Crypto is simultaneously fascinating and frustrating. The frustrating part of watching “number go up”, has been watching:
a) legalized grift and pumping. This can range from sewer-dwelling spammers to podcast-darling VCs who spout new-age word salad and clever analogies from the same set of sci-fi books.
b) newly flush financial tourists speaking like experts on matters of investing and economics. A charitable classification of this group is honest but not yet competent. Their confidence is just “beer muscle” (I realize this would hit harder if I wrote it 9 months ago, but just look at a 3-year chart of BTC and it holds as long as you don’t know the difference between time-weighted and dollar-weighted returns).
The “a” group knows who they are. They can jump off a bridge. Incompetence is one thing, but being smart and dangerous gets you negative respect and a forever loss of trust in my book. (There is a path to redemption: you can always donate your dirty gains to charity and unwind the Bay Area home price increases you spurred with the fiat you exchanged for bags of coal. If your eventual attempt at penance is nothing more than a “ReformedVC” Substack where you litany all the “story-telling” and “narrative-building” persuasion tactics you employed it isn’t gonna make the @ladder_is_kicked_crypto_is_my_only_hope Twitter anon feel any better.)
The “b” group, if they care about learning, should read:
Economic Misconceptions Of The Crypto World (8 min read)
by Noah Smith
It explains 2 important economic concepts:
- Cash is not savings
- Scarcity doesn’t necessarily create value
Noah is an economist so I’ll let his post explain those ideas but I’ll add a bit that seems intuitive to me for no other reason than I’ve played Monopoly. The fact that the money supply grows whenever you pass GO is a clue. This is totally unacademic so feel free to correct me:
Money’s primary purpose is liquidity — to reduce transactional frictions. The money supply needs to increase with the population.
Imagine an island economy with coconuts, hut-building labor, and surf instructors…they could use seashells as a medium of exchange to solve the double coincidence of wants problem. If the seashell supply were fixed, then as the economy grows the seashells would be deflationary (meaning everything of value in the economy would go down in value relative to the seashells). And crucially, liquidity would dry up. Money would not fulfill its promise of facilitating trade because islanders would horde seashells.
When the population grows there is more supply and demand for goods and services. Population growth means economic growth. GDP increases. (Note that for GDP per capita to grow, which is what we ultimately desire to raise standards of living, productivity needs to grow. For example the ability to grow more coconuts with the same labor. We call that agriculture.)
BTC ultimately has a fixed supply. It’s like the seashells. If the technology known as “money” is useful because it creates frictionless transactions, aka liquidity, then a fixed supply is a counterproductive design.
[I’ve heard people argue against this by saying BTC is divisible into tiny amounts.
Brb, lifting a 4-slice pizza so I can cut it into 8s and sell it to you for a profit.]
To be complete, BTC’s scarcity can make it a store of value even if it’s not great as a form of money. Cash is a store of value, but only temporarily, and that’s ok because, well, read Noah’s article.
(One last parenthetical from me…gold and silver are somewhat divisible and scarce. They maintain some collective acceptance as money. They have also been stores of value. But they have satisfied these roles as “stores of value” and “money” in uneven ways. I can’t buy bread with silver at the store. Its volatility in dollar terms is much higher than the annual standard deviation of CPI and as long as I need to convert silver to USD to buy stuff, this volatility spread matters. As a store of value, gold and silver real returns have beaten inflation on the centuries time scale, but since your life is lived in decades there’s a lot of tracking error. Unless you’re a cat, the experience of your life happens once so you need to decide how problematic that tracking error is.)