Once upon a time, way, way back in early October [2017] when bitcoin was being exchanged for proper money at less than a third of the price it is today, I had my first opportunity to peek behind the curtain into the magical work of Cryptocurrency – and what a revelation it was!
Nestled behind a very professional looking website and housed in a cool incu-pod, shared office-space, the faultlessly polite, fresh-faced young men behind the venture took time out of reshaping the future of finance to explain some of the basics of the New Era to us two slow, old dinosaurs who had called upon them in search of enlightenment. [First published Dec 2017]
As the scheme at hand was laid out, the starting point was to raise several tens of millions of francs via that latter-day purchase of casino chips called an ‘Initial Coin Offering’. Once effected, this World of Warcraft intrusion into the realm of real money would be used to pay salaries, defray expenses, act as regulatory capital, and serve as fodder for onward investment in a manner to be outlined below.
Or rather, we hasten to clarify, the much-derided ‘fiat’ stumped up for the ‘coins’ was destined do much of that work since, as the great Cantillon pointed out, during a similar episode of breathless ‘innovation’ three centuries ago, all the cutely named cryptocurrencies springing up like flowers in the desert rain can hardly yet perform the basic – nay, existential – transactional function of a true ‘money’.
No. For cold, hard cash is still needed once one steps out from the games room of virtual speculation and back into the humdrum world of parking tickets and pizza parlours. Out here in the daylight, away from the flickering green screen reflections of the geeks’ bedrooms, silver (metaphorically speaking) is STILL the ‘true sinews of the circulation’.
But we digress. For the next stage in this act of naked empire-building, a hundred million dollars or so more were going to be floated off to the wider Boobosity (to use a singularly apt phrase of the great HL Mencken’s), the proceeds to be used to feed that most impressive sounding of beasts, a ‘multi-strategy’ hedge fund.
On closer inspection, however, this turned out to be a Pythonesque Spamfest of a thing since all the usual paraphernalia of ‘long-only’, ‘smart-beta’, ‘systematic’ and ‘event-driven discretionary’ approaches would be used in order to invest – and here we use the word in its loosest possible sense – solely in the fruits of our interlocutors’ peers, to a man all issuers of ‘coins’ and ‘tokens’, housed, no doubt, in similar, start-up space cubicles, huddled on the peripheries of university campuses and tucked into inner-city, hipster warehouse-conversions all across the globe.
Nor would there be any lack of targets for such investments, we were earnestly assured. Indeed not! For, if there is one thing that does not exist in this burgeoning virtual Klondike, it is a ‘moat’ or other barrier to entry – at least not one wide enough to prove more than a passing hindrance to those who aim to surpass the mediaeval alchemists by turning dirty, brown-coal server-fuel straight into virtual gold.
Fitting a buggy whip to the Bugatti
With a touching concern for the likes of us antediluvians who are still languishing ‘off-chain’, our hosts further outlined their ambition to secure one of those old-fashioned money-printing permits granted to the Rubes in the ‘legacy finance’ business, colloquially known as a ‘banking licence’. Once secured, that would allow us old fogies to invest our hard-earned ‘fiat’ the traditional way, via a fund or a managed-account, and all in a truly – if definitionally vague – ‘democratic’ manner, we were solemnly assured by these would-be Private Bankers to the People.
So far, so intangible, but what about the mechanics of the ‘investment’ process? If we have not horribly garbled this, the idea is that the punters cough up their dollars and dinars to buy our hosts’ tokens which would then be used on the existing networks to buy a mainstream crypto-counter such as Ethereum or Bitcoin, hence to be swapped once more for the target investment, someone else’s ‘coin’.
Eyes rapidly glazing over, we recalled the old, pre-euro game where one imagined taking a hundred deutschemarks and then tripping across all of Europe’s borders, swapping into the local currency at each stage, before returning crestfallen to Germany, light of 10 or 12 sizeable bid-offer spreads and so with only a handful of coins to show for one’s pains. Now repeat the exercise ‘on-chain’, add in the wild swings in valuation taking place between the many exotic specimens roaming the crypto-menagerie, subtract the hefty transaction fees, allow for the odd hack and system snafu and the potential for self-harm – if not for outright mischief – looms large.
The problem as we see it is that if each new ICO issue simply invests in everyone else’s ICO there would seem to be no external anchor of value or indeed any other source of genuine wealth creation. This is Tron meets Charles Ponzi meets Sir John Blunt. A bleedingly cutting-edge update of the classic proposal ‘for carrying-on an undertaking of great advantage but no-one to know what it is.’
A world of their own
So there we have it: the long-sought road to Golconda is now no more remote than a fast internet connection. Immeasurable wealth will be showered on us all once I launch an ICO to buy into yours and you do likewise with mine. Merrily, we will all spiral upwards in our rarefied little universe, patting ourselves on the back for our astuteness, writing sunny little monthly bulletins to our gratified investors to trumpet our skill and occasionally stooping to vent our scorn over Twitter at the dull, pedestrian multitude still shuffling obliviously by outside our Golden Circle, clinging to their obsolescent Visa cards and weighed down with their grubby, chronically depreciating banknotes.
Except, of course, for one to be able to put the kids through school, much less make the down-payment on the Aston, one needs to find another Greater Fool, eager to buy one out using smelly old, widely-derided, off-chain ‘fiat’ and to do so at a much higher price than one paid oneself. The fact that one of the key neologisms of the cryptosphere is ‘HODL’ – a post hoc acronym implying you will have to pry my bitcoin from my cold, dead hands (assuming I do not lose it down the back of the cyber-sofa, as up to a quarter of buyers have supposedly already done) – suggests that, so far, few indeed are the numbers of Greater Fools transmuting back into Lesser ones.
As more and more moths are attracted to this particular flame – the latest of them purportedly either borrowing money for their table stakes or pledging their holdings as collateral so that they might yet eat while watching their hoard grow larger – the dynamics indeed point to further, potentially accelerating gains before the cold winds of disillusion finally serve to snuff it out.
All we can do is caution that even if the last, highest bid 10 lots (present consideration somewhere around $165,000) manages to move the price a couple of percentage points upwards on the exchange, this does not REALLY constitute a 46-times bigger, $7.6 million increment to global wealth (~$380 million ‘market cap’ x 2%). Were that the case, I could enter a one lot bid for Apple (market cap $885 billion) at ten times the current quotation of $172, get instantly hit, and magically create $8 trillion in new ‘wealth’ for all the remaining stockholders – thus conjuring up the equivalent of almost nine months’ GDP for the whole of China and all for less than the price of a MacBook Pro.
Likewise the fact that the $40-odd trillion stock of existing ‘fiat’, M1-type monies can be divided by the 21 million bitcoin cap to imply that the latter’s ‘fair’ value is $2 billion a throw is an abuse of both arithmetic and economics.
The idea that a truly sizeable fraction of businesses and individuals around the globe will soon clamour to forsake their local currency for the newcomer and thus surrender to its early sponsors seigniorage gains truly beyond the dreams of avarice – much less that jealous governments and suspicious regulators will sit idly by while such utter disruption takes place – seems far-fetched in the extreme.
And, no, the present volatility is NOT what we would expect of an entity’s accumulation of ‘moneyness’, certainly not by some hand-waving appeal to a non-existent historical precedent.
The adoption of gold and silver as such media took hundreds of years, if not millennia, to achieve, Furthermore, though the accretion of that quality undoubtedly did add much to their valuation, these did NOT shoot upwards by hundreds and thousands of times along the way. The whole point of the metals’ enduring appeal is the relative constancy of their exchange ratio to, say, that of a man’s daily labours or to the cost of the suit of clothes he wears – how can a well-functioning money do other?