Is Bitcoin Anti-Productive?

Republican Conservatives Wonder

Peter Ryan writes for The American Conservative. He recently wrote an article about Bitcoin. I am glad to see it because I think that thought leaders and intellectuals in the conservative movement must grapple with cryptocurrency concepts. The way they can do that is to write about it to stimulate conversation.

Bitcoin is easily dismissed as a fraud. Tulip bulbs. There is clear evidence that many fraudulent schemes have been perpetrated using Bitcoin or other cryptocurrency. Certainly, when the Bored Ape Club non-fungible tokens (NFT) and other NFTs were sold, they looked like tulip bulbs.

At the same time, when you read Packy McCormick’s essay on NFTs integrated with standard corporate marketing, it illuminates another view where the technology becomes legitimate. What if cryptocurrency injected into marketing changes the way companies view marketing; from an expense to an intangible asset?

I have had my own evolutionary thinking when it comes to crypto. At first, fraud. Then I started to think about it hard and saw uses for it because there are a lot of gatekeepers in financial markets that don’t add a lot of value but exist due to “it’s the way we always have done it” or regulation. Last year, I was frustrated with crypto and warned everyone to stay away because it was just way too cumbersome. No one had built anything yet of value that anyone could use easily.

Stay away and don’t touch, but observe.

Peter Ryan concludes that it’s all just a fraud. He worries that investment in Bitcoin is siphoning off real dollars that could be invested into more current productive segments of the American economy.

I don’t think that people should worry about where money gets invested. The problem is at the early stages, virtually every good venture investment looks kind of crazy in some way. If it doesn’t, it’s not a good investment. Great venture investments look fantastic in the rearview mirror. Of course, you would have invested in a company that allowed you to page a car to pick you up on your phone. But, would you have done it soon after the computer mobile phone was introduced and the company had virtually no customers and no cars?

I made a few crypto investments. I invested in Bitnomial when it was just the founder by himself and an idea. That was ten years ago. Now, it has the largest open interest of any startup futures exchange, and it is regulated by the CFTC with a captive clearinghouse and its own institutional wholesale brokerage operation. Volume is steadily increasing and their small team has done an incredible job getting the company to where it is at. The company is starting to look like something. If you trade cryptocurrency and you aren’t on Bitnomial, you are missing out.

I would agree with Peter Ryan that up until this point, virtually the entirety of crypto’s only excuse to exist was to speculate and day trade. There is no there there. Nothing tangible has been built yet and since crypto’s initial introduction combined with all the massive hype, it’s been a trail of empty promises.

Speculation isn’t a bad thing. It’s healthy. Investing in early-stage companies is a pure form of speculation by itself and America has received gigantic dividends from the risk appetite of its citizens. We talk about Henry Ford and Thomas Edison, but what about Fred Smith? He started Federal Express in 1973. The post office and UPS already existed. Investors speculated in his idea and the world is better for it. Of course, we had lots of speculation in the 1980s/1990s which crashed spectacularly in 2001. Still, we are better off for it. You use the internet every single day. Many many companies didn’t make it and others were most certainly frauds. However, if you were trying to use the web before Netscape was released, the moment you used it you had a revelation.

Most of the companies I have seen that are using some form of cryptocurrency to implement a solution are merely analogs of Web 2.0 trying to formulate them in Web 3.0. In their defense, many of the first startup companies way back when the internet was first taking hold were replicas of existing systems or companies that merely took the product to a virtual landscape that was highly scalable. Intuit wasn’t revolutionary but being able to do all your accounting and scale it across computerized platforms was. Lotus 1-2-3 could be done by hand with great difficulty and the potential to make mistakes, but doing it on a computer was a lot better.

The place I think cryptocurrency can revolutionize our world is by taking down companies that have erected what’s called a “walled garden” to keep you in. The company takes a lot of the producer surplus from that garden and turns it into almost monopoly profits. Apple is a classic example. They have a phone, a watch, a computer, and an App Store. Apple generates reams of profit from its App Store. Creators don’t get the lion’s share, but they have to be on the App Store if they want to receive anything at all. There are plenty of examples in every single business vertical. The goal of any business is to try and be a monopoly. Peter Thiel outlines this strategy in his book, Zero to One. Winners take the most.

Here are some ideas where cryptocurrency revolutionizes things:

• A tokenized immigration system might alleviate problems at the border.

• Tokenized voting would eliminate voter fraud. It’s voter ID on steroids.

• What are your favorite airline miles worth? What if there was a market to trade United for American or Delta airline miles? How would that market alter the strategies of airline companies when it came to choosing and scheduling routes?

• What if I could travel the world and not be beholden to using US Dollars or whatever the local reserve fiat currency was? What happens to the speed of payment systems and the operations behind that transaction? What happens to overall pricing, does it get more transparent? Do cross-border trade transactions become more efficient making goods and services cheaper?

I do think there are some dangers with cryptocurrency that aren’t immediately seen. For example, because crypto is “cleared” on a public or private blockchain, there could be “lock-in” to that blockchain which gives monopoly power to the token. This blog post from 2017 from my friend Craig Pirrong still rings true. Read his whole blogpost because it has academic support for his writing. One part of it is this:

The digital economy is driven by network effects: think Google, Facebook, Amazon, and even Twitter. In addition to creating new efficiencies, these dominant platforms create serious challenges for competition, as scholars like Ariel Ezrachi and Maurice Stucke have shown:

Peter Thiel, the successful venture capitalist, famously noted that ‘Competition Is for Losers.’ That useful phrase captures the essence of many technology markets. Markets in which the winner of the competitive process is able to cement its position and protect it. Using data-driven network effects, it can undermine new entry attempts. Using deep pockets and the nowcasting radar, the dominant firm can purchase disruptive innovators.

Our new economy enables the winners to capture much more of the welfare. They are able to affect downstream competition as well as upstream providers. Often, they can do so with limited resistance from governmental agencies, as power in the online economy is not always easily captured using traditional competition analysis. Digital personal assistants, as we explore, have the potential to strengthen the winner’s gatekeeper power.

Blockchain will do the exact same thing.

I do think that a US Digital Dollar is an absolute no-no. A tokenized US Dollar would give the government power over how you use currency, and it would be able to track every purchase you made. The government could also turn on, or turn off your ability to use digital currency because of its whims. The Orwellian thoughts that go through my mind when I start to think about that are truly frightening and horrific.

My friend William just moved his blog to a Web 3.0 platform. I am thinking about moving my blog to it. Please click the link and read what he has to say. See what you think. Feel free to comment below about it. I’d like to see some meaningful thoughts and conversation, not just a one-line hottake about “it’s a fraud” or “it’s gonna change the world”. William writes:

It's not all perfect, but it's coming together perfectly well, because I didn't have to do one technical thing to connect these 5 services together, except for a few clicks, just as every Web2 user is accustomed to doing.

This makes one wonder if, after all, at least initially, Web3 could become a bunch of features for Web2 experiences, in essence backing its way into adoption. It wouldn't be a bad thing. There are 5.3 billion Web2 users, and Web3 will chip at them slowly and gradually.

The real problem is we aren’t talking about the issues that Craig or William bring up. We are talking about surface stuff that is meaningless in the grand scheme of things. I appreciate some politicians like Ted Cruz saying they are “for crypto”, but it’s not enough just to be for it. Just like other core beliefs that people have, there needs to be structure and purpose that support that belief.

The reason to ban crypto isn’t because there is fraud or people launder money using it. They do that with the existing regulations and banking system we have today.

I disagree with anyone, conservative or liberal, that we ought to stop investing in cryptocurrency or that we ought to heavily regulate/tax it. Let the market develop and decide. Whatever survives will make our lives better.