The Case Against Bitcoin
Peter Thiel’s former portfolio manager says that the crypto narrative is built on half-truths and a nonchalance about the security provided by the nation-state.
A rising price does not tell you something is working. If you don’t believe that’s true, consider what happened to holders of tulip bulbs in the 1600s.
That’s how Michael W. Green sees cryptocurrency. It’s like driving uphill with no brakes — and those relentlessly boosting it refuse to acknowledge its profound vulnerabilities and downsides.
What happens, for example, when you lose your crypto-key? What if a 51% attack happens, in which 51% of the processing power in a blockchain network come under attack by a group with immense computing power? This is to say nothing of the environmental aspect of Bitcoin mining, which uses more energy than entire nations. Or the fact that groups like the Al-Qassam Brigades are using cryptocurrency to finance their operations and solicit donations.
Michael has been an investor for more than 30 years. He recently joined Simplify, where he is introducing new innovations in ETFs. He has previously been at Logica Capital Advisers, where he was the chief strategist; Thiel Macro, where he managed the personal capital of Peter Thiel; and Canyon Capital Advisors, a $23 billion multi-strategy hedge fund based in Los Angeles. He also founded Ice Farm Capital, a discretionary global macro hedge fund seeded by Soros Fund Management.
Earlier today, Balaji S. Srinivasan made the case for crypto. Here’s Michael with the case against:
The Bitcoin Universe is awash in “Old Man Shouts at Bitcoin” memes in response to Charlie Munger’s recent assertion that the explosive growth of Bitcoin is contrary to the interests of civilization. I like memes as much as the next middle-aged guy interested in tech. But in my view, the snarky reaction to Munger speaks to something quite deep: a divergent view about the nature of civilization.
Bitcoin advocates, like my debate partner Balaji S. Srinivasan, generally fall into a category of “techno-progressives” — individuals who believe that the combination of unfettered free markets and technology inevitably advance society.
Here’s how Balaji put it in 2015:
Squint a few years out to visualize the complete marginalization of today’s establishment. The future is nationalists vs technologists. A full-throated, jealous defender of borders, language, and culture. Or a rootless cosmopolitan with a laptop, bent on callow disruption.
The primary axis won’t be left versus right, he argued, but the cloud versus the land. “You have your elections, and we have our search engines. Vote how you want, we will move where we like.”
In other words: the nation-state is necessarily fighting a rear-guard, anti-progress agenda and the individual — assuming they are technologically savvy and wealthy — is necessarily unbound as a “sovereign individual” (a bit of a bible to the Bitcoiners). By stripping the provision of “money” from the state, Bitcoin has become the ultimate expression of freedom from government interference. Based on this belief system, Bitcoin must, by definition, be a social good.
Munger, in contrast, is expressing contrasting beliefs about human nature and about the nature of politics and markets. Namely, that our inevitable flaws, including our lack of perfect foresight, require guardrails to reduce the risk of unintended consequences, like, for example, speculation in “low-risk” mortgages that drove a global financial crisis. Without borders, languages, culture and, yes, fiat currency, our civilization can be easily placed at risk.
Whether the techno-progressive belief system or Munger’s is correct is uncertain at this point. I am no apologist for the existing system. The United States government has made, and continues to make, unconscionable choices that harm our society, especially the young. A cursory review of the student loan debacle provides more than enough evidence to make that plain. Such choices are negatively impacting our ability to work towards our common goals, a condition I discuss at length in recent media appearances.
Those concerns do not change the fact that a system built around Bitcoin, despite its obvious technological innovation, is fundamentally flawed — a real world game of Monopoly where the objective becomes to take wealth from others rather than work both individually and collectively to raise living standards for all.
I want to specify that I am referring to the rule set of Bitcoin specifically, rather than broader innovations in cryptocurrency. While many other cryptocurrency experiments have flaws, as the early leader to the space, Bitcoin has created unique vulnerabilities by growing rapidly in an environment without a regulatory regime prepared for it. What’s worse is that its proponents are more than willing to conceal the facts to promote its success. For this reason alone we should be skeptical.
Indeed, the Bitcoin narrative is built on a foundation of half-truths, untruths, Social Darwinism, cynicism, an odd comfort with criminality, and nonchalance about the security provided by the nation-state.
Crypto advocates are fun to follow on Twitter, but they won’t tell you the following:
1. Money exists for one purpose: to cancel debt. Written on the front of every dollar bill is the phrase “This Note is Legal Tender For All Debts, Public and Private.” Your taxes are paid in fiat currency; your mortgage is payable in fiat currency; and the brief liability created by the purchase of your morning coffee is settled in fiat currency. Any dispute surrounding these debts will be resolved in a court system that will allow settlement in fiat currency or place you in jail (or worse) if you refuse to honor that settlement. The police, courts, and military are funded via the issuance and receipt (in the form of taxes and fees) of fiat currency.
In contrast, Bitcoin is a speculative asset that, like all assets, requires systems of law and force to protect it. I recently debated the chief strategist of Kraken, among the largest crypto exchanges, on this subject. He conceded that Bitcoin required protection from malicious actors and suggested U.S. government intervention to protect his investments. There are no atheists in foxholes.
2. I am not an apologist for American hegemony and all the behaviors it has enabled. But imagine the counterfactual. Over the course of the 20th century, the relative standard of living of those who lived under the protective umbrella of Pax Americana exploded relative to those living under the competing Soviet or Chinese systems. While techno-optimists will suggest that the counterfactual is utopian, the evidence on the ground is far darker. I would encourage a read of the work of Radigan Carter, a pseudonymous (and disenchanted) U.S. special forces operative who has written eloquently on the subject, and has argued that a world without U.S. leadership is a world even he would be afraid of. (Radigan is uncertain about crypto and holds a small allocation.)
3. China, Iran and Russia are playing the dominant role in the world of cryptocurrency. In the last week of April, mining pools based in China accounted for roughly 90% of the processing power (“hash rate”) in the Bitcoin network. Roughly three weeks ago, a power outage in the Xinjiang region of China resulted in a plunge in global Bitcoin processing. Bitcoin mining — the process of record keeping for the “immutable” chain of record on which the Bitcoin network depends — is dominated by entities in countries with the stated objective to harm the interests of the United States. Bitcoin proponents continuously assure us that this is “just about to change,” but the data has not shifted in a meaningful manner in the last five years. This is not a decentralized system. It is centralized in the countries that seek our destruction.
4. When Peter Thiel floated the idea a few weeks ago that perhaps “Bitcoin should also be thought of in part as a Chinese financial weapon against the U.S.,” he wasn’t mincing words. “It threatens fiat money, but it especially threatens the U.S. dollar,” he said. With China having banned domestic ownership and usage of Bitcoin, while dominating Bitcoin production and encouraging foreign speculation in the asset, this seems a reasonable avenue of exploration.
5. Those bullish on crypto love to point out that there is more criminal activity occurring in U.S. dollars than in Bitcoin. Given the dominance of the dollar in economic activity, this should surprise absolutely no one. What they leave out is that roughly 40% of crypto transactions are used for illicit activity. The data on crypto usage in criminal activity is intentionally obscured within the industry. While statistics like <1% are regularly reported, this data mixes crypto exchange volumes (similar to the trading volumes on the New York Stock Exchange, but admittedly manipulated) with end economic activity.
Using the most recent estimates for final purchases involving crypto (similar to the calculation of GDP), the roughly $400 million per month in illicit activity for 2020 would equate to greater than 40% of all Bitcoin usage. This week’s attack on a U.S. energy pipeline — carried out by a terrorist group operating out of Russia and requesting ransomware payment in Bitcoin — suggests Munger is not unfair in his characterization of Bitcoin as useful to extortionists.
6. Bitcoin mining is remarkably energy intensive. Even Bitcoin’s most ardent proponents acknowledge that Bitcoin energy consumption has now reached levels roughly equivalent to that of Sweden. Elon Musk, who agreed to accept Bitcoin for Tesla purchases, as of this week has abandoned that plan as the company came under fire for the environmental damage created by Bitcoin mining.
He is far from alone. Bitcoin usage for purchases of goods and services has stagnated.The latest data available from Statista suggests that the largest use for Bitcoin in end markets is for prepaid gift cards, followed by payment for internet (largely pornography and gambling) and VPN services. After stagnating for years at around $4 billion per year, historical data on “merchant volumes” has largely disappeared from the data record. Odd for a transparent “ledger of record.”
7. Bitcoin marketing is designed to mislead, with an expressed refusal to report anything negative — a strategy frequently used to great effect in Silicon Valley to promote entities of dubious value like WeWork. If that seems far-fetched, I would encourage readers to watch the shenanigans of Michael “Bitstein” Goldstein in his 2019 presentation “The Art of Bitcoin Rhetoric: How to Meme Bitcoin to the Moon.” Or perhaps read Elaine Ou’s “Reject Nocoiner Orthodoxy.”
8. Just because the price of something is going up does not mean there it has an underlying value. Nothing makes that case clearer than the story of Dogecoin, the latest crypto sensation. Dogecoin exposes both the current mania and the irrelevance of many of Bitcoin’s claimed attributes: It is not scarce, nor secure, nor limited. Elon Musk admitted on “Saturday Night Live” that it’s a “hustle.” And yet the price of Dogecoin has risen far more rapidly in recent months than Bitcoin.
9. While arguing for a utopian future, Bitcoin proponents embrace the time-tested methods of exploiting societal fear to drive adoption. As social animals, we are terrified of being left behind by the tribe. The language of Bitcoin — “Not gonna make it” or “Have fun staying poor” — are intentionally designed to exploit this amygdala response and drive participation in a scheme that relies entirely on driving additional participation to generate gains for current participants.
10. The final lie is the most important: “Bitcoin is unstoppable.” Over a year ago, some talented technologists proposed a mechanism by which a state actor could disable the Bitcoin network at remarkably low cost. This challenge went ignored until I raised it in a recent debate with promoter Anthony “Pomp” Pompliano. In a break with Bitcoin promotion orthodoxy, this was acknowledged as valid by the Bitcoin maximalist Andreas Antonopolous and a solution to the threat remains elusive. Why are you unaware of this? Because the objective of Bitcoin promoters is to drive speculative activity into Bitcoin rather than offer you an informed choice.
With a focus on delegitimizing government, substituting offensive memes for culture, crowding out legitimate energy uses, and supporting anarchy in the name of individual “freedom” to generate speculative profits, I’d suggest that despite his advanced age, Charlie Munger — not to mention Gary Gensler, Janet Yellen, Peter Thiel, and Nassim Taleb — still gets it.
If you liked today’s Bitcoin debate and want to see more of this kind of thing, please let me know in the comments.
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