Crypto’s Reverse-Minsky Moment
A friend who is a savvy investor emailed recently to say that he thinks Bitcoin will be the best performing asset of 2021. He then clarified that this was only for a trade, and compared its fundamental value to “voting on the Voice.” Someone else emailed to say that another major hack was inevitable and would kill the rally. Nouriel Roubini continues his excellent Paul Krugman circa 1998 impression (“… it will become clear that the Internet’s impact on the economy has been no greater than the fax machine’s.”) and Steve Mnuchin is single handedly trying to ram through farcical new rules designed to protect his once and future employers in the fiat domain.
And yet, the rally continues, in part by pulling in prominent investors who are even more influential than the folks listed above. The rally is also spreading. First Bitcoin, now Ether, later everything else. In economics, a Minsky moment is the moment when reality catches up with an overly-optimistic financial sector, leading to collapsing prices. It’s more concept than rule, but useful in understanding how human nature has a tendency to overshoot.
A Minsky Moment is based on the idea that periods of bullish speculation, if they last long enough, will eventually lead to crisis, and the longer the speculation occurs, the more severe the crisis will be.
Crypto is currently experiencing a reverse-Minsky moment: the point at which years of pent up skepticism — some of which was reasonable, most of which was willfully ignorant — blows up. The importance of permissionless blockchain networks and the digital currencies that they enable in broader society is no longer a question of whether, but rather how much. The resulting repricing will be extraordinarily volatile, but resolve to the upside.
Why now? Because of the powerful combination of the macro situation coupled with all that is increasingly unbearable with the digital domain.
Let’s start with the more obvious driver: 2020 has been a signature year for borrowing and printing. You’d be hard pressed to find a government or central bank that didn’t unleash a bazooka of liquidity. Global debt to GDP was a record even before the pandemic. Now it’s in the stratosphere.
Some of this was understandable given the circumstances. But what’s telling is that nobody believes it should stop, and many argue it’s still not enough. Remember when political conservatives were opposed to deficit spending or money printing? LOL! The outgoing Republican President has set records for both, and his biggest beef with Congress is that they won’t agree to more. In this era of severe polarization, the one thing everyone from Trump to AOC agree on is that the fundamental purpose of government is to borrow and print. European and Asian leaders agree. We are all Argentina now.
This backdrop alone is reason enough for an easy to store, easy to divide, and easy to transport scarce store of value to appreciate. Bitcoin inflation was cut in half this past year, around the same time that the Fed exploded its balance sheet by 50%. Bitcoin might be risky, but sprinkling some digital gold on your portfolio might be the responsible thing to do in this unprecedented monetary environment.
But there’s a lot more to this reverse-Minsky moment than just a new kind of store of value. Arguably even more important than the currency is the infrastructure that enables it, and the ways it can be evolved as a counter to authoritarian governments, decrepit bureaucrats and maniacal monopolists.
How about a payment system not built on the backs of small businesses? Or a banking system not designed to discriminate? Or an alternative to the slow-metastasizing cancer of corporate-owned platforms that is now ruining every corner of cyberspace? If this last bit sounds hyperbolic to you, then you either haven’t been paying attention, or are a Google/Facebook/Twitter/Uber/Lyft/Visa/PayPal/Grubhub/DoorDash shareholder (to which I tip my hat).
Online platforms — as their ad campaigns often remind us — are supposed to make the world a better place. But as we learn with every passing leak, documentary, and antitrust investigation, there’s something fundamentally wrong with the centralized, corporate-owned variety. They go from ripe to rotten in record time, turning on the very users who helped them succeed.
There’s a reason why Google abandoned its motto of Don’t Be Evil and Facebook no longer claims the service is Free and Always Be. Lyft still claims to be Improving People’s Lives with Better Transportation, but we’ll see how long that lasts now that the hypocrisy of rideshare companies refusing to pay their drivers benefits (because they are entrepreneurs!) while insisting the government give them unemployment benefits (which entrepreneurs don’t qualify for) has been exposed.
Whether it’s surveillance capitalism, regulatory arbitrage or outright extortion, most of your favorite platforms are not what you think they are. They don’t exist to serve you, the customer, or the influencer/driver/restaurateur they pretend to empower. They serve their shareholders, and shareholders demand greater profits. Why wouldn’t they? It’s their money on the line. This misalignment of incentives drives every corporate-owned platform to eventually turn on its users. As proof, consider the following commentary from Uber’s CEO during its most recent earnings call:
Yes. I think that we don’t want to say quarter to quarter, but you’ve seen our take rates improve pretty consistently. We think that the take rate path is a positive path. So we see upside as it relates to our take rate.
The “take rate” is the percentage of every driver’s earnings that the company takes. Uber shareholders believe that the only way to achieve lasting profitability is by decreasing the pay of the drivers that the company pretends to care about. Lure them in with financial incentives, encourage them to re-orient their lives around being a driver, then pull the financial rug from under them. The CEO clearly agrees. Oh, but don’t worry, there’s now a moving ad campaign thanking drivers.
If you take the “classical” view of digital platforms and Metcalfe’s Law, then there’s nothing to be done. The pandemic has pushed digitization beyond the point of no return, and us lowly users serve at the pleasure of our corporate overlords. Your local family-owned restaurant no longer exists to make you delicious food while earning a respectable living. It exists to make the shareholders of Visa and DoorDash rich. Don’t believe me? Ask the owner of that restaurant (or virtually any restaurant) how they did in 2020. Then look up DoorDash and Visa’s stock price.
Crypto is different. It’s more than just a currency or a digital store of value. It’s an entirely different way of distributing financial rewards. It’s the belief that a digital platform meant to serve its users should be owned by them. Bitcoin is similar to VisaNet in that it’s a global payments platform. But the Bitcoin platform is owned by its users. If it grows in utility, the financial gains accrue to its users — not some corporate behemoth about to tweak its fees to further burden vulnerable merchants. Bitcoin payments also entail transaction fees, but ones designed to provide security, not fund share buybacks. Ethereum abstracts this user-owned model to pretty much everything else, including fiat payments and banking.
The current crypto rally has as much to do with the realization that the world needs a different approach to digital interaction as it does with the macroeconomic backdrop. You can hear this in Paul Tudor’s Jones remarks on what he learned about the tech after he invested in Bitcoin. You can see it in PayPal’s abrupt plunge into crypto or Visa’s subtle shift to being “a network of networks.” You can find it in Jamie Dimon’s supportive comments about blockchains for dollars and the ECB’s careful consideration of using the tech to issue a digital euro.
Most people — including the institutional investors slowly coming around to owning crypto or the platform CEOs toying with blockchain — are still years behind the curve. They can’t fully imagine the changes coming down the pipe, in the same way that Blockbuster’s leadership flirted with but ultimately walked away from streaming. But that’s their problem. Your task is to understand and embrace the coming creative destruction.
Crypto’s reverse-Minsky Moment is here. Plan accordingly.