Don’t make it so hard: cryptocurrencies are a new asset class
Imagine that you have to explain the lighting of skyscrapers to a candle maker.
Imagine that you have to explain the operation of a car to a manufacturer of horse-drawn carriages, or to an 18th-century horse breeder.
Imagine that you have to explain to a 17th-century shipping merchant the operation of a container ship powered by diesel engines.
Imagine that you have to explain to Alexander Graham Bell how a smartphone works.
Imagine that you have to explain the email to a 19th-century carrier pigeon breeder.
So my question is why so many want to explain (or rather, defenestrate) blockchain technologies, DLT, Web3, and cryptocurrencies in general, using the premises of Luca Pacioli?
We have been living for almost a century in a cursed hallucination that has the form of a global monetary system based on debt. Banks issue debt, then endorsed by the corresponding central bank, which is turned over to consumption to keep a productive apparatus that produces for consumption. The created Leviathan is maintained by a huge bureaucratic apparatus made up of useless people incapable of generating wealth, who can only watch it pass or manage it by creating taxes that “burn” part of the debt and leave the system ready to reissue. More debt for more consumption.
This, which is profusely taught in universities around the world, is called Modern Monetary Theory (MMT) and was promoted since the 70s and accepted throughout the planet.
If everyone accepts as true the system based on debt and instrumented through “bills”, mere promissory notes issued by a discretionary central power and managed by corporations far superior in power, how then can a planetary distributed assets system, built with hashes, strings, zeros and ones, nonces, blockchains, public keys, private keys, asymmetric cryptography be explained?
The difference between “currency” and “money” is that currency is printed and money is made. Printing is done by dictatorial central power. You and I make money every day doing what we know to do. At the moment, most of our money is in centralized institutions that serve the MMT system and are called banks and financial institutions. The proposal of decentralization is that our money is distributed in thousands of computers around the planet, interconnected by a code and a consensus protocol that makes theft very expensive. For a bank, stealing has no cost. For a hacker, breaking into your crypto wallet is very expensive. He/she’s only going to do it when he/she smells a lot of money that justifies the operation. (The old squirt adage: “I rob banks because that’s where the money is”) So, the more spread out you have the money you made, the more unlikely it is to be stolen. In fact, your crypto wallet is nothing like what people decode as a physical wallet where bills, credit cards, and photos of your kids and dog are kept. The crypto wallet is just an access key to a blockchain in which all your operations are based, and it tells you your balance by adding and subtracting.
An asset, MMT system volunteers tell us, is something that has “intrinsic value” and produces value. They always use the same example: “a house produces rent”. I hope that in the future they will develop creativity and enlighten us with other examples.
But what is this intrinsic value? When a corporation asks a bank for a loan, the bank, by granting it, is issuing money, because the bank does not have the money it claims to have to lend to the corporation. At night the central bank approves the operation and then the money is issued. This is the famous Cantillon effect, which says that any type of intervention in a market by the central power, modifies, sometimes dramatically, the structure of the market. The most valuable economist of the Austrian School imo, Friedrich Hayek explained this masterfully with the example of honey poured on a plate. Unlike a more liquid substance, honey begins to spread slowly from the center to the edges of the plate, so it doesn’t get everywhere at once. In other words, the corporation that is centered on the plate receives the honey immediately, long before those further away find out about the operation, long before prices rise. So the people far away on the edges of the plate only receive a tiny part of the honey, and face rising prices, while the corporation received the money, for example, to leverage itself in a financial operation that provides extraordinary profits. Is this what they call intrinsic value?
Which two things are clear: first, the enormous advantages of being close to the banks’ board of directors, and second, that inflation makes the rich richer, and the poor poorer.
How many fortunes have been made in the last 50 years based on this very simple principle of MMT which is to issue money at will to favor the rich! All these guys are fans of Warren and his Debt Lovers Band.
That’s why they sell so many records and fill so many stadiums (Davos, G-8, and the like). Actually, more than 90% of the planet is still a fan of this band, some because they benefit a lot from listening to their songs (the latest hits are “Poison Rat Boogie” and “25 dollars for your Bitcoin”), and the rest because they don’t understand and they don’t want to understand that the debt-based system that fuels consumption is being transformed by leaps and bounds right under their noses.
The International Accounting Standards Board (IASB) considers cryptocurrencies as an “intangible asset” because it can be separated from the holder and sold or transferred, and because it is not a monetary asset, therefore it does not give the holder a right to receive a sum fixed or determined number of units of currency.
But of course, many conclusions have been developed to converge on the fact that cryptocurrencies do not fit well in Luca Pacioli’s accounting. It seems that accounting was not done for cryptocurrencies.
If cryptocurrencies fit into the concept of an intangible asset, then they are like trademarks. Examples, are Adidas, Marlboro, and Stella Artois (my favorite). In the vast majority of cases, trademarks are the most important asset a company has. The curious thing is that the trademark is an asset that is not inside the company, but outside, in the minds of consumers. The main job of a marketing manager is to build a brand. The main job of a developer of a crypto project is to build an intangible asset worthy of being valued.
Unfortunately, the current discourse of new blockchain projects has as its underlying concept and message the idea that “you will be able to get rich in a few weeks”. A speech derived from the consumerist ethos in which value is measured according to the number of goods (the more luxurious the better) that you have in your balance sheet assets. The whales benefit from this game. The whales are the banks, financial institutions, and corporations. Few individuals in person are whales (a Whale has over 1000 BTC). Banks and financial institutions dedicated solely to speculation in the markets are the whales.
Check out this snapshot from Telegram’s official Whale Alert channel:
You realize from the figures that it is very difficult for them to be natural persons. You will most likely never become a whale, but the MMT wants you to believe it and work for them. When you enter with no experience in the financial games of speculation, the whales keep all your money.
Instead, the vision of decentralization exposed mainly in Satoshi Nakamoto’s White Paper is very different from that of a world immersed in financial speculation. The main vision is the elimination of the middleman. This, which seems so simple, is probably the most revolutionary bomb known to humanity since the pharaohs. Time will show that little by little the cryptosphere is going to thicken not with individuals who want to get rich in a few weeks, but with those who, after having studied the fundamentals of blockchain technology, join the new trend of transfer of value without intermediaries.
The whales are as pernicious as the fans of Warren and his Debt Lovers Band. Warren and his fans are probably the most dangerous whales.
They are the ones who tell us that Bitcoin and Ethereum are not assets because they have no “intrinsic value”. There is quite a lot of ignorance in this, or probably an overt yet hidden desire to fool those who still see the cryptosphere as a way to get rich in a few weeks with no work and effort.
Bitcoin is not an asset? With what parameter do you say this? Bitcoin is a payment system that replaces the intermediary, in this case, various intermediaries, namely banks, central banks, credit cards, lenders and usurers, ATM manufacturers, various others, and, ultimately, governments, parliaments, and international organizations. By eliminating the MMT, all these nodes have no reason to exist. And you tell me that cryptocurrencies are not assets? It seems logical to me that the MMTs and the musical bands that they follow are worried.
It’s simple. If currency issuance is infinite and has no ceiling, then a corporation goes to a bank and asks for a loan to leverage a financial stratagem. The corporation then collects the profits and splits them with the bank that gave it the loan. And the inflation caused? It does not matter. Now, if you have a decentralized currency with an emission cap, that cannot be manipulated and that does not depend on any central power, then the previous trick is impossible. It is natural that they are concerned.
The difference between borrowing on the MMT system and on a decentralized platform is huge. When you ask for money in a bank, you ask for a debt and you acquire debt. If your business is not doing well and you are having difficulty repaying the debt you requested, a long ordeal begins for you. You will receive multiple calls from collectors who profit from your debt, threats of seizure and expropriation, “bullying” from lawyers, and blah, blah, blah. Instead, if you ask for money on a DeFi platform, you ask for an asset that you have to collateralize with another asset, which is a cryptocurrency. If your business is doing poorly, or the market is not on your side, then your collateral is liquidated because it is an asset and has value as such. You will not receive threats from bureaucrats who profit from your debt. You lost your asset, but you owe nothing. Do you understand the difference? Not to mention the interest charged in both cases. And not to mention the mountains of papers that you have to present in both cases. In decentralized platforms, there is no such word as “permission”. You are the only owner of your money, and you interact with a smart contract, not with an employee.
Fortunately, I think the market is maturing. This bear market is not the same as the last one. More people, especially millennials, are understanding the concepts of “digital assets”, “open source distributed systems”, and, in general, the relationship that exists between cryptography and the economy that determines the elimination of the middleman. In the previous bear market, Web 3 was in its infancy and today we are full of new developments based on decentralization.
Let me give you an example. I own the digital property of this house in Upland.
The house exists brick and mortar at 1032 Magnolia St, Oakland, California. I do not own the house. I am the owner of the digital property of that house, that is, of a digital asset that I minted on the Upland blockchain. It is an NFT whose only owner is me, and for which I receive rent every three hours. (this is for those who like houses that produce rent, in this case, it would be something like a digital rent). Is my NFT an asset or not?
Another example. The number of followers we have on Twitter, isn’t that an asset?
Another example. The communities on Telegram or Discord that develop and give life to companies, aren’t they an asset?
Another example. The new Move-to-Earn craze with apps that pay you in cryptocurrency to walk, is a much bigger event than it seems. Until someone came up with this, all the energy used to walk was dissipated into the atmosphere and not recovered. Now, it is transformed into a cryptocurrency, that is, an intangible asset that can be built as a registered trademark, and used for paying goods or swapped for another crypto.
Four examples of intangible assets as important than a registered trademark.
Luca Pacioli never in his wildest dreams would have dreamed of this asset class.
This gives me the opportunity to set out what for me is the crux of the matter when we talk about the cryptosphere, which is the creation of a new class of assets that humanity has never known before. This seems to me to be the most difficult thing for fans of Warren and his Debt Lovers Band to understand. Because an economy based on the exchange of value through assets has nothing to do with an economy based on the exchange of value through debt. The difference is that the economy based on the exchange of value through assets has the possibility of definitively eliminating the intermediary, that is, the discretionary central power, because the asset is mine and I don’t have to ask anyone for permission to use it if it’s stored in a decentralized environment, and because no one can devalue it through spurious issuance.
Neither Luca Pacioli nor the MMTs thought of this. Or they don’t want to think. It’s like explaining skyscraper lighting to candlemakers. At the end of the 19th century, critics of electric lighting warned the population that the advent of electric lighting would expose the population to death by electrocution in the streets. Now, the detractors of Bitcoin and the major cryptocurrencies tell us that Bitcoin is a scam and that it has no “intrinsic value” therefore it is not an asset.
I would say ask miners whether or not Bitcoin is an asset. And to the manufacturers of mining rigs. And to the states that are incorporating it as legal tender. And to the institutions that buy it to hodl. By the way, for those who like to speculate on the price of Bitcoin, here is a survey published by PWC some days ago: the majority of crypto fund managers surveyed believe that BTC will be at $100k by the end of this year.
It would be good for MMT fans to read, even if they only go to the first page of the Bitcoin White Paper and discover that Bitcoin is nothing more than a payment system that doesn’t need intermediaries, as a debt-based system that prints a central power in the form of banknotes does. In the case of Bitcoin, there are only 21 million minus the coins that were lost forever. In the case of debt issuance, the sky is the limit. Read and learn some of the new technology, before continuing to apply Luca Pacioli’s rules.
But it seems to me that the most difficult thing for followers of Warren and his Debt Lovers Band to understand is that Bitcoin is not a competitor to fiat, but rather a substitute.
All of us who study business strategy have read the extensive work of Michael Porter. This brilliant professor defined the five competitive forces that shape every industrial sector. One of them is the strength of substitutes, which are products that from the consumer’s point of view solve the same problem, but originated from a different technology.
Bitcoin came to replace fiat. Even if Vitalik Buterin does not agree with this. We are not discussing if this will happen or not, but when. What has changed is technology. As in the case of electric light and candles, or horse traction and the internal combustion engine. In both cases, we are talking, in terms of Porter, of substitute products. Candlemakers continued to compete with each other to see who made the best candles, while electric lighting converted them in curiosity. Horse breeders continued to develop the best animals that continue to delight us today, but that no one uses for transportation anymore, except on small farms.
Regarding the issue of energy consumption, which many detractors and non-detractors worry about, we are facing a myth that tends to dissipate. It is absolutely undeniable that Bitcoin has, as a method to secure the network, a mechanism that consumes large amounts of energy. But when the comparative calculation is made and it is related to the current banking system, it is very important to know what the calculation methodology is like, and which items are taken into account to compare. For example, if you add to the energy consumption of the current banking system the daily transport of the millions of employees of the global banking industry, surely the numbers would be in favor of the Bitcoin mining network. When the banking system disappears, those millions of employees will no longer have to commute to their dark workplaces, unless the buildings are turned into restaurants. In this regard, there is a report that is going around that is interesting to read, written by Michel Khazzaka, called “Bitcoin: Cryptopayments Energy Efficiency, posted on June 16, 2022. The Abstract reads “We demonstrate that Bitcoin consumes 56 times less energy than the classical system and that even at the single transaction level, a PoW transaction proves to be 1 to 5 times more energy-efficient”.
This topic is controversial, but the numbers are the numbers. If this myth is busted, then Warren and his Debt Lovers Band and his fans will have to strike harder with the issue of scams, money laundering, and arms trafficking perpetrated by anti-establishment terrorists.
I believe that the museums of the world are going to present examples of banknotes in their exhibitions, as a reminder of what was the “Era of the transmission of value through debt”. Bitcoin does not compete against any other currency. It is a substitute for fiat and the system that spawns it. But it is not better than ETH or DOT or ADA, because these currencies have different functions, although based on the same technology. What we are witnessing is the eternal battle of the traditional with the new, in this case, greatly magnified, because the old represents the basis of the fortunes made by the rich in the last 50 years. We never thought that the battle was going to be easy, and the bad news is that it is just beginning.
The battle will be fought between those who defend a despotic King who issues debt to the feudal lords who receive his privileges, and the villains who fight for middlemen suppression and to be the real owners of the money they created. It is a new Renaissance, 400 years after the first.
With so many bands on Spotify, it’s time for Warren and his Debt Lovers Band fans to try listening to other songs. Especially the ones played by decentralized bands.
As usual, none of the things written in this post are financial advice and are not intended to replace personal research. My sole intention in writing this post is informative. Several of the things discussed here could be wrong, so in no way can this post be construed as financial advice, and in no way should it replace your own research.
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