Bitcoin Is Not Punk Rock

Cryptocurrency is at the forefront of financial innovation. In this post I want to lay out why I think it is absolutely moronic to envision a world that embraces a decentralized, freely floating currency. I do not think the technology is bad or unjust, quite the opposite! I do think Bitcoin is inherently dangerous and promotes inequality. Unfortunately it’s not as bad as some governments out there, but it is not the answer for preservation of wealth nor storing any kind.

I’ve been re-reading Debt, the First 5000 Years and the following quote really caught my attention regarding the future of Bitcoin.

There is a shape to the past, and it is only by understanding it that we can begin to have a sense of the historical opportunities that exist in the present

Debt, the First 5000 Years, David Graeber

In order to understand what the future of money will look like, we should look to the past. First came debt. People generally engaged in a sharing economy, but when they did something illegal or they needed something they did not have, a debt was created and held by a person or institution. Enter credit. Credit was extended to workers to increase their productivity today so they could both pay back the credit holder with interest as well as increase their own output. Finally came money, which, as detailed in the last post, serves as a store of value, a unit of account, and a medium of exchange. Money is much more flexible than informal credit systems, but much more subject to fraud and stealing.

The origins of Debt, Credit, and Money all arise from worker output and the exchange of goods and services. A creditor cannot receive what is owed if the debtor is not able to produce the value of the debt. A mob boss cannot bully a shop owner into paying $1mm per month. The shop owner simply cannot do it and neither are richer on collection day.

Throughout history debt has taken many clever and horrific methods of repayment. In the middle ages, if a peasant wanted to borrow or buy some farm equipment from a nobleman, he may offer his 50 barrels of hay or maybe his daughter. Warring tribes may sue for peace with cattle or sheepskin. Debt could be a subtle as a tit-for-tat economy. Bats even behave this way. Bats with excess food share food with others so that when they themselves are in need of food, other bats share back with them. Bats that do not share are not offered food and die.

As an aside, Adam Smith’s paradigm of an economy where individuals and nations trade single goods between each other simply did not exist in history. While his conclusion that nations should produce what they produce most efficiently and trade for the rest is basically common sense, at no point did an mason make horse shoes, trade with the baker for 10 loaves of bread, then trade 5 loaves for a steak and potatoes, etc. People generally pooled their resources together and took what they needed from the collective pot. There’s more to it than that, but you get the idea.

Debt is a record as well as a relation of trust. It is unfortunate that debt has a negative perception in today’s society. While debt today is rather informal and only represented by origination fees, interest payments and principal payments, it was not always this way. I’ll just say that by abstracting debt to solely financial agreements, the rich, either countries or people, can easily coerce those of lesser means to incur debt at usury rates in order to compel those of lesser means to get out from underneath the proverbial foot of that very same creditor that is using to hold them down. I suggest everyone read Confessions of an Economic Hitman. Read part of it through the eyes of student debt, especially those of first generation college students. I’m not arguing for or against forgiving student debt, but I am saying you don’t understand people in situations unlike your own (read not-nice-and-heartless) if you are unequivocally against debt forgiveness dependent on different situations. Especially debt incurred by people under the age of 18 with no parental guidance and the coercive marketing budgets of college institutions.

Then emerged bullion as the main medium of exchange in local economies. Around 500 or 600 bc, China, India and areas around the Aegean Sea decided complex credit systems were not enough and decided to issue coins made of precious medal. From the introduction of money, currencies in different societies has oscillated between being pegged to specific value, such as a cow, and floating freely, which would usually mean value was determined by what was owed in taxes. Money both fuels and instigates war; money can be both stolen and forged much easier than debt or credit.

In 1971 Richard Nixon ended the Bretton Woods System (started in 1944), which terminated the convertibility of dollars into gold and allowed the US dollar to float freely among other currencies. Other currencies soon followed suit. We live in an era of floating exchange rates and the exchange rate between the US dollar and bitcoin versus the US dollar and the British Pound sterling is no different other than each currency’s respective difference in purchasing power. It’s interesting to note that at a microeconomic level purchasing power can be quite variable regardless of currency.

This is going somewhere, I promise. Here. Let’s say I become leader of the Proud Boys and we conquer Canada (sorry Canada) and I want to issue a new currency Proud Bucks. First, I would create a debt. Every citizen owes me (Canada) something to exist in Canada. These are known as taxes. I would allow citizens to exchange Canadian dollars for Proud Bucks, initially fixing the value to another currency. If I were crazy I could fix the value to a good, like a cow. I would then use the exchanged foreign money to buy goods from foreign countries and sell those goods back to Canadians citizens for Proud Bucks. Canadians citizens would use these goods to harvest food, provide services, and build machinery. They would sell these goods and services to other citizens who would pay them in Proud Bucks. All government employees would be paid in Proud Bucks. In every exchange taxes would get paid back to the government and eventually all citizens would be exchanging Proud Bucks. A new currency and government is formed.

The important part is that Canadians already have wealth and that I would be willing to exchange that wealth for an equivalent amount of Proud Bucks. I could tell Canadians citizens that I wouldn’t accept any foreign currencies and simply distribute Proud Bucks amongst whoever I wanted, which would effectively put me in charge of deciding everyone’s starting position in society…that kinda sounds like…

What I’m getting at is the inherent value of the currency is the ability of those who use it to produce and protect its existence. If we go back to the Money Equation (supply x velocity = price level x GDP), we see that the prices of Proud Bucks are dependent on money supply, how often Proud Bucks changes hands, and output. If you increase output, money supply generally increases. This is good! If you just increase money supply without increasing output, prices just go up. This is bad!

Moreover, money supply is distributed to those who increase output. This is good! Also, this is why we don’t like Bitcoin. Bitcoin’s supply is fixed. It was also not distributed by those who created output, but by those who created the currency. Using computers to solve arbitrary equations is not increasing actual value. It increases value of the network, sure, but the value of the network is only the value of processing digital transactions and this is a fraction of Bitcoin’s current value.

So you’ve read all this just to find out that those who hold Bitcoin are not those that create output. Moreover, the origins of Bitcoin do not support the historical origins of Debt, Credit and Money. With Bitcoin, there is no debt, no credit, just money. If there is no debt owed for past resource usage, no credit to increase future output, there is absolutely no basis for the distribution of a new form of money.

The Winklevoss twins own 70,000 BTC. The M2 money supply of the entire world is about $40 trillion. Global real estate accounts for about $30 trillion in assets. After including other forms of global debt and financial derivatives, the world’s wealth is about $1 quadrillion. The maximum number of Bitcoins that will ever be created is 21 million. If the entire world solely used Bitcoin and the world didn’t fall apart from sheer stupidity, the Winklevoss fortune would be worth the equivalent of $3.33 trillion. Moreover the top 10 public companies that own Bitcoin own over 204,000 Bitcoin. The infamous creator, Satoshi Nakamoto owns 1 million. Any lost Bitcoin decreases the denominator, making the outstanding Bitcoin more valuable. I’ll let you do the math on these, but there’s not much Bitcoin left for the remaining 7 billion people on this earth.

So when El Salvador adopt Bitcoin, it increases the velocity of Bitcoin. If El Salvador increases its economic output, and the supply of Bitcoin can’t increase, the price level actually decreases. This means the value of Bitcoin goes up in relation to other currencies, such as the dollar. This doesn’t mean El Salvador’s citizens get richer (they do, but slightly, and 110% of the poverty level is basically the poverty level), but the Winklevoss’s get much richer. So much so, the few Bitcoin whales are raised up by the output of the unfortunate workers that choose to adopt Bitcoin. This is not good!

Allowing Bitcoin to grow in value will be the single largest wealth inequality event in history. And we know this because Bitcoin was not created from debt nor credit. It did not arise from societal output nor was it distributed in an equitable manner. I support crypto currencies as a medium of exchange and believe those not pegged to a government-backed currency or basket of assets should be allowed to float freely. But reality should dictate the value freely floating currencies should be tied to the value of the network (looking at you $MEME stocks). Using crypto currencies to evade financial regulations is rife with fraud and hidden risk. While removing consumer protections allows for more opportunities, it invites even more fraud and scheming.

Financial innovation should not be about skirting rules (unless they are burdensome without added consumer protection), but by providing fair access and reducing costs. Providing access to capital at a fair cost with the minimum amount of transaction fees is a worthy cause and should always be at the forefront of financial innovation. It’s rooted in history and serves the world as a whole. A new currency poorly distributed amongst few holders with no consumer protection certainly is not.

The Delta Trade

Something has piqued my interest in the last few days. The Delta variant is sweeping through the nation, which has resulted in reimposed indoor mask mandates, increased hospitalization rates, and increased timelines on self-imposed work from home mandates by private companies. Robinhood debuted as a public company only to drop 8% on the first day of trading. That seemed absurd because its very customers are infamous for propping up stocks well beyond any reasonable measure of valuation. Well, just a few short days later and it’s up a whopping 90%. That means $MEME stocks are alive and well. And if this Delta variant keeps us glue to our screens in our bedrooms, $MEME stocks are likely to have a resurgence.

The Delta variant is actually worrying and frustrating. It’s important to reiterate, 99% of deaths and 97% of hospitalizations are attributed to UNvaccinated people. But breakthroughs are are becoming more common and I certainly don’t believe it’s at only 10%.

I don’t have any evidence for this, but vaccinated people who have been reintegrated to society and get an illness are not getting tested. The vaccine is obviously effective at reducing symptoms and shouldn’t hamper mobility as long as the UNvaccinated don’t clog up our hospitals. Even Mitch McConnell who recently got Covid and miraculously praised the vaccine for reducing his symptoms, said it ‘felt like a sinus infection’. It’s hard to have sympathy for the UNvaccinated, but try and keep some for anyone who chose not to get the vaccine due to a compromised immune system. Reddit is doing a plenty good job with the posthumous shaming. But there is a renewed interest in the Covid news cycle and I’m going to go ahead and directly tie that to an increase in retail trading propping up covid-related companies well above their plausible value of discounted cash flows.

The WSJ quoted infectious-diseases expert Carlos del Rio saying, “If you’re vaccinated, you should not worry about the Delta variant.” Having just recovered from the Delta variant, I think he’s both right and wrong. If you have any comorbidities, it’s worth taking some precautions. I was out for 5 days. No fever, but I certainly wasn’t comfortable. If you are going to see any at-risk people, also take a pause. The Delta variant is wildly contagious and vaccinated people seem to pass it along at an alarming rate even if they are not symptomatic. All that said, if you’re vaccinated and not worried about getting the flu or strep, you probably shouldn’t worry about the Delta variant. But I’ll never stop anyone from taking whatever steps they want to be personally responsible for their health. The government’s job is to provide accurate information so we can make our own informed decisions, and it seems like they are. Also, people are looking for information.

But We’re Here for the $MEMEs

Ok great. I’m sure most of you have been devouring headlines about the Delta variant the last few weeks. Did you catch the news about the Lambda variant in South America? So why are we here really? Here’s why:

That looks a lot like the stocks that exploded last right after we digested the fact that we would be working remotely, would have limited mobility, and that there would likely be a successful vaccine.

Moderna: I’ve been holding this since March last year and WOW. It’s now a part of the S&P 500 and they just received FDA fast track designation for Respiratory Syncytial Virus (RSV) Vaccine (mRNA-1345). I obviously copy and pasted that. mRNA vaccines are all the rage these days. I’m not selling, but not buying any more because that stock has been on an absolute tear.

Novavax: The stock popped today because they sealed a deal with the EU for 200 million Covid-19 vaccines. They had a big pop in January, but haven’t seen their 52 week high of $331 since then. They were also trading at $4 in 2019. With a current market cap of $16.6bn, I think there’s a lot of room to grow here. I’m going to pick some up tomorrow.

Pfizer: I just bought this one. It looks like the FDA will give the vaccine full approval, as opposed to emergency approval, by September. Historically there’s nothing to suggest this stock will pop, but it’s a big pharma stock that can’t hurt to own in your 401k. They have the resources of a big pharma company and proved they are nimble enough to be first the the market with a vaccine that looks like it will get full approval. Bravo.

Catalent: Catalent provides advanced delivery technologies and manufacturing solutions for drugs, gene therapy biologics and products for the consumer health space. Catalent has partnering with JNJ, AstraZeneca and Moderna to provide fill-finish expertise to their supply chains and their biologics revenue, which represents 44% of their total revenue, is up 31% from the prior year. I’m honestly not sure why this company hasn’t manage to profit more from helping pharma companies manufacture vaccines. Whatever, I’m re-buying.

I also own JNJ. I’m going to look at buying all the other classic quarantine stocks like Zoom and AstraZeneca. Big tech is an obvious one, but I can’t buy any more of that. Clorox looks good, especially because it just took a 10% hit after posting a disappointing Q4 due to dwindling demand.

Pinterest is an interesting play. It just got crushed after earnings because its revenue guidance said it would be difficult to sustain its growth that it got after quarantine. Well, now that people think it’s going to contract this is a perfect time to surprise. I’m not going to buy now, but if mobility decreases and the stock doesn’t go up before the next earnings call, this looks like a solid buy.

Sell China…

Ok, that’s it for now. Oh and sell China. More on that later, but the Chinese government is intent on reminding Chinese billionaires and multinational companies that they need to understand their place in the system and fall in line. China is a state capitalist economy and it intends on staying that way. They do not allow Chinese companies to list shares on foreign markets (there’s a workaround through the Caymans, obviously) and if Hong Kong is any indication, there’s no way to stand up against the system, even on the global stage. Alibaba, Tencent, JD, Baidu and the list goes on, are all down 10 – 30% this year. I hope Jack Ma is doing ok. Some traders see this as an opportunity. I don’t. I’m even more concentrated on US equities than ever before.