What You Are Investing In When You Buy Crypto
So, you’re interested in “investing” in crypto. Fine. Like any investment, you might want to know exactly what it is you’re investing in. Ok, but Crypto is, however, NOT an “investment”. Like gold, it is a speculation on what other people might be thinking and doing. An investment in the conventional sense means you are deploying your money in something for which you and others can state the purpose of the investment and the reasons why it will or will not succeed in growing. For example, sell more goods or services or sell better and faster ones, etc. You can then rely on some degree of quantitative and qualitative information and make an empirical judgment.
Crypto is, as they say, an “uncorrelated asset”. In this regard, it is more like MLM or Ponzi schemes. And, in this way, they are more like cults and driven almost entirely by sentiments such as FOMO and get-rich big-or-quick or avoid-becoming-poor appeals.
But there are many places short of a casino where you can put your money.
Historically, in the case of gold (or diamonds or rubies, etc.), much of its value originally derives from its having been a “portable” (relatively speaking) store of value in the past. Seashells were also once used like this in many places but never caught on in land-locked areas. Silver was once, too, but no longer as much and is now largely treated as a commodity. Owning any of these directly has significant limitations on their portability and, most of all, their scalability: the means by which you can receive or exchange as much or as little as you like quickly and with ease. The easier and more scalable the possession and deployment of a value store, the easier it is to hide the amount and use of the value store.
Gold and, notably and more conveniently, blood diamonds and similar were the only things that permitted this to any degree. But exactly the issue of scalability was still a problem. You could circumvent money-laundering regulations, tracking of arms sales, and sales of illicit products and activities, but it was very inconvenient and often dangerous.
SCALABILITY, SCALABILITY, ummm SECRECY….
Along comes Bitcoin specifically as a project to circumvent the ability of government and law enforcement to track and tax and regulate its value and its uses. Not surprisingly, it was originally a tech and libertarian hobby until Silkroad.com started using it. BTC had muddled along until then and, suddenly, it was discovered as a means to buy and sell every kind of illicit service and good and virtually no possibility of being discovered or tracked: narcotics, bribery, arms and armaments, blood resources, private information, extortion, even murder for hire.
Finally, the world looked good. And the value of BitCoin soared from $1 in April 2011 to $1,242 in November 2013 and then crashed back down to $340, largely tracking the rise and fall of Silkroad.com. But the die, as they say, was cast. For the next 5 years, it tracked the rise and fall of both its promotion and its discovery by 3rd world corrupt governments and elites and the rise and fall of exchanges.
There was a short while of the price meandering up and down. But the arrival of Ethereum in 2015 and DApps, ICOs, Jim Cramers, and a shiny new toy for libertarians, the long lost cause of money for money’s sake began its current chapter. And here we are today.
But where are we really and what are we really investing in? The short answer is China’s view of western institutions: sometime in the nearer future, crypto investors are very much at risk of being blackmailed economically by China. Decentralization…Meschmentralization!
China currently accounts for 66% of Bitcoin mining and as large or larger shares for practically every other coin requiring PoW cryptographic algorithms to build blocks. If you include Mongolia and Russia, you get close to 90% of mined crypto. Even if the location of the rigs was more evenly distributed, China still has a stranglehold on the technology. NVIDIA’s GPUs used to have a dominant position as the supplier of rig ICs, but now they are insignificant. The supply of mining rigs via the Chinese companies Bitmain and Canaan Creative covers north or 90% of the market. Trump’s policies had some effect on accelerating China’s project to in-source all this. But even without Trump, China has a long-term policy objective of freeing itself entirely of dependence on US/European tech and, more than anything, the dollar-based world economic system. In other words, western liberal democratic control of things.
Don’t get me wrong. There are a huge number of things I like and admire about China. But I can’t miss observing that China is still a totalitarian society that is openly inimical to western liberal democracy and, most of all, the west’s dominance of world financial systems. The economic and technological power that is increasingly given to China via Crypto gives pause. Once Crypto is in a large enough number of bank accounts and in investment portfolios in the West, there is the ability for China to wield political power in the same way the west does with the dollar reserve currency system. This is what they want.
ome people argue that because of PoW (Proof Of Work) supported PBFT (Practical Byzantine Fault Tolerance) and the game theoretic implications, there’s no way the miners or the rig suppliers would shoot (economically) themselves by undermining/destroying their businesses if the Chinese Communist Party ordered them to do it. There are ample reasons to think otherwise, starting with the examples of Hong Kong and Jack Ma.
On 24 October 2019, Xi JinPing gave a speech on blockchain and its importance for China. In the following 2 weeks, the crypto markets went nuts like permanent Christmas. Then the real meaning came. Transacting with crypto or having an account with a crypto exchange was outlawed for all Chinese citizens. Crypto exchanges themselves were all outlawed in China.
But what came in the following weeks was more interesting. Indeed, China would make a big push in mastering and owning blockchain technology. But this meant that any blockchain project must be registered and approved and the Chinese government is given full access and all projects must run on top of government owned/managed infrastructure.
The only more interesting aspect of this development is the fact that Chinese crypto miners were left to continue as before, since they were no longer servicing Chinese customers.
There have since been several interesting developments. One of the most interesting and paradoxical is the American company called BloxRoute, founded and run by a Northwestern U. computer science professor. Without going too deep into the technology, this company has created a way to speed up (somewhat) the mining and re-mining of crypto for block creation by creating an entirely virtual private network to support updating the main chain shared among the miners.
What is interesting about this? Well, it is not a further difficult step to use that infrastructure to monitor transactions and hence obtain a volumetric view of transactions and impute and control price movements. If all of China’s miners join this platform — as it appears they are — this could enable the Chinese government to manipulate prices and add to its already blunt ability to shut down nearly all mining transactions.
The more crypto is found in more western investment accounts and with substantial amounts of business in the financial sector tied to crypto, this could be a huge lever for China. This could easily be used to respond to, for instance, economic sanctions against it or its allies.
If you are a believer or promoter of Crypto, you have to recognize who holds the reins of this particular economic workhorse.