5 things I learned in crypto this week: 29 October – 4 November 2018
Welcome to week two of my crypto learnings diary! For the purpose of these posts see last week’s entry. This week is notable perhaps in that my attention largely hasn’t been on crypto directly, but on how this space fits within the wider context of economic and market theory.
So let’s dive in…
1. ‘What the wise man does in the beginning, the fool does in the end’
My audio book odyssey has continued this week with Howard Marks’ new publication Mastering the Market Cycle. It’s a great read/listen and I would thoroughly recommend it. The core idea of the book is that while markets are inherently unpredictable, they are governed by cycles upon which you can depend (note: for more on this concept watch Ray Dalio’s How the economic machine works). When in the ascending part of the cycle positivity pervades and investors become blinkered to the risks that lie ahead. When the cycle dips from unquestioning optimism to fear, investors can see only doom ahead. Howard’s point is that as an investor you need to position yourself to capitalise on the downturns and not become overexposed on the upturns. He discusses several boom and bust cycles, including the dotcom bubble and the global financial crisis, and how his investment firm used these cycles as profitable investment opportunities. Unsurprisingly (given Howard’s investment focus) there’s no mention of last year’s crypto market bubble, however anyone paying attention to Bitcoin and other assets will be able to relate with all the signs and hallmarks of market euphoria he talks about.
Link: https://www.amazon.com/Mastering-Market-Cycle-Getting-Odds/dp/1328479250
2. Meeting the Masters of Money
Almost by accident, I uncovered a fantastic set of BBC documentaries from 2012 that I had previously missed. Masters of Money [find links below] is a three-part series in which the beeb’s then economics editor Stephanie Flanders investigates the economic theories of three of the most influential economic thinkers of recent times – Keynes, Hayek and Marx – and applies their principles to the economic climate post-GFC. Where each of these thinkers differed most significantly is in their respective views on the role government should play in the economy. Keynes believed the government had a responsibility to intervene in the markets, especially to bring stimulus during times of recession. Hayek believed the market is a self-correcting organism that provides valuable information that can be used to more efficiently allocate capital and other resources. Thusly, market activity should be entirely unfettered by government meddling as this would necessarily bring inefficiency (and ultimately lay the path towards totalitarianism). Marx believed capitalism is inherently unstable and designed to reinforce the ruling class’s power. These ‘class war’ tensions are essential to the capitalist system and help bring about its own destruction, leading to a new economic model where state planning is used to protect workers and maintain equality. It’s incredibly interesting to consider all three of these models within the context of Bitcoin, which – it’s fair to say – is a large-scale experiment of Hayekian/Austrian economics in action.
Keynes -
Hayek -
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3. Buidl responsibly
Moving back to crypto, I enjoyed reading this write up of the Multicoin Summit which took place in New York in late October. The event sought to debate ‘the hard questions’ in blockchain and covered portfolio management, protocol governance and the development of the Web3 stack among other topics. The below quote from Katherine Wu, Head of Business Development and Community Management at Messari, really stood out for me:
"You can’t move fast and break things when building important public infrastructure and raising millions from non-professional investors. Buidlers need to buidl responsibly."
Katherine makes a shrewd and important point as many crypto projects are being pressured to follow the lean startup/high growth model that has been pervasive in the tech sector for some years now. A cursory look at any project Telegram chat group shows impatient “investors” prodding the team for updates and signs that teams are over-extending to meet the ambitious milestones they listed in their whitepaper. Keep in mind, however, that unlike a photo-sharing iPhone app mistakes in developing a blockchain protocol can have serious and very costly implications. Move slowly, get it right.
Link: https://tokeneconomy.co/https-tokeneconomy-co-multicoin-summit-recap-932a36e6aa01
4. Moving from speculation to engagement
I always enjoy reading the views of Fred Wilson, VC at Union Square Ventures, on developments in the crypto space. His recent post Engaging in Cryptonetworks is a particularly fascinating take on what it actually means to participate in this new form of value creation. Fred argues that to date, being ‘involved’ in crypto has largely meant either holding or speculating on tokens, but with the advent of Proof of Stake models there will be greater opportunity for individuals to support a network by ‘turning idle assets (e.g. their cash savings) into an income producing asset by staking, validating or governing to earn the rewards of that engagement.’ The implications of this investing approach, particularly for a new generation of investors that have never known bank interest or been able to relate to the ‘old money’ stock market, is huge.
5. Beware the Pyramid Scheme
I hate to bring such loaded and click-baity terms as ‘Pyramid’ and ‘Ponzi’ into a discussion on crypto (this work has been done ad nauseum already by cynics such as the FT), however this weekend I finally got round to watching the excellent Netflix documentary Betting on Zero. The film explores hedge fund manager Bill Ackman’s billion dollar short on multi-level marketing scheme Herbalife. The company had existed for more than 30 years on a business model predicated on the recruitment of new members rather than sales of a product with dubious health benefits. Ackman took particular exception to the company’s approach of exploiting Hispanic communities, to which representatives sold the ‘American Dream’ of riches untold, destroying savings accounts and lives in the process. One interesting view from Ackman on how the company had endured for so long was that ‘the bigger the lie, the more likely it will be believed’. Bringing it back to crypto, I see this as a cause for vigilance. We’ve already seen once major pyramid scheme in this space (Bitconnect), which imploded astonishingly quickly, and no doubt we’ll see many others. Such schemes can burn inexperienced investors and discredit the entire space and so must be outed and admonished as early as possible. Watching this documentary helped me to distinguish the defining nature of a pyramid scheme: any business or network that relies on recruiting/referring new members rather than delivering tangible business value should instantly be questioned. Though, as Ackman discovered, be careful with those shorts.