The Opportunity Cost of Crypto, For China

China Cracks Down on Decentralization (Some Americans Would Like To Do The Same)

The study of economics isn’t about money, or even supply and demand. Supply and demand are geometric lines translated from mathematical functions to illustrate people’s behavior.

No, the study of economics is about scarcity.

There are no free lunches. Every resource isn’t unlimited, nor is it free. When it is “free”, there is a cost somewhere else.

When you really look at the capitalist economic system, the one thing that really comes out is decentralization. Capitalist economies are very decentralized, and the transparent price system influences behavior and action. Entire supply chains work from getting raw materials to selling finished goods and no one really knows each other. Transactions are governed by objective law, and things happen.

Milton Friedman says it well in this video.

China doesn’t have anything resembling the capitalistic free-market system. It’s centrally planned. I remember when I was getting my MBA at Chicago Booth (2005-2007) and people were telling me things had changed. I was in the minority, but I never thought communists really changed. I think today, I have been proven right. I think Booth made a strategic error moving their Asian campus from Singapore to Hong Kong.

When you think about the theory behind cryptocurrency, it is decentralized. It’s not dissimilar from the overriding idea behind the founding of the United States which is “federalism”.

Cryptocurrency was embraced early by people in China. Why do you think?

My hypothesis is that no matter where people live, what race or gender or whatever they are, they have an ingrained drive to pursue a better life for themselves. When shackles are put on their hands, they figure out hacks. Federalism isn’t some forced system of government. It leverages basic human behavior that we would engage in without a government and organizes it to make it functional, repeatable, and safe.

The other reason the Chinese ran to mine cryptocurrency is simple. Greed. Mining crypto seemed like a free lunch.

One example of human survival instincts happened outside of China. People in Venezuela set up Bitcoin miners in their homes. Electricity is “free” in Venezuela. Citizens mined Bitcoin and then converted it to fiat currency so they could spend money on sites like Amazon and get groceries delivered. Feeding your family in the face of a deliberate socialist/communist/totalitarian government famine is a strong incentive. I guess they couldn’t get to the animals in the zoo. People figure out ways to survive in the face of despotism. If you speak with people that grew up behind and experienced the Iron Curtain, you will hear some amazing stories. I hope we don’t have to experience that in the US.

China went hard into crypto mining. Hard. It had a huge share of miners. 75% of the total hash rate. The government let it happen. They were greedy. They wanted the money and they wanted the power. They thought they could control Bitcoin if they could control the mining. Today the hash rate is 46% and dropping quickly as miners are put out of business by their pals in the government.

What they failed to grasp is that since Bitcoin was designed as a decentralized system, it was impossible to control. There was no one to bribe. No crony capitalism. There was no way to use military might or a local police force to get people to bend the knee. Remember, the Chinese system only works because the government owns all the deadly force. Ponder that the next time you want to repeal the Second Amendment.

China has tried to control and limit Bitcoin in the past. But, this time it’s real and it will be final. This is not just cryptocurrency. Premier Xi is cracking down on all businesses and the people that run them. As long as he controls the military, he will win.

You might wonder why someone like Jack Ma just doesn’t up and leave. It’s worth pointing out he has family in China, and they will make life extremely miserable for his entire extended family if he does. These people below aren’t lining up for work at the local Nike factory.

China has no rule of law. It has no decentralization. If there is “capitalism”, it’s crony capitalism. The one thing it did glean out of the cryptocurrency experience was that they could create their own central bank digital currency. I am 1000% against the United States developing similar.

China cannot afford to have people have an extended taste of decentralization. Decentralization means freedom. Freedom is antithetical to the Chinese vision of society. They have to crush it.

In America, I see people that have similar feelings to decentralization and free-market capitalism as the Chinese Politburo. Janet Yellen wants to tax unrealized gains. The Democratic tax bill wants to change the entire playbook when it comes to saving for retirement.

In a recent Wall Street Journal editorial, President Joe Biden’s Office of the Comptroller nominee said she “thinks asset prices, pay scales, capital and credit should be dictated by the federal government. In two papers, she has advocated expanding the Federal Reserve’s mandate to include the price levels of “systemically important financial assets” as well as worker wages. As they like to say at the modern university, from each according to her ability to each according to her needs.

In a recent paper “The People’s Ledger,” she proposed that the Federal Reserve take over consumer bank deposits, “effectively ‘end banking,’ as we know it,” and become “the ultimate public platform for generating, modulating, and allocating financial resources in a modern economy.”

The 1989 graduate of Moscow State would oversee all the nation’s banks. By proxy, Biden agrees with her. That is simply evil.

Their framing of how success happens and who earns it isn’t that different from the Chinese Politburo.

People that dismiss crypto do it for a lot of reasons. Yes, it’s not backed by the full faith and credit of the government. Unlike airline miles, which a centralized management team at an airline can change the rules on, cryptocurrency is governed by a decentralized management apparatus. Another reason there are crypto detractors is they haven’t thought deeply about it and buy into the memes that tokens are tulip bulbs. Another reason is people bray at innovation. They see it as stupid until it is adopted and easily usable. “Get a horse”.

It’s still early days in crypto and a lot of projects will certainly fail. Most of them as a matter of fact. People will lose money. They will feel hurt.

If you run the Federal Reserve or think that government spending is the straw that stirs the drink when it comes to economic progress, cryptocurrency is extremely threatening. The first thought is to find ways to stamp it out. Regulate it. Tax it. Ban it. Spread anecdotes about it and how it facilitates nefarious activity. Of course, there are more examples of nefarious activity being engaged in by governments and government officials than there are in the corporate private world. Look at my home state of Illinois and compare and contrast prison sentences of public officials versus private and you will get a flavor.

But, some of the projects will bear fruit. They will improve your life, increase competition and grab market share from the oligarchies and monopsonies that govern the American economy today. Value will be created. The result will American people will be freer.