So many bets to make, so little time
Tokenization of everything
Financial markets are a funny thing. As the price of a financial instrument ping pongs from one number to another, everyone has a narrative that they religiously believe is the truth behind the price change. However, for most people, they don’t know and won’t ever know what actually happened. The millions of people buying and selling the financial instrument might have had a completely different reason for doing so relative to what you or I believe.
As the crypto financial crisis unfolded in the last 3 months, the crypto haters have been out in full force. I believe the feeling is encapsulated in this single tweet from economist Nouriel Roubini:
The funny thing about this tweet, if you didn’t quite catch it, is that it’s from November 2018 (hat tip to @Cobie).
Imagine an old world in 2018 where Bitcoin at $20,000 was too high.
Today, Bitcoin at $20,000 is too low.
The psychological flippening is significant. No one knows whether it will all work, but there’s been another discrete step-up in the price function of crypto assets. All the narratives in the world - believers and non-believers - are distilled into the single metric called price and it has once again inched up.
While our local financial news site may only say “it’s down this much from all time highs”, is that really the right metric? Bitcoin is still “up a lot from all time lows”. The former is sensational and the latter is boring. Financial news sites like the sensational.
In an attempt to explain to the non-believers the why behind crypto’s continued existence, there’s been a proliferation of content highlighting the useful crypto “use cases”. Here are a select number of examples:
Web3 Use Cases: Today, via Not Boring
Some potential use-cases for crypto, via Sam Bankman-Fried
It appears that many people are asking for a noble and useful cause to justify crypto’s existence and valuation. I believe that crypto-enabled services - and perhaps the ones cited by the authors above - will be something that changes the world. However, I don’t see why we need a noble cause to propel crypto forward today.
As an example, when I look at some of the largest tech companies today, most of their success is from pretty simple things that - unfortunately (?) - caters to the old, archaic parts of our brains. A few examples:
Netflix: A movie store, but online. It delivers enormous amount of visual content which makes most people sit on their couch for hours on end rather than experiencing physical movement
Facebook: Started as a place to connect online, but has become a news feed. Instagram is a place where people just endlessly scroll through pictures and is aided by functionality that is made to keep you scrolling
TikTok: Endless scrolling of dance videos and other material. The scroll setup feels like a slot machine
Twitch: Watching other people playing video games
One could argue that most of “the internet” is just entertainment content and messaging apps. The bulk of the internet - cat pics, memes, dance videos, YouTube, sunset pictures, comments - is not noble nor “useful” in many cases. While not necessarily bad, it’s definitely addictive in a lot of cases. People temporarily delete apps such Instagram, Facebook, TikTok, YouTube and Reddit for a reason. It can suck them away from a healthy and active life.
Unless I’m missing something, crypto doesn’t need anything fancy to “succeed”, where success is equivalent to continuous survival. It only needs something that connects to an innate aspect of human beings. I believe the answer to the riddle is what is typically referred to as “the tokenization of everything”. This abstract phrase has a synonym: the crypto casino. Speculation is perhaps the activity that will keep crypto alive and enable it to survive while the noble use cases are further developed.
Human beings have been in the business of speculation for a long time. Some people say that the stock market is a casino, but I’d say that’s a narrow view of the world. People speculate on everything:
Buying that house in the up-and-coming neighborhood where you expect it to appreciate in value
Picking to build a business in an industry that you can eventually “exit”
Anything you select to buy or do where price appreciation is part of the equation
Everyone thinks that they’re smarter than the average and that they can see the future better than the next guy. I’d say that these inherent human tendencies is the natural flywheel that makes us continually bet in real estate, the stock market - and more recently - crypto assets. Outside of an outright, globally coordinated ban on the activity, the wheel will continue to spin forward.
In relative terms, the stock market is limited. Outside of developed markets, they’re either illiquid, small or non-existent. As for crypto, it’s globally connected, diverse and volatile. Speculation is expanded to every “startup” or “small business” project. So many bets to make, so little time.
So it doesn’t matter how much the system gets beaten down, the crowd will always come back. The track record of speculation’s survival expands to thousands of years. The noble use cases will appear in time, but until then, speculation will keep the boat afloat.
All opinions are my own. This is not investment advice.
A wise man once said ?(to paraphrase BG): In the short-run, the stock market is a voting machine. Yet, in the long-run, it is a weighing machine.
Moments like these feel like the rough transition from votes to weights and measures. Agree that speculation will indeed return. Tulips, CDOs, monkey JPEGs, next time will be the same, but different.