One day, a man went to an auction. When an exotic parrot went on the auction block, the man decided he was going to buy the bird no matter what. The bird was unbelievably rare, and he had been looking for this particular bird for an extraordinarily long time.
The man wanted the parrot so badly, he didn’t think twice about the anonymous bidder who was consistently outbidding him. The man just kept bidding, getting outbid, and bidding higher and higher until he finally “won” the bird for a price of $23,000,000—a price the majority of auction investors would call “a definite bubble.”
Despite his disappointment about the price, the beautiful bird was his at last.
As he was paying for the parrot, he said to the auctioneer, “I sure hope this parrot can talk. I would hate to have paid so much for it, only to discover that he can’t speak!”
“Oh, don’t you worry,” said the auctioneer. “He’s a talker. Who do you think kept bidding against you?”
Price and Value
“Creating Value” is the corporate slogan of the twenty-first century. C-suite executives proudly parade around offering “value” at annual board meetings. Everyone seems to be obsessed with value, but no one seems to know precisely what it is. As with the man auctioning for the parrot, a disconnect seems to exist between price and value, and within this gray area, a great deal of confusion and risk arises.
Value is not price. At best, price is a hazy reflection of value— our best attempt to collectively come to a flawed universal agreement on what it means to trade any given service or thing for an equal representation of the subcomponents of value (such as labor) in the form of currency. Prices are actually the terms of exchange that two parties engage with; this concept can get lost as transacting becomes so ingrained in us that we don’t stop and think what price actually represents (a contract). The whole system of valuation is shocking if you think it. We have the ability to assign a price to an apple in relation to that of a multibillion-dollar behemoth such as Amazon. Society has the power to reflect the difference in how much we value one object/entity versus another. That is not an arbitrary accomplishment at all. Currency is one of the most compelling human agreements and inventions. Currency is the parameters we all agree to in order to make an exchange of value convenient for many.
Founder of the Austrian School of Economics Carl Menger was one of the greatest economists to tackle the ambiguity in “The Subjective Theory of Value,” written in the late 1800s. He wrote, “When anything . . . whether of the material sort or not . . . has both desiredness and scarcity, it then has value for any person who concerns himself with it from this binary perspective.” Menger’s theory follows that valuation for one person can look radically different from another. This isn’t negative—a prevailing minority can believe in the desirableness of the underlying properties of an object, and that is all that truly matters for that object to be considered valuable. How much I value a paintbrush is going to look extremely different in relation to Picasso’s valuation.
Menger’s definition contrasts with other hazier, modern definitions, such as Huffington Post writer Caroline Banton’s 2019 description of economic value as “. . . a measure of the benefit from a good or service to an economic agent. It is typically measured in units of currency. . .” Menger’s definition isn’t concerned about the benefit derived. Instead, his definition is purely focused on the individual’s desire for what will be derived and how scarce the object of attention is. Banton’s definition, which is widely visible on Investopedia for millions of eager students to read, is an example of how the definition of “value” has been watered down; the potency and specificity have drained away over time.
Where does the idea of intrinsic value fit into Menger’s puzzle?
A house has “intrinsic value” for billions of people. Ask a group of intentional nomads how they value a house. What is the intrinsic value of a house for these nomads compared to you and me? Truthfully, a more accurate approach may be to view intrinsic value as a large number of people desiring underlying characteristics or function of an object such that the general consensus is that of readily agreed-upon value.
Intrinsic value is defined by the masses, creating generally agreed-upon prices. The masses can create uptrends in price and the masses also create downtrends as a result of the consensus of how desired the object is. As Menger stated, what the object is does not matter. The unprecedented truth that has altered the art of valuation is that in the twenty-first century, the rate and speed of information dispersal has increased drastically. The internet has quite literally made instant information a reality and as a result has allowed the masses’ demand to shape-shift and form quicker than ever before.
If checks and balances weren’t placed on the speed of this shape-shifting, we would begin to encounter ridiculous prices. For example, during the COVID-19 pandemic, toilet paper was sold out in stores across the United States. Hand sanitizer became a luxury. Clorox wipes were considered cleaning gold. If price gouging laws were not in place, you could have seen toilet paper worth ten to fifty dollars in some areas. Enough people valued toilet paper during the crisis such that they prioritized it as a purchase before other items, and the speed at which this desirability valuation evolved (“hysteria,” as the media would call it) happened exponentially faster than it would have happened half a century ago.
While the experts can calmly enter the marketplace and call the rest of the people sprinting to get toilet paper “irrational” because of their desire for what was perceived to be scarce toilet paper, at the end of the day, the masses and small sets of hoarders determined the shortage, not the armchair experts.
The Cryptocurrency Proposition
How does this circle back to cryptocurrency?
Cryptocurrency is known as the “Gold of the internet”. Cryptocurrency is a digital or virtual currency designed to work as a digital medium of exchange–it allows for safe, peer to peer transactions over the internet to anyone anywhere in the world with an internet connection and a cryptocurrency wallet (which anyone can create for free). While certain traditional currencies such as the dollar have multiple day latency for moving money between bank accounts, cryptocurrency is nearly instantaneous. What is more is that you have complete agency over your own cryptocurrency. There is no approval process from a human third party intermediary.
Cryptocurrency is made possible by blockchain technology (which is increasingly known as decentralized ledger technology). Blockchain is a decentralized ledger of transactions, accounts, and data secured by a decentralized ownership of the ledger, in which mathematics and cryptography are the digital law of the ledger. The maintenance and use of the shared ledger is made possible within the ecosystem using digital cryptocurrency as the medium of exchange, which is simultaneously the incentive for those who maintain and secure the ledger to continue to do so.
Instead of trusting a chain of centralized parties to backup, update, and verify your own transactions and your own wealth, we instead trust publicly visible coded protocols to manage and maintain our transactions. The digital laws of the ledger are built with mathematics—a perfectly neutral party we can all trust as the facilitator of truly peer-to-peer transactions. What’s more is that the control of the digital ledger and its rules are made up of a decentralized community—stopping any single party from manipulating the rules of the ledger or the ledger entries. Because everyone has the same copy of the ledger, it becomes easy for protocols to spot anyone who attempts to manipulate the ledger.
In the end, leveraging public-key cryptography (the same stuff that makes the internet work) allows everyone who uses this decentralized ledger to now make peer-to-peer transactions without the need to be reliant on multiple intermediaries to make a simple transaction possible.
How Does Blockchain Work?
You’re with a group of friends and you decide to loan ten dollars to your friend Austin. Your two friends Dakota and Tony see this transaction take place and take note of it mentally. A week later, Austin pays you eight dollars and says, “That’s how much I owe you.” Naturally, you are upset! What is the proof that Austin has returned the wrong amount? Dakota and Tony back you up: “It was ten dollars—we were there when you made that transaction.” As a friend group, the accepted consensus is that Austin owed you ten dollars, not eight. Your group has created a pseudo decentralized ledger in which each party is cross-checking to make sure the record of transactions is kept fair and balanced.
Also known as a Decentralized Ledger Technology (DLT), blockchain is a system of record keeping in the form of a digital ledger. A blockchain has the following set of properties: the ledger is distributed, shared, immutable, and composed of cryptographically linked entries in the ledger that take the form of “blocks.” The protocol—the coded law that controls how the transactions and balances are maintained and executed on the ledger—is designed to continuously build consensus on what the shared ledger contains at any given moment.
Your friend group of twenty people decides to make its own currency. We will conveniently call this currency “cryptocurrency.” You’ve decided the only way anyone is allowed to transact with each other is if everyone is present for the transaction, and the majority of the people will allow the transaction to be made. Everyone records the same transaction on their own personal ledger. Using this system, everyone has an identical ledger, and consensus is maintained. If Tony purchases an item for ten dollars from Dakota, all twenty people will record this transaction in their own ledger.
If anyone attempts to change their balance on their ledger from ninety to one hundred dollars, the next time they attempt to trade or transact with someone else in the group, all other parties individually own their own identical “shared” ledgers that point to the fact that the individual does not have a ledger that matches the rest of the group. Because the group catches a mismatch in ledgers, the person is then punished with some sort of fee and is not allowed to trade with anyone else until they adopt the ledger that the rest of the group is using. This is another feature of blockchain: it eliminates the danger of any single party manipulating the ledger in their favor—creating a more secure network of transactions of currency than a traditional centralized currency system.
Cryptocurrency Value Proposition vs The Dollar
Consensus, enhanced security, corruption resistance, distributed ledger (by design), decentralization of power, immutability, audibility, and permissionless in nature are what make cryptocurrency and blockchain valuable. As we eventually turn to cryptocurrency as an investment, these valuable principles of decentralized ledger technology will be used in various apps and businesses to solve the problems of the present and future.
Ameer Rosic, cofounder of BlockGeeks, defines cryptocurrency as “an internet-based medium of exchange which uses cryptographic functions to conduct financial transactions.” Any given cryptocurrency’s worth is tied up in the trade of value between a buyer receiving a certain amount of cryptocurrency in exchange for a specified amount of currency the seller is demanding. While the US dollar is purely a medium of exchange, cryptocurrency (of which I will frequently interchange with “crypto” from now on) is special because not only is it a digital currency with a unique set of properties enabled by blockchain, but crypto is also the means by which the underlying decentralized ledger is secured, maintained, and incentivized. Cryptocurrency unlocks certain types of digital financial transactions that a US greenback cannot achieve on its own. Simply put, cryptocurrency has underlying utility that US greenbacks do not have.
“There are three eras of currency: commodity-based, politically-based, and now, math-based.” —Chris Dixon
Every blockchain enables different types of special financial transactions—the more valuable the transaction possibilities on any given blockchain, the greater the cryptocurrency will be priced because of the increase in desirability for that crypto’s utility. This increased valuation happens because the cryptocurrency is both the facilitator and medium of exchange for these transactions on the blockchain ledger.
“Virtual currencies, perhaps most notably Bitcoin, have captured the imagination of some, struck fear among others, and confused the heck out of the rest of us.” —Thomas Carper, US Senator
While blockchain’s reception has been overwhelmingly positive as a potentially valuable technology, the hegemony of sovereign currencies is uneasily facing the unprecedented competition presented by digital cryptocurrencies. The global hegemony understands digital cryptocurrencies have fundamental properties that are potentially more desirable than their paper currency alternatives. To return to where we began, the value proposition of cryptocurrency may be stronger than traditional fiat; the consensus is still out. A small tribe of individuals (compared to the stock market) have fiercely “speculated” and valued cryptocurrencies as being worth a significantly higher price than the majority of people in the world. Despite this, the intense desire for crypto by this small tribe of investors, against the better judgement of “experts,” does not take away from the validity of what they are valuating. It merely increases the risk entailed by investing. The powerful investing institutions, miners, and retail investors will decide the degree to which these digital assets will be priced.
The Federal Reserve & The Dollar
What is the value proposition of the dollar? To the left of the portrait of George Washington, the dollar proclaims: “This note is legal tender for all debts, public and private.”
Hal R. Varian, a University of California Berkeley economist and New York Times columnist wrote, “A more profound, and perhaps slightly unsettling, reason that a dollar has value is simply that lots of people are willing to accept it as payment. In this view, the value of a dollar comes not so much from government mandate as from social convention.” This disturbing revelation reveals to us an unnerving truth: when a currency is purely a medium of exchange without utility, such as a piece of paper with ink on it, then the value of the dollar is purely built upon trust in the United States’ ability to guarantee those dollars’ transactional value. In addition, the purchasing power of any given dollar is based on the scarcity of the dollar—directly impacting the value as per Menger’s model.
The scarcity of the dollar is wrapped up in the total amount of supply in circulation. Envision with me for a moment the following picture: you are staring at a swimming pool—the surface area of the water represents the supply of the dollar. The less surface area, or amount of dollars in circulation, for swimmers to swim around in, the more valuable every part of the pool is worth. You can fit more people in a pool than a hot tub, which is typically why the hot tub is going to be full more often than not; the small amount of room available in the hot tub makes it valuable compared to a spacious pool. Yet this smaller surface area, corresponding to a smaller supply of dollars, is difficult to move around in, causing us to frequently bump into other people.
A mysterious entity called the Federal Reserve controls the size of the pool we all play in when it comes to the US dollar. As Roger Ver, a famous Bitcoin entrepreneur, put it: “At any time for any reason, the central banks can print as much money as they want. They call it things like quantitative easing . . . it makes the dollars you and I have worth less.” The Federal Reserve are the pool designers, constantly increasing or decreasing the size of the pool at will. This is where inflation created by the Federal Reserve deeply impacts the average person.
A simple thought experiment: how much is a dollar worth today compared to 1917?
Pause for a moment and genuinely make a guess.
The general belief is that the dollar is worth more now than it was back then. One dollar in 1913 had the same buying power as twenty-six dollars has in 2020. This is a deceptive portrayal, so let me reframe. Your one dollar today is only worth three cents in comparison to the dollar from 1913. The dollar has lost approximately 97 percent of its value because of inflation since 1913. Not only is that ugly, it is downright terrifying.
The Federal Reserve has increased the size of the pool over time, and you can’t blame them. More swimmers have entered the pool that need to trade and transact. But when the excess reserves grow faster than exponential growth such as the extreme amount of inflation during the COVID-19 crisis, we have significant cause for concern. Furthermore, this growth does not appear to be slowing down anytime soon. The Federal Reserve can choose to reduce the size of the pool, but it has refused to do so historically.
Why does the Federal Reserve refuse to reduce the size?
The Federal Reserve rents out the new pool space it creates to banks that then turn around and rent it out to swimmers, or everyday people and businesses, at a profit. Here is the catch: the Federal Reserve can increase the size of the pool infinitely for free—simultaneously forcing a portion of everyone’s dollar into the new pool space. Printing money is free. Clever manipulation can move the value of your dollars into the hands of those in cahoots with the banks and Federal Reserve, all without you doing anything.
And you can’t stop it. Even members of the Federal Reserve understand this truth.
“Printing money doesn’t produce goods and services. It doesn’t hire people. It may seem like the right short-term medicine, but can the cure be worse than the disease?” —Charles Plosser, president of the Federal Reserve Bank of Philadelphia
As such, when it comes to scarcity, the cryptocurrency community has more and more evidence that cryptocurrencies are the solution to centralized entities controlling monetary supplies as opposed to the dollar. And as the Federal Reserve continues to (perhaps unintentionally) abuse the power of the monetary printing press, the value of cryptocurrency will rise in reaction over time.
The Powers That Be
While protection of the consumer is cited on many occasions, the truth is that a lot is at stake. Anything that would threaten the hegemony of the United States and the power of the dollar as the de facto global currency is immediately under intense suspicion. Congressmen have on multiple occasions called for a complete ban on cryptocurrencies under this very basis. Donald Trump has openly stated on Twitter, “I am not a fan of Bitcoin and other Cryptocurrencies, which are not money, and whose value is highly volatile and based on thin air.” He has also stated there is only one real currency in the United States, the United States Dollar. This is ironic considering a survey by HSB revealed 36 percent of small to medium businesses in the US accept Bitcoin. Major companies that accept Bitcoin are AT&T, Expedia, Microsoft, and everyone’s favorite data silo, Wikipedia. Clearly bankers are concerned, and you can’t blame them. Decentralized technology is the exact antithesis of those who believe in the central control of technology and monetary policy.
“An awful lot of our international power comes from the fact that the US dollar is the standard unit of international finance and transactions. Clearing through the New York Fed is critical for major oil and other transactions. It is the announced purpose of the supporters of cryptocurrency to take that power away from us, to put us in a position where the most significant sanctions we have against Iran, for example, would become irrelevant.” —Congressman Brad Sherman
Fear not, one representative’s negative view of cryptocurrency is not universally accepted. Utah has put favorable regulations in place to help encourage blockchain innovation within their own borders. The “Blockchain Technology Act” (Bill 0213) excludes blockchain businesses from money transmitter compliance standards—a problem that is stifling innovation in other states. Other states have also begun toying around with state legislation outlining rules specifically for cryptocurrency and blockchain technology. Andrew Yang, a 2020 presidential candidate, is known for wanting to bring clarity in the regulatory space from a federal standpoint.
“Right now we’re stuck with this hodgepodge of state-by-state treatments and it’s bad for everybody: it’s bad for innovators who want to invest in this space. So that would be my priority is clear and transparent rules so that everyone knows where they can head in the future and that we can maintain competitiveness.” —Andrew Yang
China has banned, unbanned, rebanned, and finally reopened the door for cryptocurrency effective January 1, 2020, with the passing of the Cryptography Law. US regulators have uneasily begun outlining how to proceed with crypto regulation. Warren Buffet has made comments concerning his thoughts on blockchain as an investment. Clearly, the value of cryptocurrency and blockchain (which enables crypto) cannot be denied nor shut down any longer. The largest players understand that regulation is key because in the long run cryptocurrency might simply be a better form of currency. The risk of cryptocurrency being banned in the US is low. Innovation is a tenet of the US, and will continue to be so into the indefinite future of technology.
Cryptocurrency Speculation & You
What does it mean to speculate? As I think back to the COVID-19 pandemic, I begin to wonder who the speculators were. Are they the people who walked around without masks hugging other people until the last second before quarantine was declared? Are they the people who purchased apocalypse supplies long in advance? Or are they armchair analysts who read the daily news and believed they had their finger on the pulse of society and reality?
Carter Thomas, a long time investor in many different markets, has a quote that comes to mind for speculation: “Reality is largely negotiable.” People will always have their theories and their stories—their triumphs and disasters. Interwoven between the present and the future are our speculations. Here is mine:
One day, we will live in a world where currency is decentralized, out of the control of any single entity. We will globally transact with people from all seven continents without needing multiple banks and intermediaries to conduct the transaction. Our exchanging of value will be peer to peer, person to person. Cryptocurrency will continue to be adopted because of its properties mentioned earlier—it’s simply a better form of currency, even when you account for the trade-offs. Blockchain technology will enable use cases that will shake centralized organizations to their core; entire businesses will be run in a decentralized fashion, with participants rewarded with cryptocurrency using an automated design. We will not use “banks” in the traditional sense—the blockchain and its universal ledger will be our futuristic bank. Some people, organizations, and countries will adapt. Some won’t.
That is my reality, my negotiation with the future. Maybe I am an apocalyptic COVID-19 hoarder in a tribe of high-octane risk-takers investing in a speculative digital asset. I wouldn’t say “maybe so”—it is definitely the truth. I don’t deny it.
I want to be early to the game because great money has been made and is yet to be made by those willing to pull a chair up and believe collectively that we are onto something here, that this whole blockchain and cryptocurrency “thing” has potential to be seen as something with real intrinsic value.
Cryptocurrency is the very first instance of a currency capable of being decentralized, scarce, easily transportable, and digital. It is more reliably scarce than gold and more private and transactionally efficient than “modern” digital banking. This is why people are excited about cryptocurrency: it has the potential to completely and utterly revolutionize money, transactions, and contracts.
The game has changed drastically, and many are not aware of this new paradigm. Because of twenty-first century information transfer, cryptocurrency is the first time a new form of currency can be this easily poured into and speculated in the long term outside of an individual’s sovereign currency. It is why those tied down in tough economic landscapes such as Zimbabwe are opening their arms to crypto. It is financial freedom guaranteed by mathematics and designed to resist the heaviest hitters in the world from shutting it down.
Welcome to a decentralized future.