keep our thinking sharp. Arnold strikes me as very honest. However, the depths of his arguments give me the impression he hasn't spent the time to truly understand bitcoin. He may still come out of it as a skeptic, but would stop using Ponzi terminology to describe it
The problem is that the word "crypto" (in a finance sense) conflates at least four things:
1) people holding “well established” tokens in the expectation of long term value or as a method of international settlement like a trade currency
2) institutions exchanging those tokens
3) people making up random tokens and hucking them as valuable in various scams
4) cheating illegal banks masquerading as exchanges
It is true the differences between all of these categories are subjective, but they all exist. And many agendas are served by confusing the categories. I wish Dr. Kling would be among those who distinguishes these things rather than conflate them. (after all I gather that conflating distinct economic behaviors into dubiously wrought Big Calculations is one of his criticisms of mainstream economists)
I have a hard time seeing how cryptocurrency cannot have ongoing social and financial significance, at least in emerging markets. In places like Argentina, stable coins are becoming increasingly integrated into the daily financial life of ordinary people who need to move their paychecks in and out of their rapidly inflating fiat currency frequently. In Nigeria, something like 40% of adults under 60 own or have recently traded crypto and Bitcoin in particular is often used to facilitate cross-border payments. Central Banks in many such places (see India going back to 2018) seem convinced that crypto will disrupt monetary control without global regulatory cooperation.
Does this widespread grassroots adoption of cryptocurrency in low-middle and high-middle income countries figure into the discussion above or not really?
Blockchain, the technology underlying crypto, is useful. The NFT market, I think, will be big. Not million dollar pieces of art, but low cost songs, books, or movies. There are already analogous platforms, e.g. iTunes or Amazon. Artists will drive the adoption - to avoid fees and the ever more common censorship by tech companies. Apple is already (or planning) charging 30% on NFTs bought on iOS. They see the threat, but that response is a bit like the record labels’ response to Napster. I don’t see much value in crypto as a replacement to actual currency, but smart contracts will remake black markets. Last summer two relatively high level Boston drug dealers were killed in a dive bar fight in Providence. The case was solved with help from the secret service. Why was the secret service involved? Guess who is tasked with crypto crimes. It remains to be seen what other uses will be discovered.
Finally, one way of looking at crypto, even more so with governance tokens, is as stock in the blockchain network.
I see two crypto platforms that could survive for different reasons.
The first is BitCoin. I see it as the reserve currency for crime and porn. As long as identity thieves and ransom ware attackers willing to take payment in Bitcoin, it can survive (for the same reason that even a weak currency can survive as long as it’s issuing state takes tax payments in its own currency). As other coins fail, people will move to BitCoin in a flight to relative safety and liquidity.
The second is Ethereum. The reason is totally different. Ethereum has focused on being a distributed computing environment. It has had failures and survived. It’s roadmap focuses on platform efficiency -- first the move to proof of stake and now renewed work on sharding. If Ethereum fails, I suspect it will be because the delay in native sharding led to a non-native roll up layer, and that layer is pretty centralized. So one big failure there could now sink the platform. But if it succeeds, I think it will be on the back of smart contracts being broader than just crypto transactions. If they do succeed at that, then it might eventually replace BitCoin in its dominant space.
I don’t see any other standouts. There are others that seem like they are competing on the same strategies as BitCoin and Ethereum, but don’t have the depth or scale. Sometime a more nimble second-mover can win, but I’d think that the flight to liquidity will make that even more difficult.
1. "currency for crime and porn" - CRIME: The number one currency for crime is the U.S. $100 bill. It is far less traceable than Bitcoin and has held world champion status in this regard for my entire lifetime. PORN: The number one technology for the proliferation of porn was the internet, which was accelerated by the smart phone. I don't claim to be a porn expert, but a quick Google search should confirm, you can get a large quantity of this product for approximately free. Both of these arguments are "Hitler had a dog" type hand waves.
2. Bitcoin only doing one thing is a feature not a bug. It does that one thing very well, and has done so for over a decade. It is focused on one thing and doing that thing very well. You won't see bitcoin get distracted by adding climate change and social justice to it's mission statement. That is a very positive thing. It wakes up every day, trying to be the best money ever. No other institution in the world is doing this. How is that a bug? If you are trying to sell me "the best money in the world", your sales pitch needs to end at "its the best money in the world". If there is a substantial "and" after that, I will go away wondering what the true priority of this "money" really is.
The underlying blockchain technology that enabled Bitcoin is great for this monetary mission. Otherwise it is a relatively slow database. I'm sure folks will find some uses for it, but nothing earth shaking yet.
There are plenty that have promise, and I think bitcoin’s days are numbered just because it is simply a currency - and one that can be monitored now. An alternative to bitcoin may something like oasis rose. It is capable of both smart contracts and encrypting the contract. Celo is going for mobile first. Ontology for identity management and data. Solana is big in the the gaming market - but may not survive the FTX failure. Hedara is going for speed and scalability. Just a few, and. there are many building applications on the networks. On Hedara, there are apps being developed for medical records, scientific data, and many others. These are all gambles, people need figure out what works, and there will be failures. Crypto is one use of the blockchain technology. That is known, the unknown is the upside, and that is what you should bet on.
Yeah, I agree, many of them do have promise -- sufficient promise that you wish the first-mover had done what some of them are doing. That’s the benefit of being the second-mover in a market where the software has to be explained to the public in a really thorough way to be credible. But, in the short run, the flight to liquidity seems like a pretty strong headwind. It could show up in defections of users or defections of key developers. It will be interesting to watch, if you can tear your eyes away from the ongoing train wrecks (wrecks of trains carrying dumpsters on fire, because “train wrecks” just isn’t emphatic enough).
Crypto had three eras. The first, romantic stage was driven by libertarians and nerds interested in a new and cool technology. After bitcoin blew up in 2017 started the second era with crypto bros pulling Ponzi scams over get-rich-quick customers. The third era is the rapid death of most of the crypto ecosystem. Final era will be a handful of libertarians and nerds still hodling bitcoins.
Customers have lost any hope of making money and are selling their crypto and are exiting the market. Exchanges can't or don't want to give their USD for sh!tcoins so they are going to pull the rug. Bitfinex/Tether has issued coins worth 66 billion USD but have only about 3% backing in real currency for their stable coins. This was not a problem when money were moving into crypto but it is when money are moving out.
Serious banks will not create crypto exchanges because they can't compete with the Ponzi schemes in attracting clients. FTX was offering sign up bonuses, 8% yield for what are basically saving accounts, allowed users to place margin bets for 95% of their account, allowed traders to place bets 100x the value of their account, spent 1 billion USD on ads, 100 million on charity and 50 millions on democrats. Crypto dot com spent similar money on ads and had amazing card offerings that they had to scale down a bit. A serious business can't offer all these and keep 1:1 matching funds in currency for safety. A Ponzi scheme can because they spend money only on client acquisition.
This is why Coinbase despite being older and having submitted to US regulations and IPO audits was smaller than FTX which was founded in 2019, has the HQ in Bahamas and was opaque to public, investors and regulators. Most crypto investors want to make money fast so they go for the highest yielding offers not the safest ones. Many of those who lost money on FTX could have kept their crypto safe in cold wallets if they wanted but they were chasing yields.
Binance is the biggest crypto exchange but doesn't even has a HQ and is banned in multiple countries. Crypto bros don't care about safety but about going to the moon.
What about the digital currency experiment or pilot project by the NY Fed and several banks? How would that work? Does it rely on blockchain technology?
The dollar is already mostly digital. This is a Hail Mary to try to snuff out competition from independent monetary systems. The only way this gets implemented broadly is at the point of a gun. This tech basically gives the government 100% surveillance power over every transaction you make. How long until that surveillance power becomes veto power? Ask the Canadian truckers.
1. Those who just see it as a growth asset and are willing to use 3rd party custody. The services you describe + Fidelity for more retail types seem like good options.
2. Those who have a deep distrust of the entire system and want to self custody, eliminating all counter party risk. Again, unchained capital, casa, swan bitcoin are all good places to start looking for this option.
Why are there folks in category #2? Let me count the ways,....
Bitcoin is viewed by many as an upgrade to the traditional commodity store of value - gold. One of gold's major flaws (there are several that bitcoin has improved on) is its lack of portability. Try to go buy $1,000,000 in gold and self custody - how confident do you feel in the quality of the gold you just bought? how do you move it securely? how good do you feel about that being in your house somewhere? If its not in your house - you aren't self custodying it. This lack of portability led to the centralization of gold into large custodial operations. The bank will hold your gold for you and you just use these paper notes... Surprise, its 1933 and FDR just confiscated all the gold! This was easy because it was all centralized. Don't worry - this is just for ordinary people, governments can still own gold. The US government will keep it nice and safe for you... Surprise, its 1971 and Nixon just closed the gold window, keep all the foreign gold reserves held by the U.S.
Across the 1970's the price of gold skyrocketed, but starting in the late 1980s and through today, there has been persistent speculation that the gold market is being manipulated. Since their are large pools of "paper gold" in the market, they can be re-hypothecated in a scheme that doesn't match, but rhymes with what FTX was up to. (FTX's bankruptcy filing showed $1.4 billion in bitcoin liabilities, and $0 in bitcoin holdings. It was printing paper bitcoin.) Market shenanigans by a large centralized player to keep prices down instead of up, thus disguising the true rate of inflation in fiat currency.
There needs to be a large portion of bitcoin held in self custody outside of centralized exchanges/custodians for this asset to maintain one of it's core features - scarcity. The good news is that a large portion of bitcoin is already being held this way. >60% of all bitcoin holdings haven't moved in over a year. Since 19 million+ of the eventual 21 million total has already been mined, this means a large portion of bitcoin's total eventual supply appears to be in custody that is likely non-centralized. As well, the previous few weeks have shown huge outflows of bitcoin off of exchanges. Advantage bitcoin.
I was in cat. #1. Over 4 months I purchased $1100 in a blend of BTC and ETH through Coinbase over four months last year, mostly just to see what it was all about. Today's value: $379.99, a 65% loss. Essentially all financial instruments have performed better than BTC and ETH over that period, undermining the notion of crypto assets as "stores of value."
Sorry to hear you are down since last year. Glad to hear you started with a responsible amount. I first invested in both back in 2017. While I’m no financial advisor, if anyone asked me my advice - I’d tell them not to put in anything that they needed in the next 5 years. Early adoption curve gives potential for upside, but volatility is huge. Hopefully $400 bucks is small enough in the grand scheme of things for you that you can watch this for the next couple of years and see what happens.
Yes! If we run out of electricity, there will be bigger problems, as they say. A good tool to mitigate those problems could be a stack of 5.56 and a delivery vehicle for those.
I just believe my son's understanding of the subject. He has been working in the area since the start. https://www.youtube.com/watch?v=abcKL_x_aoA
This morning I went back through the archives to find and listen to "The Cryptocurrency Fraud in 4 Slides" that was linked to here. - https://www.youtube.com/watch?v=xXDMzSZ409w
Step one: separate Bitcoin from crypto.
Everything besides Bitcoin is a speculative bet on some as yet unproven application for the blockchain. “Use our great software that for some reason needs its own money!” Just doesn’t make sense to me. I know why you would want to print your own currency, but I have no idea why I would want to use it.
Bitcoin is holding up well because it has one purpose only - digital monetary asset. It has performed this function very well and continues to grow in attractiveness in the QE infinity world.
Arnold is correct - one hurdle is the perceived difficulty of self custody. Self custody is critical because it removes counter party risk which is a key feature of Bitcoin. It is now much easier in the past, but needs to improve further. Big gains have happened here this cycle and they will continue. (See unchained capital, swan Bitcoin, casa)
I’m not sure why a fidelity or BNY Mellon providing custody services wouldn’t be attractive to some large portion of the investment community. The investment community doesn’t custody their own stocks, why would they be immediately hung up on this for Bitcoin (the only thing they should be buying as a digital asset)?
I'd like to see Arnold review The Bitcoin Standard. I expect he'll remain skeptical, but at least he would gain clarity on the distinction between Bitcoin and the rest of the ecosystem.
Agreed. I love to have honest skeptics to keep our thinking sharp. Arnold strikes me as very honest. However, the depths of his arguments give me the impression he hasn't spent the time to truly understand bitcoin. He may still come out of it as a skeptic, but would stop using Ponzi terminology to describe it
The problem is that the word "crypto" (in a finance sense) conflates at least four things:
1) people holding “well established” tokens in the expectation of long term value or as a method of international settlement like a trade currency
2) institutions exchanging those tokens
3) people making up random tokens and hucking them as valuable in various scams
4) cheating illegal banks masquerading as exchanges
It is true the differences between all of these categories are subjective, but they all exist. And many agendas are served by confusing the categories. I wish Dr. Kling would be among those who distinguishes these things rather than conflate them. (after all I gather that conflating distinct economic behaviors into dubiously wrought Big Calculations is one of his criticisms of mainstream economists)
I have a hard time seeing how cryptocurrency cannot have ongoing social and financial significance, at least in emerging markets. In places like Argentina, stable coins are becoming increasingly integrated into the daily financial life of ordinary people who need to move their paychecks in and out of their rapidly inflating fiat currency frequently. In Nigeria, something like 40% of adults under 60 own or have recently traded crypto and Bitcoin in particular is often used to facilitate cross-border payments. Central Banks in many such places (see India going back to 2018) seem convinced that crypto will disrupt monetary control without global regulatory cooperation.
Does this widespread grassroots adoption of cryptocurrency in low-middle and high-middle income countries figure into the discussion above or not really?
It isn't a game of cat and mouse where the mouse is more agile- it is a case of confusing which is the cat and which is the mouse.
Blockchain, the technology underlying crypto, is useful. The NFT market, I think, will be big. Not million dollar pieces of art, but low cost songs, books, or movies. There are already analogous platforms, e.g. iTunes or Amazon. Artists will drive the adoption - to avoid fees and the ever more common censorship by tech companies. Apple is already (or planning) charging 30% on NFTs bought on iOS. They see the threat, but that response is a bit like the record labels’ response to Napster. I don’t see much value in crypto as a replacement to actual currency, but smart contracts will remake black markets. Last summer two relatively high level Boston drug dealers were killed in a dive bar fight in Providence. The case was solved with help from the secret service. Why was the secret service involved? Guess who is tasked with crypto crimes. It remains to be seen what other uses will be discovered.
Finally, one way of looking at crypto, even more so with governance tokens, is as stock in the blockchain network.
I see two crypto platforms that could survive for different reasons.
The first is BitCoin. I see it as the reserve currency for crime and porn. As long as identity thieves and ransom ware attackers willing to take payment in Bitcoin, it can survive (for the same reason that even a weak currency can survive as long as it’s issuing state takes tax payments in its own currency). As other coins fail, people will move to BitCoin in a flight to relative safety and liquidity.
The second is Ethereum. The reason is totally different. Ethereum has focused on being a distributed computing environment. It has had failures and survived. It’s roadmap focuses on platform efficiency -- first the move to proof of stake and now renewed work on sharding. If Ethereum fails, I suspect it will be because the delay in native sharding led to a non-native roll up layer, and that layer is pretty centralized. So one big failure there could now sink the platform. But if it succeeds, I think it will be on the back of smart contracts being broader than just crypto transactions. If they do succeed at that, then it might eventually replace BitCoin in its dominant space.
I don’t see any other standouts. There are others that seem like they are competing on the same strategies as BitCoin and Ethereum, but don’t have the depth or scale. Sometime a more nimble second-mover can win, but I’d think that the flight to liquidity will make that even more difficult.
1. "currency for crime and porn" - CRIME: The number one currency for crime is the U.S. $100 bill. It is far less traceable than Bitcoin and has held world champion status in this regard for my entire lifetime. PORN: The number one technology for the proliferation of porn was the internet, which was accelerated by the smart phone. I don't claim to be a porn expert, but a quick Google search should confirm, you can get a large quantity of this product for approximately free. Both of these arguments are "Hitler had a dog" type hand waves.
2. Bitcoin only doing one thing is a feature not a bug. It does that one thing very well, and has done so for over a decade. It is focused on one thing and doing that thing very well. You won't see bitcoin get distracted by adding climate change and social justice to it's mission statement. That is a very positive thing. It wakes up every day, trying to be the best money ever. No other institution in the world is doing this. How is that a bug? If you are trying to sell me "the best money in the world", your sales pitch needs to end at "its the best money in the world". If there is a substantial "and" after that, I will go away wondering what the true priority of this "money" really is.
The underlying blockchain technology that enabled Bitcoin is great for this monetary mission. Otherwise it is a relatively slow database. I'm sure folks will find some uses for it, but nothing earth shaking yet.
There are plenty that have promise, and I think bitcoin’s days are numbered just because it is simply a currency - and one that can be monitored now. An alternative to bitcoin may something like oasis rose. It is capable of both smart contracts and encrypting the contract. Celo is going for mobile first. Ontology for identity management and data. Solana is big in the the gaming market - but may not survive the FTX failure. Hedara is going for speed and scalability. Just a few, and. there are many building applications on the networks. On Hedara, there are apps being developed for medical records, scientific data, and many others. These are all gambles, people need figure out what works, and there will be failures. Crypto is one use of the blockchain technology. That is known, the unknown is the upside, and that is what you should bet on.
Yeah, I agree, many of them do have promise -- sufficient promise that you wish the first-mover had done what some of them are doing. That’s the benefit of being the second-mover in a market where the software has to be explained to the public in a really thorough way to be credible. But, in the short run, the flight to liquidity seems like a pretty strong headwind. It could show up in defections of users or defections of key developers. It will be interesting to watch, if you can tear your eyes away from the ongoing train wrecks (wrecks of trains carrying dumpsters on fire, because “train wrecks” just isn’t emphatic enough).
Crypto had three eras. The first, romantic stage was driven by libertarians and nerds interested in a new and cool technology. After bitcoin blew up in 2017 started the second era with crypto bros pulling Ponzi scams over get-rich-quick customers. The third era is the rapid death of most of the crypto ecosystem. Final era will be a handful of libertarians and nerds still hodling bitcoins.
Customers have lost any hope of making money and are selling their crypto and are exiting the market. Exchanges can't or don't want to give their USD for sh!tcoins so they are going to pull the rug. Bitfinex/Tether has issued coins worth 66 billion USD but have only about 3% backing in real currency for their stable coins. This was not a problem when money were moving into crypto but it is when money are moving out.
Serious banks will not create crypto exchanges because they can't compete with the Ponzi schemes in attracting clients. FTX was offering sign up bonuses, 8% yield for what are basically saving accounts, allowed users to place margin bets for 95% of their account, allowed traders to place bets 100x the value of their account, spent 1 billion USD on ads, 100 million on charity and 50 millions on democrats. Crypto dot com spent similar money on ads and had amazing card offerings that they had to scale down a bit. A serious business can't offer all these and keep 1:1 matching funds in currency for safety. A Ponzi scheme can because they spend money only on client acquisition.
This is why Coinbase despite being older and having submitted to US regulations and IPO audits was smaller than FTX which was founded in 2019, has the HQ in Bahamas and was opaque to public, investors and regulators. Most crypto investors want to make money fast so they go for the highest yielding offers not the safest ones. Many of those who lost money on FTX could have kept their crypto safe in cold wallets if they wanted but they were chasing yields.
Binance is the biggest crypto exchange but doesn't even has a HQ and is banned in multiple countries. Crypto bros don't care about safety but about going to the moon.
What about the digital currency experiment or pilot project by the NY Fed and several banks? How would that work? Does it rely on blockchain technology?
The dollar is already mostly digital. This is a Hail Mary to try to snuff out competition from independent monetary systems. The only way this gets implemented broadly is at the point of a gun. This tech basically gives the government 100% surveillance power over every transaction you make. How long until that surveillance power becomes veto power? Ask the Canadian truckers.
Agreed. I also see two classes of investors:
1. Those who just see it as a growth asset and are willing to use 3rd party custody. The services you describe + Fidelity for more retail types seem like good options.
2. Those who have a deep distrust of the entire system and want to self custody, eliminating all counter party risk. Again, unchained capital, casa, swan bitcoin are all good places to start looking for this option.
Why are there folks in category #2? Let me count the ways,....
Bitcoin is viewed by many as an upgrade to the traditional commodity store of value - gold. One of gold's major flaws (there are several that bitcoin has improved on) is its lack of portability. Try to go buy $1,000,000 in gold and self custody - how confident do you feel in the quality of the gold you just bought? how do you move it securely? how good do you feel about that being in your house somewhere? If its not in your house - you aren't self custodying it. This lack of portability led to the centralization of gold into large custodial operations. The bank will hold your gold for you and you just use these paper notes... Surprise, its 1933 and FDR just confiscated all the gold! This was easy because it was all centralized. Don't worry - this is just for ordinary people, governments can still own gold. The US government will keep it nice and safe for you... Surprise, its 1971 and Nixon just closed the gold window, keep all the foreign gold reserves held by the U.S.
Across the 1970's the price of gold skyrocketed, but starting in the late 1980s and through today, there has been persistent speculation that the gold market is being manipulated. Since their are large pools of "paper gold" in the market, they can be re-hypothecated in a scheme that doesn't match, but rhymes with what FTX was up to. (FTX's bankruptcy filing showed $1.4 billion in bitcoin liabilities, and $0 in bitcoin holdings. It was printing paper bitcoin.) Market shenanigans by a large centralized player to keep prices down instead of up, thus disguising the true rate of inflation in fiat currency.
There needs to be a large portion of bitcoin held in self custody outside of centralized exchanges/custodians for this asset to maintain one of it's core features - scarcity. The good news is that a large portion of bitcoin is already being held this way. >60% of all bitcoin holdings haven't moved in over a year. Since 19 million+ of the eventual 21 million total has already been mined, this means a large portion of bitcoin's total eventual supply appears to be in custody that is likely non-centralized. As well, the previous few weeks have shown huge outflows of bitcoin off of exchanges. Advantage bitcoin.
Do your own research, buy bitcoin, self custody.
I was in cat. #1. Over 4 months I purchased $1100 in a blend of BTC and ETH through Coinbase over four months last year, mostly just to see what it was all about. Today's value: $379.99, a 65% loss. Essentially all financial instruments have performed better than BTC and ETH over that period, undermining the notion of crypto assets as "stores of value."
Sorry to hear you are down since last year. Glad to hear you started with a responsible amount. I first invested in both back in 2017. While I’m no financial advisor, if anyone asked me my advice - I’d tell them not to put in anything that they needed in the next 5 years. Early adoption curve gives potential for upside, but volatility is huge. Hopefully $400 bucks is small enough in the grand scheme of things for you that you can watch this for the next couple of years and see what happens.
Yes! If we run out of electricity, there will be bigger problems, as they say. A good tool to mitigate those problems could be a stack of 5.56 and a delivery vehicle for those.