Is Bitcoin Bullsh*t? - Mike Green

Podcast Summary

• Critical Perspective on Crypto Investments: Approach crypto investments with caution, focusing on utility and potential benefits beyond just financial value, and consider joining communities for valuable content and experiences.

  While the allure of wealth creation through cryptocurrencies like Bitcoin can be tempting, it's important to approach these investments with a critical and informed perspective. The marketing and hype surrounding cryptocurrencies often play on our fear of being left behind, but it's essential to consider the potential risks and limitations. Mike Green, the chief strategist and portfolio manager for Simplify Asset Management, shares his skepticism towards the way Bitcoin and crypto are being marketed and promoted. He argues that the emphasis on wealth creation is fraudulent and can lead to rank speculation. Instead, it's crucial to focus on the utility and potential benefits of these technologies beyond just their financial value. Additionally, joining communities like Trigonometry on Locals can provide access to valuable content, connections, and experiences, making the investment worth more than just the monetary value.

• Blockchains offer real-world utility but are currently focused on speculation: Blockchains offer potential for real-world utility, but the focus is currently on speculation and buying/selling tokens, leading to a reliance on traditional currencies to maintain their robustness.

  Behind the allure of Bitcoin and other cryptocurrencies lies an important truth: they offer the promise of wealth creation, but their value largely comes from the accounting systems, or blockchains, that underpin them. These systems could potentially have real-world utility, such as enabling peer-to-peer transactions, but the focus has shifted towards speculation and the buying and selling of tokens in the secondary market. This has led to a reliance on a continuous inflow of traditional currencies to keep the accounting systems robust. While there is potential for these systems to create value, they have yet to fully realize this potential and instead have become a source of speculative hype. It's important to remember that the emphasis on wealth creation, rather than utility, can make these digital assets function like securities, and the hype around them can create uncomfortable situations when the math behind the perceived value doesn't add up.

• Eliminating intermediaries with blockchain technology: Blockchain technology distributes a database across a network, eliminating intermediaries, providing transparency and immutability, but current limitations require improvements for faster and more robust systems. It also has the potential to digitize documents and securities, increasing efficiency and reducing costs.

  Blockchain technology is an innovative solution that aims to eliminate the need for intermediaries like Visa or banks by distributing a database across a network, allowing everyone to audit transactions in real-time. This concept, known as a distributed database with limited areas of trust, provides transparency and immutability, making it hard for people to dispute or change transactions. However, current blockchain technology is slow and limited, making it difficult to accommodate the volume of transactions required. The future of blockchain lies in second and third-generation technologies that address these issues, allowing for faster and more robust systems. Another significant aspect of blockchain is its potential to digitize documents and securities, eliminating the need for paper records and reducing costs associated with physical storage and processing. This shift towards digitally native securities can lead to increased efficiency, transparency, and the ability to embed various features and performance components in smart contracts.

• Understanding the Utility and Potential of Bitcoin and Ethereum: Bitcoin and Ethereum have unique features and applications that determine their utility and value. Ethereum introduces smart contracts and proof of stake, while Bitcoin functions as digital gold. Market inelasticity can lead to significant price changes.

  While the world of cryptocurrencies, such as Bitcoin and Ethereum, holds excitement and potential for creating new things and changing systems, it's important to differentiate between the genuine utility of these protocols and speculative behavior. Bitcoin and Ethereum, as algorithms, have similar functions, but their utility and value come from their unique features and applications. Ethereum, for instance, attempts to be useful through the introduction of smart contracts and proof of stake. However, the market for cryptocurrencies can exhibit inelasticity, leading to significant price changes for small shifts in supply and demand. This was observed during the pandemic when the crypto market spiked and crashed, as institutional investors and other market participants bid up the price in their pursuit of Bitcoin. Ultimately, understanding the underlying utility and potential of these protocols is crucial in navigating the cryptocurrency market.

• Bitcoin's value influenced by market dynamics, sentiment, and institutional narrative: Bitcoin's value can rise due to scarcity and demand, but its lack of enforcement mechanism limits its use as a replacement for traditional currencies, causing price volatility.

  Bitcoin's value is influenced by market dynamics, investor sentiment, and the institutional narrative. When demand for Bitcoin increases, prices can rise significantly due to the scarcity of the cryptocurrency. However, this theory that Bitcoin could replace governments as currency is flawed because money is a byproduct of debt and is used to cancel debt contracts. The government's ability to enforce tax payments using legal tender creates demand for traditional currencies. Bitcoin, as a decentralized digital currency, lacks this mechanism for enforcement and is primarily used for illegal activities. The Bitcoin market experienced a collapse in 2021 due to the institutional narrative shifting, but it remains to be seen if this is the end of Bitcoin's growth as a currency.

• CBDCs: Opportunities and Threats in Crypto: CBDCs offer new functionalities but also risk privacy intrusion and government control. The crypto market's volatility and FTX's collapse highlight the importance of preserving anonymized transactions and price signals.

  While crypto offers potential for innovation and decentralization, it also comes with risks and challenges, particularly when it comes to government involvement and privacy. Central Bank Digital Currencies (CBDCs) represent both an opportunity and a threat, as they can enable new functionalities but also pose risks of privacy intrusion and government control. The recent collapse of FTX, a $1 billion crypto exchange, serves as a reminder of the volatility and potential risks in the crypto market. The discussion also touched upon the importance of preserving anonymized transactions and the potential negative consequences of suppressing price signals in the economy.

• Perception of Value: Intrinsic vs Market Demand: Understanding the true value of an asset requires considering both its intrinsic worth and market demand. Focusing solely on market demand can lead to unsustainable valuations and potential fraud.

  The value of something, be it a physical commodity like gold or a digital asset like FTX, can be perceived differently based on intrinsic value or market demand. While intrinsic value is determined by a product's ability to generate cash flows and provide value to consumers, market demand can drive up prices based on speculation and the desire for ownership. The unfortunate reality is that in some cases, the focus on market demand can lead to unsustainable valuations and potential fraud, as seen with FTX. The venture capitalists and other investors who bought into FTX were motivated by the potential for high returns, reinforcing a system that rewards separating value from cash flows. This dynamic can create bubbles and eventual collapses, highlighting the importance of understanding the true value of an asset.

• VCs prioritize protecting established tech giants over fostering new businesses: VCs focus on short-term profits, distorting the industry and leading to a belief that nothing matters

  The venture capital industry has been primarily focused on protecting the interests of established tech giants by acquiring companies that could potentially disrupt them, rather than fostering new businesses with long-term growth potential. This behavior, fueled by the promise of short-term profits and the lack of accountability for the acquired companies' performance, has created a distorted system where nothing seems to have real value or meaning. The FTX case is an example of this trend, where investors were drawn into a potentially risky investment due to the allure of quick profits and the perception of being part of the future of finance. The societal impact of this trend is significant, as it can lead to a widespread belief that nothing matters and that people should blindly follow the crowd, rather than critically examining assumptions and making informed decisions.

• Perception of Cryptocurrencies as a Lottery Ticket: While some view cryptocurrencies as a way to bypass stagnant wages and potentially get rich, it's important to understand the risks and volatility involved.

  During the past decade, many people have seen cryptocurrencies as a way to bypass stagnant wages and potentially get rich, similar to a lottery ticket. However, this perception is not without risk, as the market is volatile and requires effort to understand. Some individuals may view their involvement in crypto as a testament to their uniqueness and financial savviness, further fueling their belief in its potential rewards. This mindset resonates with millennials, who grew up during economic transitions and were exposed to financial scams. Personal experiences, such as the Triple M scam in Russia, serve as cautionary tales about the potential for deceit in financial markets. Despite the allure of cryptocurrencies, it is crucial to approach them with a clear understanding of the risks involved and the potential for government intervention.

• Gold vs Bitcoin: Understanding their Unique Properties: Gold's scarcity drove technological advancements in mining and refining, while Bitcoin's programmatic scarcity may lack incentives for innovation and may eventually lead to one person owning all the coins, limiting its potential as a monetary system.

  While gold has historical significance as a limited resource used for currency, its unique properties encouraged human ingenuity and innovation to address scarcity. Bitcoin, on the other hand, is programmatically limited and will eventually lead to one person owning all the coins, removing the incentive for human ingenuity. The marketing of Bitcoin, with its origin story, was also criticized as misleading and lacking substance. Gold's scarcity led to advancements in mining and refining technologies, whereas Bitcoin lacks this reward system. Despite its limitations, gold served as an effective monetary system for centuries, but its rigidness had its drawbacks, particularly during population growth. Bitcoin, while innovative, may not be the future of finance due to its lack of incentives for human ingenuity and its eventual collapse into the hands of one person. The comparison between gold and Bitcoin highlights the importance of understanding the underlying properties and implications of these resources.

• The role of luck in wealth creation and the impact of monopolies: Luck plays a significant role in wealth creation through high-risk, high-reward bets, but the narrative often overlooks this fact. Monopolies, evidence of market power, are increasingly common and can have far-reaching consequences if left unchecked.

  The cultural shifts we've seen in recent years, including the rise of social media and the increasing concentration of wealth, are deeply interconnected. The free market is often seen as making the right choices and leading to meritocratic outcomes, but this narrative overlooks the role of luck in creating wealth. Peter Thiel, who worked in venture capital, recognized that this system allows individuals to make high-risk, high-reward bets, which can lead to immense wealth. However, this dynamic of luck is often ignored. The work of Ole Peters goes further by arguing that the creation and participation in these systems has become a narrative, and monopolies, which are evidence of market power, are no longer being challenged. The US, as the world's largest economy and military power, has led the way in this shift away from challenging monopolies and recognizing the windfalls created by participation in the system. It's important to consider the role of luck in wealth creation and the potential consequences of allowing monopolies to continue unchecked.

• The role of luck in wealth distribution: Our societal narrative often overlooks the role of luck and systemic advantages in wealth distribution, allowing companies to engage in illegal practices with minimal consequences and perpetuating an imbalanced system.

  Our current economic system, which celebrates extreme success as a result of individual merit, is increasingly flawed. The evidence suggests that luck plays a significant role in wealth and income distribution, yet our societal narrative often ignores the role of systemic advantages and exploitation. Companies like Apple and Google, which have been found to engage in illegal business practices, have been able to do so with minimal consequences, further skewing the distribution of wealth. Additionally, the value of degrees and other markers of success have shifted from actual educational value to symbols of elite status, leading to a distorted understanding of merit and opportunity. Monopolies, fueled by political influence and wealth, further perpetuate this imbalance. It's crucial that we reevaluate our assumptions about success and wealth, and work towards creating a more equitable system that recognizes and addresses the role of luck and systemic advantages.

• Passive Investing's Impact on Markets: Mike Plummer warns passive investing can lead to potential liquidity crises and societal risks, as daily transactions impact market behavior.

  The notion of passive investing, where individuals mimic the behavior of others in the market without actively selecting investments, is flawed and can lead to significant risks for society. Mike Plummer, a market structure expert, argues that markets are driven by transactions, not information, and passive investors, such as Vanguard and BlackRock, transact daily, impacting market behavior. This can lead to a potential liquidity crisis, which history shows can result in the end of democracies. Plummer encourages individuals to be aware of this issue and suggests following his work on tier1alpha.com for deeper discussions on market structure and derivatives. Additionally, Plummer responds to Danny Fandango's question about the prevalence of scams in the crypto space by stating that the individuals drawn to crypto may be more susceptible to scams, but that doesn't negate the potential value of Bitcoin or other cryptocurrencies.