Updated: Jan 21, 2021
In the summer of 2017, the cryptocurrency craze lit up with the fervor of a toddler in a candy shop. I was working as the Chief Information Officer of a small tech startup, serving our national security and intelligence community. A young software engineer, and cryptocurrency enthusiast, sought my advice. Who amongst indebted college students would not be enticed by the prospect of easy money?
In a mentorship role, I saw it as an opportunity to teach a young engineer methods of innovation. I told him to go research the history of currency, particularly focusing on counterfeiting, inflation, deflation, minting, exchange rates, money supply, loans, and barter.
He came back the next day with an enthusiastic smile. He said he looked at these things but did not see what they have to do with cryptocurrency. Because he is a brilliant person, I fault the institutionalist visions of modern professors (defined in the book Economic Sovereignty). He said that cryptocurrency solves the problem of counterfeiting and it is secure by design so hacking is not a concern. The rest of the concepts he thought were obviated by the design of cryptocurrency.
At that point I unloaded my assessment of the status of cryptocurrency in June of 2017.
I stated the practical utilities of cryptocurrency superior to the dollar:
Black market exchange of drugs and illicit goods and services
Evasion of international sanctions
Avoiding central bank financial repression, in part
Transaction costs are often less expensive and always faster than check, credit card, ACH, and wire transfer
The cost of holding cryptocurrency, inflation, is typically lower than the historical inflation of the US money supply
The practical utilities of the dollar superior to cryptocurrency include:
Loss, fraud, theft, and counterfeit protection
Universal status as legal tender for payment
Established systems of tracking and reporting yield economic data that is critical to governments, investors, and businesses
A government has guns backing its legal tender, and an interest in its stability. A stroke of the pen can stifle cryptocurrency transactions in one moment, at a much higher risk than legal tender.
Of course these benefits are from the perspective of a person who would choose to use one currency over another. To law-abiding citizens, making crimes easier is not beneficial. Although the list is not exhaustive, it’s what I could mention off the top of my head while considering the problem for the first time. My question to the young engineer, following these considerations:
“What do you know about cryptocurrency that professional investors do not? Do you believe that changing conditions in the world would make the practical utilities of cryptocurrency more attractive than legal tender?”
The answer was no. So my conclusion was that cryptocurrency in the summer of 2017 was the definition of a speculative bubble, ready to crash. I was correct:
Transaction volume imports capital into a currency. Only speculation and hype drove cryptocurrency transaction volume during that short-lived boom.
Believe it or not, when I advised a professor about treating cryptocurrency as they would a game of poker, they insulted me. I said that professional investors who I knew were only willing to risk 3% of their portfolio in crypto. The arrogant ingrate said, “Now I know you have no clue what you’re talking about – there’s no such thing as a professional investor.”
To which I replied: “If you ever become a legitimate entrepreneur, you’ll discover a party called an accredited investor. Beyond those people, there are firms that manage immense assets for very wealthy entities, or huge volumes of less wealthy entities. Those are professional investors. They’ve got a lot more at risk than you do as a single human being of humble means. So they employ talented people and algorithms to understand the markets much better than any amateur.”
The proud professor skulked away into the shadows as rapidly as the interbellum democratic socialists of Britain and France whose pacifist (disarmament) policies rolled out Adolph Hitler’s red carpet to blitzkrieg. We should never underestimate the strength of confirmation bias, and the chasm between academia and the real world.
As for my young software engineer, it was a joy to give a lesson in innovation to such a hopeful young professional. In STEM programs, most educators cram so much technical knowledge into the heads of their students, they often neglect the kind of eternal knowledge that Alvarism curates.
Technology is just a tool, currency included. No matter how sophisticated, if the designers of a technology failed to accurately assess the eternal concepts and constraints related to the problem they approach, then their tool will be insufficient and even detrimental. It’s the temptation of young STEM professionals to dream up tools searching for a problem. That is precisely the mentality that will prevent them from becoming supreme innovators.
I do believe that my young software engineer learned a valuable lesson in just two conversations. Even for those who are not engineers, they would benefit from juxtaposing currency “tools” to each other, in order to make market decisions.
As for those who listened to Alvarism on cryptocurrency, they invested more wisely than the masses of neophilic dreamers who created the crypto bubble of 2017 to begin with. The utilities of cryptocurrency are attractive, particularly for banking and financial institutions who wish to develop the technologies wisely, integrating with their existing technical infrastructure. A solid cooperation between financial institutions, governments, and academia could yield the next generation of currency, with greater efficiency. With that in mind, we will keep an eye on the progress of cryptocurrency. There are good times to buy it and bad times. Summer of 2017, we correctly assessed, was a bad time.
On the other hand, the recent crypto craze is a lesson in humility for the overzealous prospectors who got burned, and even for the lucky few who sold for profit at the right time. Taking the optimal action in complex business affairs is an art that requires a great deal of experience, analytical skill, emotional intelligence, and focused devotion. A risky investment like cryptocurrency in 2017 was a complex business affair. Caveat emptor.