Tom’s Quarterly Reads
Here is what I’ve been thinking about, plus the best articles I read over the past three months, mostly all finance-related. Your feedback is always welcome, and please share this with anyone else who might be interested. Subscribe here.
Just Listen to This
Chris Dixon – The Potential of Blockchain Technology (Invest Like the Best): A great podcast that’s worth an hour or so of your time if you’re interested in the crypto space, but want to avoid extreme positions and crazy hype videos. This discussion focuses primarily on Decentralized Finance, Ethereum and DAOs (Decentralized Autonomous Organizations); it doesn’t talk much about Bitcoin. A great discussion that I refer back to relatively frequently.
Tom’s Thoughts: Crypto Itself is the Meme
[NOTE: This piece is mainly about cryptocurrencies like Bitcoin, and is a long way of answering my wife’s usual question: “Is it a thing?” Short answer: probably yes, but I don’t have strong conviction about that yet. If you have no idea what crypto is, try starting here and then diving in to what’s below… or just scroll down to the links and the picture of Claire.]
There are lots of memes out there that you’re probably familiar with – the Crying Jordan, the Condescending Willy Wonka, and the legendary Leroy Jenkins. These examples are generally visual; once you’re in the know, they are instantly recognizable and you know the general direction things are going before you even focus on the newly created version. In the Willy Wonka example, you don’t even have to read the caption text of a new post to know that it’s going to be sarcastic, condescending and contrary to whatever it’s referring to.
But memes aren’t limited to funny internet images. Memes spread in a culture and usually evoke a particular theme or meaning, particularly as they recirculate among people. By that definition, ‘meme’ covers a lot of ground. Actually, it can cover almost anything: political movements, the concept of national unity, religions, whatever it is to be “well-respected” in your community, and on and on. And each of those ideas has symbols, slogans, and other sub-memes that reference and reinforce the overarching concept: the GOP elephant, an American flag, a cross, driving a Mercedes, etc.
In the world of cryptocurrencies, memes are legion – if you’re in the know. There’s “have fun staying poor“, “laser eyes“, “too the moon“, and a host of others. Memes in the crypto space proliferate, rise and fall, but continuously work to both reinforce belief among crypto enthusiasts as well as recruit new people into the fold. (When I refer to the crypto space, I’m talking about all cryptoassets: Bitcoin, Ethereum, NFTs, blockchain, Dogecoin, DAOs, new coins, and everything in between.)
And it’s not just memes; crypto is really good at marketing itself. Are you a buttoned-down, staid banker type? There’s a respectable whitepaper for you to read. Are you one of the cool kids on TikTok all day? There is a constant stream of short but attention-grabbing video clips you can consume 24/7. Love Reddit or Twitter? There are influencers and posters putting out written and visual content constantly on those platforms too. Interested but don’t know what a TikFaceTweetSubreddit is? There are YouTube videos here to educate you on everything you need to know.
But all of the crypto memes and marketing are nothing but sub-memes to the larger one. Like social networks, there is much more value when there are more users in the crypto space – but the economic value accrues to those who own coins and not primarily to a central entity like Facebook. So owning cryptocurrencies incentivizes you to strengthen your own convictions and evangelize crypto beliefs to get more people into the ecosystem. There are many different value propositions put forth on Bitcoin, Ethereum and many others, and since this is a “headless brand“, the narratives shift over time. But having many different narratives increases the likelihood that one of them will strike a chord in a non-believer and convert them.
Crypto itself is the meme. Spreading it is the sole point of everything else.
Now, I should take a moment to clear a few things up before I talk more about what I think this all means. First, hopefully obviously, nothing I’ve written here is financial advice since it’s not tailored to anyone’s individual situation. Second, I’m intrigued by cryptocurrencies, but I think a massive dose of jaded pessimism is in order. Third, I own a small amount of Ethereum, and an even smaller amount of Bitcoin. We’re not betting the farm on crypto; we can afford to lose every penny that has moved into the crypto space.
With that context in place, hopefully it’s clear that I’m not completely trashing crypto as worthless here. There’s immense value in a shared belief when it is able to mobilize so much time, money and human capital. If you could go back to the First Century CE and buy shares in a Catholic Church IPO, that would have made you very rich indeed. But caution is warranted; there is a decent case against Bitcoin and one must go into the space fully aware that there are risks. Below are three areas of caution, but I should add a fourth one that says “there are probably lots of unknown risks as well.”
1) Avoid Absolutist Language and Positions: One must look past the marketing and meme machines and see them for what they are: self-serving. Those that take a “Bitcoin Maximalist” position tend to talk about it in very strong, absolutist language that can – through constant repetition – entice and slowly convince someone of a truth on conviction alone.
Even in this quite good Bitcoin debate, we can see some of the things to be careful of. The pro-Bitcoin position is taken by Anthony Pompliano, who used the word “inevitable” more times than I could count. (This is one of the better debates of its type, but even here the two sides spend a lot of time just talking past one another.) Further, many of the arguments in favor of cryptocurrencies are ones that appeal to vague and or high-minded concepts that sound very enticing; “Bitcoin is Civilization” gives away the game in the title. While there are some very interesting features of crypto, and the article lays them out well, remember what internet and social media idealists said versus how things turned out.
2) Know What You Own: Do your research and actually understand what crypto you’re buying if you decide to enter the space. One of the biggest questions for me is whether there is intrinsic economic value in an asset if I’m going to invest in it. For Ethereum, lots of risks remain and one should understand the coming changes, but there appears to be an underlying economic value to owning the coin. For Bitcoin, this is a thornier topic: is it a currency, a new gold, an investment asset, a mix, or none of the above? Bitcoin has performed extremely well when viewed as an investment asset, but there doesn’t appear to be fundamental value in its ownership the way that owning stock means you own a (small) part of a (hopefully) money-making company. Justifying something as an investment asset based on its performance has a long history of ending in tears; the Dutch Tulip Mania is but one example.
The US Dollar is a meme; you know exactly what it means when you see it, and we all agree on its universal value. Bitcoin aspires to the same status but, so far, has not achieved anywhere near the same level of consistency in its value. If you go to the grocery store this week and pay in dollars, you’re able to very reasonably assume that next week’s grocery bill will be a similar number of dollars. If you pay in Bitcoin each week, you could see your grocery bill increase or decrease by 25% or even 50%. Perhaps one day Bitcoin will be useable as a currency replacement for the dollar, but not today.
Is Bitcoin a store of value like gold? Maybe. It’s usually discussed as being ‘digital gold’, and does share some of the basic properties – immutability, divisibility, better transportability, etc. To be a store of value Bitcoin needs more price stability; while the price of gold has experienced volatility too, it has been over much longer time horizons. But this is where the meme of crypto comes back into our analysis. If enough people believe that Bitcoin is valuable, then it becomes valuable – just like there is a consensus that gold is valuable. The marketing to make everyone believe in the value of the asset works very well to move the process to a point where it becomes a self-fulfilling prophesy.
3) Be able to lose it all: When there is this much uncertainty, one is certainly entitled to gamble a bit on the upside but only while protecting the downside. If an investment in crypto works out wonderfully well, that’s fantastic. But don’t put important goals in your life at risk by putting too much into the crypto space, just in case the meme gets overtaken and dies away like so many before it.
I’ve let this run far too long, so hopefully you made it this far, but thank you for giving me the opportunity to think through the topic by writing about it. This topic will likely continue to require a lot of thought going forward, and I’m interested to see how my opinions on the topic evolve. Hopefully I can continue to avoid absolutist language, but find more concise methods of doing so in the future.
Bitcoin for the Open-Minded Skeptic (Paradigm): This whitepaper is over a year old, but it’s a great starting point if you want to learn more about what Bitcoin is, why some people are very bullish on it, and also what some of the risks are. It’s generally pro-Bitcoin, but presents the case without the absolutist language and hyperbole often in attendance. The price of Bitcoin has changed in the last year, but the fundamental value proposition and fundamental questions remain the same.
A Legacy Guy Considers DeFi (Front Month): A helpful look at Decentralized Finance, or DeFi, a use case for cryptocurrencies that’s getting more and more attention, and which is worth understanding.
Zero Knowledge (Not Boring): An in-depth look at Zero-Knowledge Proofs (ZKPs), a technological solution to problems that may enable interesting crypto applications in the future. Nothing directly actionable from an investing perspective, but a potentially important concept to understand if it’s potential starts to be realized with actual products.
Non-Crypto Financial Articles
Inflation and Investing: False Alarm or Fair Warning? (Aswath Damodaran): Professor Damodaran provides and overview of what inflation is, how it’s measured, and what it could mean if the recent uptick in inflation is the start of a longer-term trend.
The Cicilline Salvo (Stratechery): Ben Thompson provides insight on some of the recently announced legislative proposals to regulate large technology companies, how they stack up against one another, and what they might mean for the biggest firms in the world.
How to Do Long Term (Morgan Housel): As usual, a Morgan Housel piece makes this newsletter. This one covers concepts (some of which conflict) that must be grasped to effectively invest for the long term.
Twitter Thread: Work from home v Hybrid v HQ (Steven Sinofsky): A thread about post-Covid work-from-home, the structure of corporations, and the uncertain future of how work gets done.
Odds and Ends
On Wanting (Letters From Home and Away): If you’ve seen the movie “Friday Night Lights”, you’re familiar with the Permian Panthers high school football team. This is about what happens after the lights go out.
The future of war is bizarre and terrifying (Noahpinion): The never-ending question about warfare is what the next one will look like, so that you can try to prepare for it. This presents a few compelling visions of future conflicts (which we may already be experiencing).
Adding is favoured over subtracting in problem solving (Nature): “The authors observe that people consistently consider changes that add components over those that subtract them — a tendency that has broad implications for everyday decision-making.” We should all remember our tendency to add complexity, and remind ourselves to look for solutions that might involve taking things away to improve outcomes.
The people who want to keep masking: ‘It’s like an invisibility cloak’ (The Guardian): There will be many long-lasting impacts of the pandemic, and this presents an interesting perspective on why some people may keep wearing masks for quite a while – having nothing to do with public health.
Claire tamed inflation, so we don’t have to worry about it.