37 Comments
Nov 30, 2022Liked by Josh Barro

What always frustrates me about the “bitcoin/AMC/GameStop/FTT/whatever is sticking it to the man to solve millennials’ problems” is that the problems are almost never actually caused by a lack of demand - if everyone somehow made a fortune on some financial bubble, they’d just bid up the price of housing further! It’s a solution to YOU PERSONALLY not having the money to buy a house, but scamming money from the financially illiterate is in no way an actual solution to rising housing prices.

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I agree that Bitcoin is lousy as an investment. I think it could have value as a currency which is not subject to a government’s manipulation. But in order for that to be the case, it would have to function as a currency and not as a vehicle for speculation. And at this point, it has almost entirely functioned as a vehicle for speculation.

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I think the ideological aspect of crypto is an argument for letting it die on its own without regulation. Most people buying it are basically just speculating (a lot of the crypto people I know were the same people who played too much online poker during college), but there probably is a significant minority buying it as an explicitly anti-establishment statement. The response to both of those is to let it die on its own merits, which I think it basically will.

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I would like to hear your "Investments Are Not Ideological Statements" take extended out to ESG.

I've heard some folks from the affected industries industries (fossil fuel, tobacco, various defense contractors) complain about ESG. But if you believe in any version of efficient markets, isn't ESG just an opportunity to profit by buying the anti-ESG index? It's a weird thing that I see on a regular basis.

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Is it such an opportunity? Probably not to a large degree, and maybe not at all. I should write on this in a future issue; stay tuned.

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I think “investments are not ideological statements” is too strong a frame here. Speaking as a professional investor I think what the crypto example demonstrates is that an ideological belief does not NECESSARILY constitute a strong investment thesis.

In the case of crypto, I personally am skeptical of the investment thesis (basically that we need a parallel or future financial system based around scarce digital assets) but that is far from disproven (e.g. bitcoin still has a long way to fall before we can write it off), but it is a coherent idea that very smart people, not just scammers, do believe. I’m open to being wrong on it. The political ideology around it though, as exemplified by Josh’s commenter, is clearly nonsense designed to draw suckers in. The fact that houses are expensive and there was a crash in 2008 has very little to do with the actual case for crypto. And I think that’s a red flag for the investment thesis.

ESG I think is an interesting example as well, but it’s a very muddled term so important to be precise. The “E” I think is a clear case where ideology and investment thesis can go hand in hand. It’s a perfectly consistent view to believe 1) climate change is a big problem society will need to increasingly focus on tackling, 2) businesses that contribute to decarbonization will therefore outperform meaningfully, 3) excess returns can be generated by investing in those opportunities because the market does not sufficiently recognize this.

The “S” on the other hand is a bit fuzzier. This can cover a lot of things but while I believe the research that shows e.g. diversity improves corporate decision-making and believe politically DEI initiatives have the right interests at heart, translating that to an investment portfolio is not straightforward. Would, say, a basket of investments with minority/female CEOs outperform? I’m not sure I believe the mechanism is that strong, so a “social” investment thesis is often more expressive than fundamentally sound.

“G” refers to good corporate governance which... of course makes sense to look for as an investment practice.

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The opposite of ESG funds aren't anti-ESG funds, they are broad-based index funds.

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This was my first thought as well as far as the natural extension of Josh’s premise. I look forward to his follow up!

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This brave reader's message is uhh....interesting? Each sentence is more concerning than the preceding one.

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Nov 30, 2022·edited Nov 30, 2022

I own less than $1000 worth of crypto (I believe at its high point the total dollar value of my crypto "investments" reached $1500), but personally I find the extreme certainty of Josh's anti-crypto position really unconvincing. Complaining that certain crypto transactions are illegal rings hollow when the legal alternatives are unjust, e.g.: https://www.econtalk.org/devon-zuegel-on-inflation-argentina-and-crypto/ I find the "but where are the practical applications after X years" objections about "Web3" or smart contracts unconvincing, so long as those people didn't have a corresponding complaint about neural nets that ran from the 1980s until AlexNet.

I don't have any kind of strong personal prediction about "right" value for BTC or ETH, as evidenced by the fact that my net worth is in a total stock market index fund and my house, but I immediately distrust the strident anti-crypto position as much as I distrust the pro-crypto "banks will all be dead" position. Even if the crypto people are right about the future they might be wrong about the details and their preferred coins might go to zero anyway. But I think even if you strongly lean one way or the other, you should at least hedge a tiny bit against the possibility that you are wrong.

Confidence-related footnote: Misspelling "Ethereum" in the footnote is not helpful for confidence in analysis!

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Nov 30, 2022·edited Nov 30, 2022

If I read him correctly, Josh B. isn't making a political or legal argument against crypto - he's making an economic one that readers are free to accept or reject. I'm not sure what there is to criticize about that.

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> I'm not sure what there is to criticize about that.

I think my criticisms are enumerated above? You are free to accept or reject those as well, but it's a little odd to think it's somehow excluded from criticism.

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I’m not 100% confident crypto is useless, but I think considering it “useless until proven otherwise” is reasonable given the discrepancy between the stated aims (inflation hedge) and the reality (speculative asset driven almost entirely by low interest rates). I’d be open to crypto proving itself useful, but I don’t think it deserves an assumption of usefulness just because it exists.

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>so long as those people didn't have a corresponding complaint about neural nets that ran from the 1980s until AlexNet.

I think this example is instructive. No one was hawking "neural nets" at the Superbowl.

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“Scammers advertised it at the Super Bowl” also applies to e-commerce and the web broadly. Pets.com et al. pumped their stock, bought a bunch of Super Bowl airtime, then promptly blew up without ever delivering any tangible value.

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Pets.com actually had a plausible business. And we know that because it's actually what chewy.com does today.

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Wait, why would he still buy it if it went to 0? He talks about it as a good investment, then suddenly zags to imply owning it is good even if it's worthless... Perhaps he just means that he would still expect its value to rise again...?

Would love to know his explanation.

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I'll cop to owning a small position in crypto (mainly ETH) and I am not a millennial (but have millennial kids). The problem I have with yours and others' crypto criticism is the "ha ha, what dopes! Crypto should die" quality to it. And that's about as in-depth as it gets. No thoughts about the different kinds of coins and what they exist for. No discussion of the future of blockchain. Bitcoin is something no one can figure out, and I dont own more than literally $100 (which is probably 30 bucks now!). I've invested in the stock market for years and have just as many sad stories (and returns) as being in the crypto market. In fact I am embarrassed to say I bought (and still own) GrubHub at its peak and have regretted it ever since. But it's a balanced portfolio so I'm not sweating it. You have pointed out the many flaws with the crypto market and I agree: no central authority, no way to predict anything or attach it to any other market movements, ie it's not a hedge, it's not gold, not a safe haven -- it's basically not safe at all. It also attracts ne'er-do-wells -- but they're a part of its origin story of sorts. That said, some coins, like ETH, have a purpose, an idea. I'm betting ETH will be important to a variety of things in the future, like payments, contracts, and even as the backbone of other currencies, it'll hopefully save time and money. My bet could be totally wrong. The other thing I'd like to point out is that our entire economic system is built on an idea, too -- granted a very strong, stable and wonderful idea: the full faith and credit of the US government and other governments worldwide. Still, our currency is fiat, which means it's backed by nothing but the aforementioned trust in the US government and its stability. The US imploding or going belly up probably won't happen (or happen soon!) but if it when it does, we'll be wiping ourselves with dollar bills. So I'm no expert but think crypto or digital or whatever you want to call it, have a future in our economy. It'll never escape the confines of the structured, regulated economies of the world -- they're conquering crypto fast. But like any conquering enemy, they adopt some of the native habits and one of those will crypto and the blockchain behind it.

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I completely agree with Josh's take about crypto being a scam. The only real-world value created is in facilitating black-market transactions that are, by definition, illegal. I hated crypto long before it was fashionable, glad the rest of the world is catching up.

Also, https://www.buttcoinfoundation.org/what-are-buttcoins/

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It’s also not very good for black-market transactions, now that governments have gotten good at tracking people down with the blockchain.

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Would Bitcoin be a reasonable asset to hold if you lived in a place with a not-so-compantant government (/central bank)? Esp. if you didn't have reasonable avenues to otherwise invest? That seems like a possible explanation of value (which in turn can be captured by first-world investors)

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The problem is Bitcoin is volatile even compared to most emerging-market currencies, on top of its other issues (like the risk you’ll be swindled or that the exchange you use will go bankrupt.) In general, the right tool for this situation is the US dollar or another major world currency.

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From what I’ve read, there are often regulatory and practical barriers to people in countries like Argentina or Nigeria accessing stable currencies; my impression is that a not-wealthy-but-internet-savvy person in these countries would find it logistically easier to hold BTC than to hold substantial amounts of a foreign currency.

My understanding of gold is that its high price is also mainly due to social convention rather than intrinsic usefulness. BTC has some structural advantages over gold (easy to transport / split / etc) as a store of value.

Obviously BTC’s usefulness as an alternative currency or as a store of value are both undermined by its volatility, but isn’t that because there are a lot of speculators and little consensus as to how to value it? If BTC would be useful if its price were stable, would that mean that, while overvalued currently, its true worth is probably not zero?

I’m genuinely interested in your response because you know a lot more about finance than I do, but I think BTC (while overhyped) has potential for these two use cases

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Nov 30, 2022·edited Nov 30, 2022Author

I mean, this is the intended purpose of stablecoins -- they have the structure of crypto combined with the promise that the value will be pegged to USD or some other currency, so you can use them to conduct transactions without worrying about the vagaries of crypto prices. The problem is that you have to rely on your counterparty to actually have the ability to exchange your coins for USD at parity in the future, and that has not always gone according to plan; some supposed stablecoins have become insolvent and gone bust. It is conceivable you could have a stablecoin product that is backed by a credible promise to maintain the peg -- that could be useful for payments, but it wouldn't really be an investment product.

Meanwhile, I don't know what could cause Bitcoin's price to be stable relative to the dollar. Currencies of advanced countries achieve relative stability compared to each other because of the stated policy objectives of central banks -- they set inflation targets and interest rates that will generally keep relative currency values stable so long as inflation and real growth rates are similar across countries; sometimes, they explicitly target exchange rates. Rich country governments (usually) have the capacity to do this because they are able to levy taxes and issue investment-grade debt, and because they cultivate reputations for sticking to their inflation targets. And of course, despite all of that, exchange rates do change, sometimes quite significantly.

Bitcoin doesn't have any of that, and it does have a lot of people who are interested in using it as a speculative investment -- as their enthusiasm rises and falls, so necessarily will the price.

By the way, while I'm not a fan of gold as an investment, it does have a key advantage over cryptocurrency: Its supply is truly fixed. The supply of Bitcoin is fixed, but the supply of cryptocurrency is not. People can always invent new ones, and you have no guarantee that new ones won't come into fashion, effectively expanding the crypto equivalent of the money supply.

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Yeah, this all makes sense, and I was always very suspicious of stablecoins. I agree that Bitcoin would never be as stable as a managed currency, but couldn’t it theoretically be about as stable as gold (which is obviously not the most stable asset, but in the long run it’s not especially volatile)? As far as I can tell, gold is priced based mainly on its desirability as a store of value. In a hypothetical world where BTC and gold had similar risk profiles, I’d prefer to hold BTC due to the simpler logistics, but maybe this hypothetical world is unrealistic?

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Nov 30, 2022·edited Nov 30, 2022

I find statements like "crypto is a scam" to be way too absolute and feel like saying "art is a way cheat taxes" or "peer-to-peer file sharing is for piracy". Those statements aren't wholely false, but they attribute a tag to an entire medium/category rather than. There are cryptocurrencies that target real world problems, like distributed file hosting, last hop distribution for video streaming, and decentralized file storage.

Cryptocurrency as it currently exists is very new technology and a large number of the cryptocurrencies are FOSS. It takes minimal effort to make a "new cryptocurrency" or glorified trading cards using NFTs. What will take time is going to be the projects that leverage the crypto and decentralized blockchains that are generally useful to people (and it is likely to be a boring and generally unexciting process).

Instead of hating "crypto" generally, I implore you to give it time, wait for novel uses and expansion on what a decentralized blockchain ledger can be utilized for.

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I've been hearing this for a decade and it's all been vaporware used to justify a market for speculation and scams.

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And that's fair, it is a relatively new, open source tech and people are largely using it for stupid purposes or scamming people.

Thankfully, useful projects in the crypto space are likely to eventually flourish regardless of what any of us personally do. There are companies that contribute to and monetize from open source projects, and companies like Amazon already heavily utilize the "coin slot" model for monetizing their services like AWS, S3, etc. Projects that are useful will likely get utilized by corporations long before they are useful to individuals outside of tinkerers and techies.

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Blockchain is a very slow, distributed, append-only database. Compared to the existing alternatives, it's worse on almost every measure for nearly every use case. Except for one:

Money laundering with privacy coins.

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It's always struck me that I couldn't find a plausible theory of why Bitcoin should have any particular price, but my thought immediately after is why any currency should have a particular price? My best answer is that it derives from the economic output and policy of the country/area that the currency relates to, but this feels vague and hand-wavy rather than solid economic theory. I'm sure there is a good answer, but I've never had that light bulb moment when it's suddenly clicked and made sense.

As an aside, I graduated at the same time as your brave reader, failed to get funding for the PhD I wanted to do and fell into a big four accountancy graduate scheme by accident instead (they'd under-recruited and were doing some good old panic hiring). It was a very strange time, and although it worked out well for me in the end (I definitely don't regret not doing the PhD) I can totally relate to the economic reality he and his brother face, as me and my siblings face the same here over in the UK. However, I've never been drawn to purchasing bitcoin as a solution - mostly because I'm very risk averse (almost certainly too much so). I think the solution needs to be (at least for the UK) some fairly seismic changes, including what the government spends money on and how we build housing, but none of the UK political parties since the financial crash have offered anything I could enthusiastically advocate for that might address these issues.

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I am not a crypto enthusiast.

Don't have any.

Don't expect to.

But answer me this please.

If crypto went up on hype and hope (always a bad financial model), what caused it to crater?

Why not just keep up the smoke and mirrors?

Or at some point is there actually real money involved?

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I own a nontrivial amount of crypto because I bought a Bitcoin as a goof back when it was $100 and it’s been funny money ever since. I used it briefly to buy some things (back in 2013 when you actually could do that) tried (and usually failed) to give it to people who didn’t want any part of the goof, and then dumped most of it when it hit 30k or whatever and started to become stressful rather than funny.

I was interested in it from a purely technical perspective and to a lesser extent an economic one, and as a consequence I seem to know more about it than 99% of the true believers out there, most of whom have a very thin understanding of how it all works. I find talking with the these people to be an absolutely maddening experience because they rarely ever have any reasoned arguments to discuss.

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I appreciate your posts on crypto so please keep them coming! I need people who know this stuff to help me parse it intelligently

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Excellent explanation. I will print this out and memorize it. I need this handy to help my younger colleagues understand the issues you so very clearly identified.

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Excellent post.

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High crypto profit is probably the best reason to avoid it, right? Stability is the most important thing for a currency to have. It means that people will continue to use that currency. Sudden spikes (and drops) in value encourage a 'buy fast, get out' mentality which injures the currency in the long run. If crypto currency is going to properly establish itself, slow, stable growth should be the goal. The U.S. dollar is reliably valuable fifty years from now. In order to thrive as a currency, that's the claim that crypto needs. Not claims of a massively higher value six months from now.

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