Long Take: Bitcoin price falling doesn't mean what Paul Krugman claims

Hi Fintech futurists --

This week, we cover these ideas:

  • That absurd Paul Krugman article about Bitcoin. Also Jim Cramer has things to say about financial regulation.

  • If all the prices are down, which they are, does that mean that everything is bad and wrong?

  • How timing is a personal financial planning problem, not a market value problem

For more analysis parsing frontier developments every week, podcast conversations on operating fintechs, and new mental models, become a Blueprint member below.


In Partnership with:

FINTECH MEETUP is connecting 1,000+ industry professionals for 10,000+ online meetings! Don’t miss out--GET TICKET

Extract investment insight from unstructured, textual data without the pain of data engineering or relying on your data science team. Accern's no-code AI platform lets you easily draw out specific themes such as ESG and M&A, as well as sentiment about certain companies from news, financial filings, and other insight-rich sources for better investment decisions. Learn more about how Asset Management firms are using AI to get an edge on competitors with our complimentary ebook -- Download Now.


Featured Jobs

There are several fantastic opportunities at ConsenSys. Join the team as:


Long Take

There’s no choice but to write about the markets. You’ve been warned.

It’s okay to be upset with a drawdown, or counting paper losses, or paper gains for that matter. It’s fair to feel angry at some amorphous something for compelling you to take some particular action. It’s even totally fine to direct that emotion at the talking heads. The talking heads talk for the attention they receive.

Consider trading saint Jim Cramer here, who routinely moves stock prices with his show. Tough nuggets for Jim, now that Elon and Reddit can move the market too.

What’s not as *awesome* is to make glaring logical errors in public, and feeling entitled to your wrongness. Public wrongness and one’s righteousness about it, of course, is a core attribute of the current cultural moment.

It is a “winning strategy” in the Prisoner’s Dilemma of our time, where being loud and wrong gets you social capital, which then crowds out everyone who is quiet and right, and through social consensus is rendered irrelevant. It is the language of tribes. It is the howling at the moon.

A good example of being wrong and loud is Paul Krugman’s article above. It is fantastic click-bait for anyone who is trying to build anything on a modern foundation — your efforts are just “technobabble”. It is fantastic click-bait for anyone who cares about software-based property rights and the digital economy — it’s just “libertarian derp”. All claims to the contrary are indicted by the source of their utterance.

Take this claim for example.

And take this counter-evidence.

There’s 15 million monthly active addesses on Ethereum and 150 million globally. But yea, it’s totally a ghost town according to Krugman. If you’re not buying sandwiches with it, it must not be real! Because the real economy is only composed of non-digital goods. Because people can’t want things in the digital domain. Because open sourcing 20% of global GDP, i.e., the financial sector, is not worth doing.

We will therefore tease Krugman for his famous call about the Internet.

You know, it’s super hard, this futurist stuff. It was nearly impossible to actually see 2000 that retail would shift so fundamentally online. The data from activity in the world was just not yet there. The relevant information was just mental construction and hypothetical modeling in the minds of thousands of entrepreneurs bent to make their particular version of the world a reality.

And now Amazon and its clouds, and the competitor clouds, are worth trillions of dollars and run 15% of American retail. And 60% of China retail is online as well.

Yeah, but Krugman’s a fancy dude, and has lots of education, and who are we to outsmart this gray Nobel laureate fox? There is a basic mistake that experts make in looking at new technologies, and novelty generally. And that mistake is to be locked into a particular, well-defined model of the world. When a new thing, whose primary mode of growth is novelty, comes into the picture, it will fail assessment in an excel spreadsheet. It will fail assessment on the normal distribution probability curve. And it will fail assessment in a macro-economic model that does not reflect the fabric of reality — that there’s a difference between money movement in cash and in QR code.

To some extent, this is the Nassim Taleb deep criticism of conventional economics. When you structure one particular view of the work under the assumptions of average behavior, you leave out everything that happens at the edges. And what you leave out everything that happens at the edges, you miss out on what actually matters. Every platform shift, systemic change, and revolution started in the fringe. All art was made in madness.

Price.

But isn’t the ctypo market price down? Aren’t you, the writers of the Fintech Blueprint, wrong too? Have you self-radicalized beyond redemption?

Look at our decentralized darlings, down more than 50% since the high this year! Some absolutely fantastic projects, like Yearn Finance and The Graph among others, are down over 70%. If the price goes down, does it mean that these projects are “bad”?

For the sake of argument, let’s assume this rule then — if something falls 70% in value, then it is bad, and worthless, and has no intrinsic use, and is dead, and everything like it will also be dead, and you wasted your time. And also you are a fool, and have been taken advantage of by career hucksters. Note: we are assuming this sarcastically.

Based on this handy illustration of Bitcoin’s price collapses from the Visual Capitalist, including three 70%+ drops, Bitcoin is dead in 2013 and has ceased to exist and has not generated any value since then.

Also those pesky embarrassing ICOs.

After the 2017 peak, hasn’t it all been downhill? Certainly decentralization died in 2018, with nothing of value being built ever again on blockchain. It’s definitely not the case that Compound or Aave or other DeFi protocols conceptualized new markets and built out giant blue oceans of opportunity! Nor that every major financial institution, government, economic body, and media company is now engaged in the crypto ecosystem.

Let’s take a moment to give thanks to the 2008 financial crisis, and the housing bubble caused by the over-leverage printed by structured finance. Massive delevering occurred across US geographies tracked in the Case-Shiller home index below, with Miami, Florida experiencing one of the largest drawdowns.

Since then, Miami has completely disappeared off the map! 70% of it just evaporated into the air, and instead there is now only a gray desert with a “For Sale” sign in the middle. Even worse, because prices collapsed, there is no more Florida. An alligator and an anaconda are locked forever in an ouroboros feast. Also, there are no more houses, because house prices fell. Nobody will live in Miami ever again.

The worst offender of market crashes apparently is this Internet bubble we keep hearing about.

The stock market collapsed from an index high of 5048 all the way down to 1114, tumbling 80%+. Since 2000, we never had stocks again, because the corporate structure just blinked out of existence. It took Delaware along with it. All web companies were scams anyway, and none of the ideas were good, and also Amazon and Netflix were just “frauds” because they didn’t generate profits. And so there was no more Internet.

Venture capitalists similarly peaked their investing in the year 2000, and thank goodness there was never early stage venture ever again. And nobody started any ridiculous “video on the internet” companies, or oversized business chat rooms, or social network nonsense. And the taxi drivers rejoiced, jamming to their Columbia House CD collection.

Last but not least, we have to hit on the favorite meme of serious people all over the world: the Tulip Mania. Well, one perspective would suggest that there wasn’t even, really, a tulip mania.

And that buying expensive things to signal social status is a natural human trait in a human social hierarchy. Or that paying $70 million for 10 years of digital art work isn’t really that much different from paying $40 million for a shiny rock that’s super hard to find. As an aside, a perfect cubic zirconia grown in a lab being worth nothing sure seems like a good explanation as to why original NFTs are worth more than their copies.

But back to the core argument of the Tulip Mania. You see, there were tulips, and hypothetically speaking, people bid up their prices a lot, and then the prices crashed.

And then, there were never again any tulips. It’s very sad. Tulips are beautiful flowers. But the Dutch learned their lessons, and certainly don’t have the world’s largest tulip garden in the world. Because they learned their lesson, and also something about regulation from Jim Cramer.

Key Takeaways

It’s not good to be mean on purpose. But it is useful to demonstrate why arguments about market prices, or even the structure of *what* drives *which* market prices, do not always capture what actually happens in an innovation process.

Crypto assets are not going away. Computation on open source decentralized networks is only going to grow. Our economies will re-structure to reflect these emerging realities. The human capital of the world is pouring into digital assets, digital objects, digital money, and digital worlds. To bet on the opposite is to indulge in stasis. And while stasis makes for a good defense, it is not the right vector of offense for our quickly moving, meaningful, global world.

There is an anxiety to address here, which is that real people are losing real money in the real crypto market. And often, they are having this experience as a personal misfortune that cannot be undone.

As an industry, we can’t afford to be glib about this. But neither can we solve the financial choices and decisions of millions of people. It is demeaning and paternalistic to disallow choice; and longer term, it is also fruitless. Spotify could stop Napster (or more generally file sharing) through a superior digital music experience. But the law couldn’t.

The right answers to speculation are well known: financial literacy, research and understanding, diversification, risk management. It is the same answer dentists give to people with cavities: don’t forget to floss.

The issue here is not the asset class, but market timing. The reason to moderate your investment exposure to crypto assets isn’t a lack of belief in them, but your ability to weather rapid volatility in a meme-correlated, enormous asset class. This is not a behavioral question, asking whether you have a diamond hands temperament. Rather, it is a practical question of what you can afford. Do you need the money next year? What is your earning power? How many people are dependent on your income? What else do you own, and where do you live?

If you can roleplay an anon degen ape on Twitter, then you can roleplay your best financial planner for your livelihood.


For more analysis parsing 12 frontier technology developments every week, a podcast conversation on fintechs, and food-for-thought essays, become a Blueprint member.

Our NFTs, embedded with premium subscription access, are available for purchase.

See NFTs on Opensea