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Crypto-Crash: An Optimistic Post Mortem Part II – Taking The Money Monopoly Away From Government.

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Over the last year, news of crypto hacks and heists became so prevalent that the new breaches were hardly worthy of reporting anymore. Among the headliners, however, was the Coincheck case, the Japanese exchange that lost over $530 million worth of the NEM cryptocurrency, as was Zaif, another exchange also from Japan, that saw $60 million worth of digital currencies vanish. Bancor, an Israeli-Swiss decentralized exchange lost $23 million to a hack this past summer, while BitGrail, a small Italian cryptocurrency exchange lost $170-195 million worth of its customers’ digital assets. All in all, nearly $1 billion was lost to hackers from exchanges and other platforms in just the first nine months of 2018, according to research by blockchain security firm CipherTrace.

An increasing number of ICOs also has come under the spotlight and attracted the attention of government agencies throughout the world. By July 2018, around $1.3 billion had already been invested in fraudulent ICOs, according to a report by Satis Group. The list of ICOs that turned out to be scams is long and it keeps growing. Among the most high-profile cases was OneCoin, an Indian operation that scammed investors for around $350 million, as was the Centra Tech, a heavily promoted and celebrity-endorsed swindle that raised a $32 million through its ICO, only to be indicted for securities fraud. Overall, even when looking at the projects that were not blatantly fraudulent or had their founders vanish with investors’ money, more than 55% of ICO-funded endeavors failed within 4 months, according to a study Boston College.

Source: Satis Groups LLC

All in all, some of the blame can be assigned to the extraordinary levels of greed that prevailed in the market, along with irrational optimism and a serious lack of attention to detail. Many of the investors who fell victim to the fraudsters didn’t even bother to read the corresponding white papers or do any kind of research before climbing on the bandwagon. It is also important to bear in mind that, much like in any other bubble, a considerable number of people who entered the market after the rally made headline news did not even have a basic understanding of the principles behind Bitcoin or any other coin they were investing in. Key concepts and mechanisms critical to the function of most crypto-related projects were and still remain largely elusive. For example, in the general public, 80% of people who have heard about the blockchain, have no idea what it actually is, as an HSBC poll showed.

“Doesn’t do what it says on the tin”

Beyond regulation and security issues, one of the main obstacles that many projects in the sector faced is that their products simply didn’t work as they were supposed to. Functionality is the bare minimum any investor and ordinary user would reasonably expect for their money and that expectation in many cases was not met.

A prime example is Bitcoin, originally promoted as a new, better, decentralized currency. While it performed exceedingly well (for some) as a speculation vehicle, it was a dismal failure as a currency. It was so badly designed and so unfit for this purpose, that the more users it attracted, the less usable it became. It goes far beyond Bitcoin too. According to an analysis by “Invest in Blockchain”, out of the top 100 cryptocurrencies in terms of market cap, less than half serve any useful function or actually have a working product.

The way forward

At the height of the crypto-rally, there were many who compared Bitcoin to gold and claimed that it could replace the precious metal. Of course, with the benefit of hindsight, such an idea now seems quaint and ludicrous. This was especially highlighted by the comparative performance of both Bitcoin and gold during the recent volatility extremes and investor anxiety levels in the stock market. As is historically the case, investors running for cover and seeking a safe haven turned to gold. As for Bitcoin, it became clear that it just does not enjoy the same trust from investors and not even the recent turmoil in equity markets could suffice to halt its descent.

The crypto-crash was a painful lesson on greed and on the downside of bandwagon mentality and it provided a much-needed reminder that “a fool and his money are soon parted”. However, it also served as an important catalyst for the industry. This dramatic thinning of the herd, eliminated many operations that were either fraudulent, unsustainable or simply not competitive enough. Much like the DotCom bubble, that eventually cleared the board for giants like Amazon to thrive and to fundamentally change the consumer landscape, this crash has also paved the way for the truly great ideas to flourish, the ones with the potential to impact significant change in the way we do business and interact.

The new and better ideas that the crash has made room for, is not the only reason to be optimistic about the future of the sector. It has also made a difference on the funding side. The significant drop in investment is not necessarily detrimental to the industry in the long run. For one thing, the excesses and waste that were facilitated by the exuberant investments and irrationally high valuations during the 2017 rally are now a thing of the past. The projects that survived and those that will be launched from this point forward face serious pressures to be operationally lean. As speculators and naive investors who were focused on “get rich quick” pitches have largely left the crypto arena, the focus has shifted to sustainable, functional and effective solutions that provide real value to their users and reliable profits to their investors. Thus, from an investing point of view, the crypto sector, as it matures, is bound to offer much more, much greater and much healthier opportunities to those seeking dependable growth.

After all, we must keep in mind that the blockchain technology and its currency applications that we’ve seen in the recent past are two different things. Bitcoin and the hundreds of other cryptocurrencies are but a single facet, just one of many possible uses for the distributed ledger technology. Blockchain has a wide variety of potential applications, already being developed, that hold great promise for cross-industry innovation: communications systems, industrial uses, quality assurance, logistics, law, trade applications and beyond.

As outlined in my previous article on this topic, there is no need to see precious metals and the crypto sector as competitors. If anything, the various solutions that are likely to emerge from the burgeoning industry, especially those with a monetary or transaction-facilitation focus (as we will examine in an upcoming article), are much more likely to threaten the future of government-controlled, fiat money. As the internet irreversibly separated our physical lives from our online activities and as the latter continuously gains ground, it is becoming clear that the tools we used so far to navigate and interact in both domains are no longer fit for purpose in an increasingly connected world.

The concept of national currencies, centrally controlled and manipulated by governments, is antithetical to the culture and the entire point of the internet. On top of that, fiat money is simply not as functional in online transactions as a specifically designed alternative, native to that realm, would be. Thus, we are bound to see the rise of “internet money”, with private and competing cryptocurrencies, able to offer stability, usability, security and convenience, providing much better and much more efficient solutions. Such a shift toward private initiatives and new concepts that enable commercial activity and online payments could soon push fiat money back into the confines of the increasingly irrelevant physical world.

On the other hand, physical precious metals will return to play their essential role as the most liquid and best store of value, as they have done for thousands of years. For investors and savers alike, the appeal of gold is timeless, as it is the only vehicle that has proven to protect and preserve purchasing power, especially in times of crisis.

We are still only beginning to realize the changes, the level of innovation and the vast array of new opportunities that a fully decentralized financial system could bring, operating peer to peer, cutting out the middle man and by doing so, destroying the government monopoly on money. Such a seismic shift would shake the current centralized power structures to the core and soon render them irrelevant. In the meantime, I believe it makes sense to keep an open mind and to familiarize oneself with these new technologies. I do see a lot of potential in systems and concepts that are geared towards digitalizing real assets, such as a physically gold-backed cryptocurrency that can be traded online, bypassing today’s centralized and government-regulated financial system, with its high fees and with transaction times of several days.

It seems to me, that the goal of this generation will be what Friedrich August von Hayek had in mind several years ago: “If we want to maintain a free society, we have to take the money monopoly away from the government”. This process has already begun and it can no longer be stopped, neither by mandate, nor by force.

Claudio Grass, Hünenberg See, Switzerland www.claudiograss.ch

This article has been published at pro aurum. All rights remain with the author and pro aurum.

Click on this link for Part I of the article

These Are The Four Anti-Capitalist Characteristics Of Huge Corporations.

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AT&T has completed its acquisition of Time Warner, in a $81 billion M&A transaction. The deal creates a behemoth dealing in fundamental telecommunications and in both the creation and distribution of popular content. It is quite typical for us to be suspicious of the creation of new corporations of huge size, but why?

There is nothing inherently bad about scale. If scale is a necessary attribute for the efficient delivery of consumer value in telecommunications and content markets, we should welcome the financial engineering that makes efficiency possible.

Unfortunately, efficiency is not all that scale delivers, if it delivers it at all. There are four fundamental anti-capitalist and anti-liberty characteristics of huge corporations.

Drinking From The Government Money Firehose.

The money and credit that government creates in vast quantities does not enter every citizen’s pocket in equal amounts at the same time. It enters the financial system at the point where entities closest to government, with sufficient scale to absorb newly-created money in industrial quantities, have set up mechanisms to receive and process it. These are banks, Wall Street institutions, hedge funds and capital pools eager and willing to be the first recipients of the new money. Having obtained it in vast amounts at extremely low cost, they are eager to redeploy it quickly and profitably. One way is to buy stock and lend M&A funds to the largest corporations. The stock market in large company equities is funded by this huge pool of money, as are M&A deals of the size of the AT&T Time Warner merger. Smaller businesses can only access this money later in the cycle at much higher interest rates. By the time the money reaches consumers, it costs up to 24% on credit cards and more than that on small business working capital loans and consumer payday lending. Giant corporations have, and use, a major competitive advantage in preferred access to the government printing press.

Organizing For Authoritarian Management.

We often refer to these giant entities as organizations. An organization is a transmission device for authority, and specifically for an authority that has its own set of rules. Loyalty to an organization builds up a power hierarchy for the application of those rules. People who work in hierarchical organizations tend to be insulated from the workings of the free market; they deal only in the power politics of the organization they inhabit. A characteristic of those power politics is that there are non-market incentives to grow the size of the internal organization – for example, the number of people reporting to a departmental executive or the size of the departmental budget become sources of prestige. More and more resources are devoted to the administration of the internal organization,  and proportionately fewer to serving the customers and consumers on the outside, and to innovation and consumer value creation. The big company can become unresponsive and unaware of changes in market needs. In the worst cases, they can lose sight of their consumer mission altogether – as when United Airlines personnel dragged a passenger kicking and screaming off one of their planes so that they could use the seat to ferry an employee for organizational travel.

The Managerial Function Is Anti-Entrepreneurial.

One of the functions of the internal bureaucracy at large corporations is management. This term refers to activities aimed at efficiently extracting economic returns from the resources created and assembled by original entrepreneurs. The company founders and original entrepreneurs were the ones who identified a problem in the marketplace that consumers wanted solved, and who either created new resources or re-assembled existing resources, or some combination of both to solve that problem. Henry Ford created a new resource in the affordable automobile, and recombined existing resources of steel and rubber and leather in new ways to implement it. Since then, managers in the automobile industry have done some minor further recombination, but the idea of the internal combustion engine, 4 wheels, seats and a steering wheel has not been innovated out of existence. The job of managers is to consistently extract financial returns from the original innovation. This is a process-based activity, with a focus on accounting, procurement, design, manufacturing efficiencies marketing and sales. It aims at stability and predictability. Innovation and creativity are anathema to management teams because they lead to unpredictability and uncertainty. So they’d prefer not to innovate.

Perceptively, Ludwig von Mises pointed out that the capitalist system is not a managerial system, it is an entrepreneurial system. The emergence of a managerial class was aimed at eliminating the influence of owners and shareholders. The managerial function is entirely different from the entrepreneurial function. Most of what managers do has no cash value in the marketplace. Much of the industry that has grown up around managerial processes, “strategy”, consulting and business school studies is just an accumulation of additional managerial costs and expanded managerial staffing. It’s not particularly profit-oriented. It’s a luxury that original entrepreneurs like Henry Ford would probably eschew.

Merging Corporate And Government Bureaucracies.

The final insult to consumers from the large corporations is the merger of corporate bureaucracies and government bureaucracies in shared activities designed to extend the power of both. Government bureaucracies design forms that require filling and regulatory demands that require an informational response. Corporate bureaucracies love this, because it gives them something to do and justifies their existence. They get to hire more bureaucrats to fill in the forms and more data engineers to provide the information flow to the government, and more supervisors and managers to oversee the activity. Large corporations are happy to hire and add bureaucratic staff in this field of compliance with government regulation, because their large size makes it relatively easier for them to do so, and their market power enables them to pass on the costs to their customers and consumers. Smaller firms in the same industry are highly disadvantaged under these circumstances. They can’t afford the compliance costs because they have less customer revenue across which to amortize. They either exit compliance-heavy businesses or decline to invest in more profitable operations.

In effect, the government is offloading the cost of its internal bureaucracy and regulation to the corporate sector, and the bigger companies are happily embracing the deal because it gives them a crony relation with the government, a more entrenched bureaucracy, and an unfair advantage versus smaller and potentially more nimble competitors.

Justified Suspicion.

Should we be suspicious of large corporations on principle? Yes. They gulp from the government money spigot, they crony up to regulation to gain competitive insulation, and they grow bureaucratic and managerial staff at the expense of innovation and entrepreneurship.

How Government Money Destroys Wealth, Health, Nutrition, Education And Civilization.

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A slow drain of the value of money over time is a slow transfer of wealth from those who hold money to those who produce it. The government produces money, whether printing their pieces of paper or conducting quantitative easing or creating credit at the overnight repo window. They declare their intent to make the money decrease in value by 2% every year. They can print unlimited amounts for themselves and their cronies, while you and I, who can’t produce money but must use it and hold it, face a guaranteed loss of value.

In The Bitcoin Standard, a book about Bitcoin as a decentralized alternative to central banking, Prof Saifedean Ammous starts his argument from this point. Clearly, the government has great power over us when it can rob us of a guaranteed 2% of our money every year. It is as a result of this process that the dollar in our pocket is almost worthless compared to its value in 1913, when the central bank embarked upon this long journey of declared robbery.

But the problem is far worse than the guaranteed annual theft of 2% of our wealth.

Allowing a sovereign the control of the money can only lead to them increasing their control of everyone’s life. Civilized human living itself rests on the integrity of money providing a solid foundation for trade and capital accumulation.

Professor Ammous lists several examples of the cultural, sociological and political depredations due to government money.

Government Control

Government control of money has turned money from being the reward for producing value to the reward for obedience to government officials.  It is impractical for anyone to develop wealth in government money without government acceptance. Government can confiscate depositors’ money from the banking monopolies it controls, inflate the currency to devalue holders’ wealth, and reward it to the most loyal of its subjects, impose draconian taxes and punish those who avoid them, and even confiscate other wealth that citizens hold.

Fiat currencies reduces people’s sovereignty over their wealth and leaves them helpless in the face of the slow erosion of the value of their money as central banks inflate the money supply to fund government operations. It becomes increasingly impractical to accumulate capital and wealth without the permission of the government issuing that money.

It is government’s ability to finance its operations through inflation that allowed for the birth of the heavily interventionist managerial state, with all its associated totalitarian and authoritarian tendencies.

Sound money, not controlled by government, is an essential requirement for individual freedom from despotism and repression, as the ability of a coercive state to create money can give it undue power over its subjects, power which by its very nature will attract the least worthy, and most immoral, to take its reins.

Economic Depressions

The cause of the Great Crash of 1929 was the diversion away from the gold standard in the post WWI years, and the deepening of the depression was caused by the government control and socialization of the economy in the Hoover and FDR years.

Currency manipulation emerged as a tool of trade policy between governments who deserted the gold standard in order to print unlimited amounts of their own money; trade barriers were erected, with disastrous consequences. Loud and violent nationalism followed.

War And Militarism

In Keynesian economics, spending is deemed the driver of the economy, and when consumers are saving too much and not spending enough, in the eyes of the Keynesians, the government must step in and do the spending. All spending is spending, in this naïve economic thinking, and so it does not matter if the spending comes from governments mass murdering foreigners. It all counts in aggregate demand. In fact, Prof Ammous describes government’s standard economic war policy as “violent militant Keynesianism”.

Politics

In the presence of unlimited fiat money to finance government, political differences between parties disappear as politics no longer contains trade-offs, and every candidate can champion every cause.

Democracy becomes a mass delusion of people attempting to override the rules of economics by voting for politicians who promise a free lunch, and being manipulated into violent tantrums against scapegoats whenever the bill for the free lunch arrives via inflation and economic recessions.

Education

The academic system is completely corrupted by government money. Government schools become propaganda mills, where the curriculum is not determined through its accordance with reality, but through its accordance with the political agenda of the government funding it.

In academia, professors spend very little time and effort on the teaching and mentoring of students, focusing most of their time on publishing unreadable research to get government grants and lucrative government consulting and projects.

Big Companies, Bad Food

In a world where central banks allocate credit, both directly and through its captive monopoly banks, the larger firm has an advantage in being able to secure funding at a low rate that its smaller competitors cannot get. This helps explain why large-scale food producers proliferate so widely around the world, as their lower interest rates allow them to finance growth and bloat.  The triumph of mass produced, highly processed junk food cannot be understood outside the effects of large scale that government money affords to producers.

Decivilization

Sound money protects value across time, which gives people a bigger incentive to think of their future – to lower their time preference – and to save and invest in order to accumulate capital, increase production and elevate the quality of life for all. The lowering of time preference is what initiates the process of human civilization and allows for humans to co-operate and live in peace.

Government money has the opposite effect. It increases time preference, and lowers incentives to save and invest. It reverses the process of civilization.

Bitcoin Is The Workaround

Friedrich Hayek believed that there will never be good money again until it is taken out of the hands of government. “All we can do is by some sly roundabout way introduce something that they can’t stop.”

Bitcoin.

 

Photo by Pepi Stojanovski on Unsplash

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