I’ve been bothered by Cryptocurrency for quite some time. I started following it seriously again after the 2017 peak and crash. I’ve always been leery of talking about it because I so fundamentally did not get why it continued to be a thing. After researching it at great length in recent months, I’ve come to the conclusion that it’s the world that’s crazy, not me. If cryptocurrency continues on its current trajectory, it’s got a lot of terrifying implications. I begin to unpack those in this video, which is intended to be the first of three.
Video Transcript after the jump…
At the beginning of the 7th century, the ancient world was divided between two enemies that probably thought of each other as immortal. The Romans and the Persians, in different forms, had been fighting each other for over half a millennium. They knew the battle ground, they knew the weapons, and they poured everything they could into fighting those fights. But while they were focused on each other, a new religion, and a new approach to conquest was being born in a desert to the South. By the turn of the 8th century Islam had obliterated the old order, wiping out the Persian empire entirely, and reducing mighty Rome to a few scattered possessions outside the walls of Constantinople.
I get irritated by people who try to force the modern world into convoluted ancient civilization analogies. But that one episode is always with me. As I look at US security strategy, and my government’s constant attempts to conjure up a threat to justify our defense budgets, I often wonder what we are missing. What’s the thing that’s going to come zooming out of the desert to annihilate the world as we know it, while we are focused on something else entirely? I am beginning to suspect it’s fricking Bitcoin.
The US government has been working really, really hard trying to make rivalry with China a thing. We spent decades building them up into a manufacturing powerhouse. While the rest of us were distracted by the orange plague we had elected president, the Pentagon did it’s big great power competition launch and it’s honestly pretty underwhelming. I mean US media is doing its usual job of copying out defense department press releases, but there is only so much they can do with reality. We are literally spending trillions to keep China from controlling the South China Sea, even though they want it to be just as open for trade as we do, and we are spending another trillion on expanding our nuclear arsenal which is already 20-100 times the size of China’s depending on how you measure it. None of this makes any sense. China couldn’t be less threatening to the United States.
You know what is threatening to the United States? money. Money is weird. Nobody really understands how it works, and even the folks who used to pretend to understand it, economists, have pretty much given up trying since 2008 as well. According to the economists of 2004, today’s level of US national debt and Federal Reserve chicanery should have led to hyper inflation,but it hasn’t. According to the way economists saw things across the 20th century, with our current debt levels, the US position as the reserve currency and maybe a functioning society should have ended catastrophically in 2009, in 2013, in 2017, and certainly in 2020, but the crash keeps not happening. Why is that?
Well my theory, which nobody has talked me out of yet is that there just isn’t an alternative. Back in the first half of the 20th century, the United Kingdom was financially dominant. It sacrificed its balance sheet to fight two wars with Germany, giving the US dollar the opening it needed to become the currency that mattered. There are a lot of figures you can look at that will tell you that the US balance sheet today is significantly worse than Britain’s was in the 1920s and maybe even the 1940s. But in the 1920s the British had to deal with a plausible alternative. The US was in great financial shape and its bankers, if not its public, was eager to take over. In 2021, The United States doesn’t have to worry about anybody waiting in the wings to take over. Back in 2004, economists thought that international investors would abandon the dollar and US debt if the US didn’t rein in spending. Both the Euro and the Chinese Renminbi looked like plausible competitors. Today they really don’t. An underappreciated aspect of the 2008 financial crisis is that Europe and China’s financial pictures now look even worse than the US’s. Add in demographic pressures and there is no way any sane investor would consider dropping the dollar for any Eurasian country’s national currency. Which is why I find the continued US indulgence of cryptocurrency so mind-boggling. US dollar supremacy and the ability to print money endlessly depends on there not being any alternatives. Yet here we all are, applauding as Silicon Valley develops a wide range of alternatives. To be clear, I think the chances of Bitcoin itself being that alternative are pretty damn slim. Extreme price volatility combined with slow and costly transactions do not a dollar competitor make. But this sector is just a decade old, and an exponentially growing number of the world’s smartest and richest people are now working to come up with new coins and new technologies that could provide a real dollar alternative.
I first learned about Bitcoin on a website called hacker news back in 2010 or so. I considered buying back then, but didn’t, for a simple reason. Quick interjection. At this point You may be getting the sense that this video is just an extended cry of regret over not buying Bitcoin 10 years ago, and you would be right! …but I still think my reasoning from back then is valid.
Back then, and still today, if you scratch the surface even a little, all the arguments for Bitcoin and other cryptocurrencies are fundamentally revolutionary. Crypto is going to change everything, Crypto is the new safe store of value, Crypto is going to replace the Dollar, Crypto is going to replace the whole financial system.
This has never made sense to me. Crypto does not have an army. The US government does. And for any of those extravagant crypto promises to come true, Bitcoin doesn’t just have to defeat the US government, but every other government in the world that wanted to have any kind of control of its own borders, budget, taxes, or anything else. Bitcoin’s fundamental promise isn’t about helping dissidents in North Korea transfer funds. It’s about making it so nobody anywhere is allowed to have any kind of government at all. China understands this, which is why it has taken progressively more draconian steps to ban it. The Chinese government is right to be scared of Crypto. The US government should be scared too.
Cryptocurrency’s fundamental promise is anarchy. That is not something I wanted to invest in in 2009, and it’s not something I want to invest in in 2021. A bet on Bitcoin is a bet on Dystopia. And before this last run up in price, I was sure it was a losing bet. I am not so sure anymore.
I am a confirmed Elon Musk fanboy. I think he’s largely changing the world for the better, and I think we’d be a lot better off if we had ten of him. All that said, I think what he’s doing pumping up cryptocurrency is incredibly irresponsible. It’s also incredibly ungrateful. I don’t begrudge him the government subsidies he has gotten, the way he has used the US government is part of his genius in my opinion, but the fact remains that both the Tesla and SpaceX empires are completely reliant on US government spending, and are therefore reliant on the US dollar. His patronage of the crypto currency industry, one that more or less openly promises to burn the dollar down is just eyebleedingly irresponsible.
And it’s not just Elon Musk. Back in 2017, during the last big cryptocurrency peak, it was still easy to discount this as a crazy fad. It was clearly getting a little dangerous for consumers, and surely the government would finally step in. That’s not what happened. Instead, Bitcoin has very quickly gotten more respectable.
Cryptocurrency entrepreneurs are getting more and more fawning write ups in the business press. I now get most of my information on the topic from Bloomberg, which treats crypto as just another fun asset class. And more and more crypto funds and businesses are getting bought up by major financial institutions or having successful IPOs.
There is now a large and growing derivatives market based on crypto. You know derivatives, the sort of thing that blew up the world economy in 2008, except instead of being based on real estate these new derivatives are based on assets that regularly drop and spike in price by 50% over the course of a week.
So if you talk to a small time crypto investor, they will usually give you the revolution pitch. In my experience the bigger time folks will tell you privately that that’s all kind of a joke. Actually, the revolution is over and it’s already been taken over by the usual suspects. All those hidden big investors are probably Goldman Sachs and Greenwich, CT hedge funds. Heck, with all the talk about how Bitcoin is great for Venezuelans and North Koreans, Crypto is practically another branch of US establishment at this point! Everything’s fine. To which I say..
No it it is fucking not.
The key problem here is the amount of money that is mixed up in this stuff, and the way that it gets progressively larger with each peak. The 2021 peak is at least the third time a big peak and crash has happened in Bitcoin prices. All the other Cryptocurrencies tend to move in tandem. I assume it’s impossible to measure accurately, but it seems that the volume of money invested in crypto is at least five times larger this time around than it was in 2017. What if that keeps happening? The entire crypto market is currently judged to be something like 2.5 trillion, so what happens if its ten trillion next time? And what happens when all of that goes up in smoke?
My assumption remains that there is no way that could happen. But I assumed 2017 was the end of the line too, and I was wrong about that.
The arguments that this time, for sure Bitcoin is done with hyper growth could be absolutely right. But there are dozens, if not hundreds of other cryptocurrencies that could be offering 10x returns. The assumption that the crypto and normal markets are going to happily coexist assumes that investors in everything else are going to be content with their normal investments while watching others make 1000% returns. That doesn’t make a lot of sense to me. What’s more, with every dollar and established player that jumps in, momentum builds. The 2025 peak could make the 2021 peak look as insignificant as the 2017 peak looks today.
Many Crypto advocates like to claim that by attacking the dollar they’re attacking the nasty US military that bombs the world. That sort of argument certainly appeals to me. But that dollar also pays for my parents healthcare. It also pays for the GPS system that helps everyone in the world get around. Oh and do you care about climate change? Guess who collects almost all of the relevant data on that? The US government. Crypto and it’s throwback ideology threatens the world as we know it, much more deeply than China ever will.
Thanks for watching, please subscribe, and come back next time, when we will talk about how Crypto is Ronald Reagan’s revenge.