Download or listen to an audio recording of The MacGuffin, Part 1: The Corrupt Crypto ‘Revolution’.
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The collapse of the Terra/Luna crypto ecosystem, along with the general carnage in crypto more generally over the past few weeks, got me thinking. Not so much about the crypto price movements and the misbegotten Ponzi scheme of Terra/Luna per se (although yes), but more about the structure of the crypto “industry” and what it has become.
I thought a lot about Orwell’s other classic – Animal Farm – and the final scene where all the animals who had followed Napoleon the Pig’s orders to rise up against their human masters look through the windows of the farmhouse where the Pig leadership took up residence.
The creatures outside looked from pig to man, and from man to pig, and from pig to man again; but already it was impossible to say which was which.
Yay, crypto revolution!
The answer is not, as Boxer the Horse said before the Pigs killed him, “I must work harder.” The answer is not a more earnest crypto project. The answer is not Better Code TM.
We need to talk about how we got here and why the revolution failed. Then we can talk about what we’re gonna do.
That’s crypto-billionaire Sam Bankman-Fried, SBF to his friends, on stage at the Crypto Bahamas Conference a few weeks ago with noted crypto experts Tony Blair and Bill Clinton, discussing (per the New York Times) “blockchain technology and the war in Ukraine”. I am not making this up.
I figure Blair and Clinton were paid at least $200k each for sharing their keen crypto observations with the crowd, but SBF can afford it. He’s #60 on the Forbes 100 list with an estimated net worth of $24 billion, which is also why he can wear shorts and a tee shirt wherever he wants.
But sure, all you apes who hate Ken Griffin with the heat of a thousand undying suns because you can imagine all the ways in which Citadel can grind you up between its hedge fund operation and its market making operation, tell me again what a cool guy SBF is. Speak to me in hushed tones about how you dream of pitching your project to Alameda Research, SBF’s hedge fund, or getting your coin listed on FTX, SBF’s market maker.
Oligarchy is a grinding machine, no matter how charming the oligarch.
That’s the tattoo that crypto-billionaire and ur-raccoon Mike Novogratz showed off a few days before the Terra/Luna house of cards came tumbling down. For those of us old enough to remember the last time Novo blew up on a currency peg, we can only imagine his right arm has a tattoo of the Matterhorn and a Swiss flag with a giant Euro in the background.
That’s a still shot from the execrable crypto.com Super Bowl LVI TM commercial, starring the one and only Matt Damon. It’s almost too easy to make fun of Damon for shilling crap so crappily. Almost. Next time I’ll make fun of Tom Brady.
That’s a tweet from Brian Armstrong, the CEO and Chairman of the Board of Coinbase, telling us that there is no risk of bankruptcy for a company with a stock down 80%, a 36% year-over-year revenue decline, and $830 million of negative free cash flow over … [checks notes] … the past three months. Meanwhile, somewhere a small RIA is being referred to SEC enforcement for not adequately footnoting an S&P 500 chart with disclaimers that you cannot invest directly in the S&P 500.
If you don’t see that the crypto “industry” has become just as blindingly corrupt, just as oozingly fatuous, just as profoundly captured by the Nudging Oligarchy as the traditional financial services industry it was supposed to replace … well, you’re just not paying attention.
A year ago I wrote In Praise of Bitcoin. Here’s the money quote:
In my dystopian vision, Bitcoin isn’t banned or criminalized. Pfft. That’s a rookie, weak State move. No, I see a future where everyone buys Bitcoin. Where you are encouraged to buy Bitcoin. Where Bitcoin is sold to you morning, noon and night. Where normie economists get on conference calls late at night because they’re Bitcoin price-curious.
Except it’s not really Bitcoin.
Instead, it’s Bitcoin! TM — a cartoon version of the OG Bitcoin, either a Wall Street-abstracted representation of the price of Bitcoin or a government-painted version of Bitcoin in Dayglo orange. Either way — abstracted or painted — your Bitcoin! TM is trackable and traceable, fully KYC and AML and FBAR and SWIFT and every other US Treasury acronym-compliant. Either way, your Bitcoin! TM has all the revolutionary potential of a bumper sticker and all the identity signaling power of a small tattoo on your upper arm.
Bitcoin! TM doesn’t stick it to the Man … Bitcoin! TM IS the Man.
And that’s exactly what has happened.
But it hasn’t just been a transformation of Bitcoin into Bitcoin! TM. No, the securitization of Bitcoin into Bitcoin! TM has created an entire ecosystem of yield farming and staking across hundreds if not thousands of crypto coins, an ecosystem that is directly based on Bitcoin! TM as a funding mechanism and indirectly based (through Tether) as a liquidity mechanism.
This is, in fact, now the dominant real-world use case of Bitcoin. Not to transmit funds to the unbanked. Not to escape the monetary clutches of a failed state. Not to create an alternative payments system for goods and services. Not to achieve any of the laudable OG Bitcoin goals. Nope, the overwhelmingly dominant real-world use case for Bitcoin today is to fund a trading account.
My god, that’s sad.
Sadder still, this vast crypto ecosystem of yield farming and staking, all ultimately based on Bitcoin! TM for funding and liquidity, has in turn either subverted or crowded out every decentralized financial project of which I am aware.
It wasn’t enough for the crypto-billionaire club – guys like SBF and Mike Novogratz and Michael Saylor and Brian Armstrong and Vlad Tenev and the Winklevi – to turn Bitcoin into Bitcoin! TM. No, no, they didn’t stop there.
They also went and turned DeFi into DeFi! TM.
All of crypto has been turned into tables at the Wall Street casino, just as far as the eye can see.
How did they do it?
By giving us a MacGuffin.
The Maltese Falcon is a MacGuffin.
Private Ryan is a MacGuffin.
The design plans to the Death Star are a MacGuffin.
The jewels/gold in a heist movie, the papers/computer file in a spy movie, the “love match” in Bridgerton, the rug that really ties the room together in The Big Lebowski, Doug in The Hangover, the Infinity Stones in the MCU, Rosebud in Citizen Kane, Baby Yoda in The Mandalorian Season 1 … these are all MacGuffins.
A MacGuffin is an Object of Desire, around which merry plots are constructed to thrill/amuse/frighten/engage the viewer.
Most movies you’ve seen over the past 40 years have a MacGuffin embedded within them, an Object of Desire introduced to the audience midway through Act 1 of the universal three act structure, revealed in its true form/power midway through Act 2, and claimed by the protagonist near the peak of the rising action arc at the conclusion of Act 2.
Seriously, just google whatever movie you like + “three act structure” and you’ll see what I mean.
Why are movies and TV shows built on MacGuffins and three act structures? Because they work! Our primate brains have evolved over millions of years to make sense of the world through story arcs. We literally have clusters of neurons in our brains that are specifically engaged to identify MacGuffins in what we see and hear, and still more clusters of neurons that make us want the MacGuffin and grok the story arc that propels both fictional characters AND OURSELVES to pursue the MacGuffin.
Hollywood is an industry built on understanding our desires, built on creating product to satisfy those desires.
So is Wall Street.
Here’s old friend SBF explaining to Matt Levine, Joe Weisenthal and Tracy Alloway how MacGuffins work in the crypto biz, specifically the yield farming and staking ecosystem of DeFi! TM, as funded by Bitcoin! TM.
Wherever SBF says “box”, insert the word “MacGuffin”.
Matt Levine: (21:17)
Can you give me an intuitive understanding of farming? I mean, like to me, farming is like you sell some structured puts and collect premium, but perhaps there’s a more sophisticated understanding than that.
Sam Bankman-Fried: (21:28)
Let me give you sort of like a really toy model of it, which I actually think has a surprising amount of legitimacy for what farming could mean. You know, where do you start? You start with a company that builds a box and in practice this box, they probably dress it up to look like a life-changing, you know, world-altering protocol that’s gonna replace all the big banks in 38 days or whatever. Maybe for now actually ignore what it does or pretend it does literally nothing. It’s just a box. So what this protocol is, it’s called ‘Protocol X,’ it’s a box, and you take a token. You can take ethereum, you can put it in the box and you take it out of the box. Alright so, you put it into the box and you get like, you know, an IOU for having put it in the box and then you can redeem that IOU back out for the token.
So far what we’ve described is the world’s dumbest ETF or ADR or something like that. It doesn’t do anything but let you put things in it if you so choose. And then this protocol issues a token, we’ll call it whatever, ‘X token.’ And X token promises that anything cool that happens because of this box is going to ultimately be usable by, you know, governance vote of holders of the X tokens. They can vote on what to do with any proceeds or other cool things that happen from this box. And of course, so far, we haven’t exactly given a compelling reason for why there ever would be any proceeds from this box, but I don’t know, you know, maybe there will be, so that’s sort of where you start.
And then you say, alright, well, you’ve got this box and you’ve got X token and the box protocol declares, or maybe votes by on-chain governance, or, you know, something like that, that what they’re gonna do is they are going to take half of all the X tokens that were re-minted. Maybe two thirds will, two thirds will offer X tokens, and they’re going to give them away for free to whoever uses the box. So anyone who goes, takes some money, puts in the box, each day they’re gonna airdrop, you know, 1% of the X token pro rata amongst everyone who’s put money in the box. That’s for now, what X token does, it gets given away to the box people. And now what happens? Well, X token has some market cap, right? It’s probably not zero. Let say it’s, you know, a $20 million market …Matt: (23:56)
Wait, wait, wait, from like first principles, it should be zero, but okay.
SBF: (23:59)
Uh, sure. Okay. Completely reasonable comments.
Matt: (24:04)
I mean, that’s not quite true, but, like, when you describe it in this totally cynical way, it sounds like it should be zero, but go on.
SBF: (24:10)
Describe it this way, you might think, for instance, that in like five minutes with an internet connection, you could create such a box and such a token, and that it should reflect like, you know, it should be worth like $180 or something market cap for like that, you know, that effort that you put into it. In the world that we’re in, if you do this, everyone’s gonna be like, ‘Ooh, box token. Maybe it’s cool. If you buy in box token,’ you know, that’s gonna appear on Twitter and it’ll have a $20 million market cap. And of course, one thing that you could do is you could like make the float very low and whatever, you know, maybe there haven’t been $20 million dollars that have flowed into it yet. Maybe that’s sort of like, is it, you know, mark to market fully diluted valuation or something, but I acknowledge that it’s not totally clear that this thing should have market cap, but empirically I claim it would have market cap.
Matt: (24:57)
I agree.
Joe: (24:59)
It shouldn’t have any market cap in theory, but it practice, they always do. Okay.
SBF: (25:03)
That’s right. So, and obviously already we’re sort of hiding some of the magic impact, right? Like some of the magic is in like, how do you get that market cap to start with, but, you know, whatever we’re gonna move on from that for a second. So, you know, X tokens [are] being given out each day, all these like sophisticated firms are like, huh, that’s interesting. Like if the total amount of money in the box is a hundred million dollars, then it’s going to yield $16 million this year in X tokens being given out for it. That’s a 16% return. That’s pretty good. We’ll put a little bit more in, right? And maybe that happens until there are $200 million dollars in the box. So, you know, sophisticated traders and/or people on Crypto Twitter, or other sort of similar parties, go and put $200 million in the box collectively and they start getting these X tokens for it.
And now all of a sudden everyone’s like, wow, people just decide to put $200 million in the box. This is a pretty cool box, right? Like this is a valuable box as demonstrated by all the money that people have apparently decided should be in the box. And who are we to say that they’re wrong about that? Like, you know, this is, I mean boxes can be great. Look, I love boxes as much as the next guy. And so what happens now? All of a sudden people are kind of recalibrating like, well, $20 million, that’s it? Like that market cap for this box? And it’s been like 48 hours and it already is $200 million, including from like sophisticated players in it. They’re like, come on, that’s too low. And they look at these ratios, TVL, total value locked in the box, you know, as a ratio to market cap of the box’s token.
SBF: (26:43)
And they’re like ‘10X’ that’s insane. 1X is the norm.’ And so then, you know, X token price goes way up. And now it’s $130 million market cap token because of, you know, the bullishness of people’s usage of the box. And now all of a sudden of course, the smart money’s like, oh, wow, this thing’s now yielding like 60% a year in X tokens. Of course I’ll take my 60% yield, right? So they go and pour another $300 million in the box and you get a psych and then it goes to infinity. And then everyone makes money.
Matt: (27:13)
I think of myself as like a fairly cynical person. And that was so much more cynical than how I would’ve described farming. You’re just like, well, I’m in the Ponzi business and it’s pretty good.
Joe Weisenthal: (27:27)
At no point did any of this require any sort of like economic case, it’s just like other people put money in the box. And so I’m going to too, and then it’s more valuable. So they’re gonna put more money in, and at no point in the cycle, did it seem to like, describe any sort of like economic purpose?
SBF: (27:42)
So on the one hand, I think that’s a pretty reasonable response, but let me play around with this a little bit. Because that’s one framing of this. And I think there’s like a sort of depressing amount of validity…
Matt: (27:53)
Can you comment on like the sustainability of that? Because, you know, on the one hand you’re like, well, a trillion dollars of institutional money is going to come into Bitcoin. And on the other hand you’re like basically there are a lot of Ponzis that have done really well.
SBF: (28:06)
Right. So let me, okay, cool. I’ll stay on the cynical route, think about like cynically, what could happen here? Well, okay. So you’ve got this boxes and it’s kind of dumb, but like what’s the end game, right? This box is worth zero obviously. And like that, you know, you can’t like keep this smart cap or something. But on the other hand, if everyone kind of now thinks that this box token is worth about a billion dollar market cap, that’s what people are pricing it at and sort of has that market cap. Everyone’s gonna mark to market. In fact, you can even finance this, right? You put X token in a borrow lending protocol and borrow dollars with it. If you think it’s worth like less than two thirds of that, you could even just like put some in there, take the dollars out. Never, you know, give the dollars back. You just get liquidated eventually. And it is sort of like real monetizable stuff in some senses. And you know, at some point if the world never decides that we are wrong about this in like a coordinated way, right? Like you’re kind of the guy calling and saying, no, this thing’s actually worthless, but in what sense are you right?
Matt Levine calls this a Ponzi scheme, and of course he’s right. But it’s so much more than that! Calling this a Ponzi scheme trivializes what SBF is describing. It puts crypto into an easily grokked story arc – oh, haha, yield farming is just a Ponzi scheme – and allows us to go on with our day, listening to CNBC and reading the Wall Street Journal and advising clients and trading our personal account, same as we ever did.
What SBF is describing is not just a Ponzi scheme and not just what’s happening in this crypto corner of Wall Street.
As SBF quite rightly goes on to say in the interview (but got only a fraction of the attention), this is exactly the same fundamental structure of the VC world.
I’ll go even further.
What SBF says about crypto and VC can be said equally about every asset class, every facet of capital markets, both public and private.
This is the fundamental structure of the business of markets, where Objects of Desire wrapped up in merry plots and three-act structures are sold to to us night and day, over and over again, not for the mere price of a movie ticket but for the accumulated wealth of a lifetime.
It’s MacGuffins all the way down.
Where does this all go from here? It’s clear enough where crypto goes, again courtesy of SBF.
Which is why we need federal oversight.
LOL. Did you think this would end any other way?
Government oversight isn’t to be forced on crypto, it is to be invited on crypto, invited by the very same billionaires who turned Bitcoin into Bitcoin! TM and DeFi into DeFi! TM.
Why? Because there is no difference between the revolutionary pigs and the incumbent humans. They are indistinguishable, all merged together into a single Nudging Oligarchy, all looking to their natural partner, the Nudging State, to complete their reign.
And when SBF calls for “oversight”, he means literally that. Not the control of a jackbooted thug, but the much more powerful control of the ever-watchful panopticon, looking out over the world of money, missing nothing, allowing nothing to emerge that would threaten its position.
The US Treasury is the Eye of Sauron — a gigantic panopticon tower that sweeps the world with its unblinking gaze.
This is the “federal oversight” that the billionaires want.
This is the “federal oversight” that the billionaires will get.
This is the “crypto revolution” that the billionaires want.
This is the “crypto revolution” that the billionaires will get.
If we let them.
I tell you that there is another way, a revolution not of the financial system, which was always doomed to be the failure we are witnessing today, but a revolution of the human heart, which was always the only revolution that ever mattered.
A revolution of the human heart won’t be televised, and it won’t make you rich. Or maybe it will, I dunno. That’s besides the point. The point is to develop a process of resistance to the MacGuffin, a process of retraining our brains to see the Objects of Desire and the story arcs created around them for what they are – a means of control, an assault on our autonomy of mind.
What are we gonna do about it? Come back next month for The MacGuffin, Part 2 and I’ll tell you.
Brilliant. And I’m so looking forward to part 2!
Cool, like you know, like whatever like.
I’ve been waiting for this one! Having been invovled in DeFi since before it was known to be DeFi, the piece on Bitcoin always struck me as applicable to the entire crypto space. It really wasn’t until the Terra implosion that I truly realized what it meant for Defi™ to materialize. Looking at the SBF and FTX playbook, almost admirable players compared to some of their peers, it’s obvious this was always what it was going to become.
It pains me, and I should probably just end the post here, but I can’t help but try to see the brighter side of the space. I belong to a younger generation than Ben, so perhaps its my misguided youth. I know better, I always described crypto was always weaponized narrative, but there was a spirit that came with Bitcoin, DeFi, and whatever it becomes next (Web3?) that seemed to fit a needed culture of the moment for my generation.
DeFi was a builders paradise. The fact that Bitcoin had to be adopted, rather than shutdown, was an indicator that the “blockchain” could serve as a platform of some resilience for at least some period of time. In that time, what was developed was a foundation of individualism, ownership, and futurism, oriented around novel digital networks. This foundation provided a bottom-up innovation that took place in the closely guarded, ever-corrupt, and ever-inaccessible realm of finance.
Clearly this wasn’t enough. The larger movements in society, the Sauron, Nudging, and Racoon cultures were never really addressed by any of this. Rooted in a reactionary energy and built to serve a digital culture, the tools of narrative where almost doubly effective in crypto. The same foundation that should have been the strengths of the system inevitably served as a fundamental weakness.
It’s a damn shame and I still can’t help but think that the we can use this to build better systems and tools in society. I see signals of the mechanisms and solutions that can create cash-flowing assets, based on productive economic activity, and rooted in empathetic social systems. But these are drowned out in the noise and often neglected. I know Ben recognizes some of this himself as the ideas proposed in the Green Protocol or what’s been discussed in NOAH and SEED leverage some of these tools. But again, whether this turns into anything like the revolution it was advertised as is still up for debate. Or perhaps it’s not and never will and it’s only my youthful optimism.
I’m really interested to see where this series goes next. I’m cautiously optimistic (see youthful disclaimer) that this ends with something as constructive and hopeful as the Narrative and Metaverse series did. Maybe I should just listen to what the cultural icon of my generation would say, “Don’t ever play yourself”.
I enjoyed this. I think some aspects of the fundamental differences between Bitcoin and “everything else crypto” are missing, but that’s not a serious impediment to the points made in this article. I’m looking forward to the next one.
That’s a fair observation, Em. Will have more to say about this in Part 2, but in general I’d say that I believe all of crypto (including ETH) operates, not on a gold standard, but on a Bitcoin! TM standard. Bitcoin! TM as the terra firma for funding, USDT for liquidity.
Thanks for a great piece. I’m very much not crypto-savvy, so SBF’s example was pretty powerful to me. Can I ask a potentially dumb question: why does it yield 16% at 100mm capitalisation?
Reading this, I couldn’t help thinking how similar the Bitcoin! TM crowd is to the Red Guard women from 3 Body Problem who are fully engaged and kill Ye Wenjie’s father during the struggle session. When Ye Wenjie finds them later in the book, they’ve been so broken and abused, they can’t even bring themselves to apologize. Everyone bringing the Cultural Revolution about suffered tragedies.
How many Bitcoiners will face a similar fate?
Great stuff!
Not dumb at all. It yields 16% because the owners of the MacGuffin (either through protocol or through governance tokens) say that it yields 16%. It’s yield by proclamation. It’s yield by fiat.
A brilliant note for many reasons. I closed all my crypto positions in January. My personal view is that the crypto boom - or rather, bubble - of the past 2 years is because the Fed started printing money and giving it out for free, and yet the pandemic hamstrung the real economy in such a way that there was nothing for that liquidity to do. It is the same reason that throughout 2021 you were hearing “stocks only go up.” There was literally nothing to do with that liquidity except speculate with it. So, when the Fed indicated they were serious about turning off or at least turning down the money printer, it’s time to get out.
The thing that has truly astonished me in recent months is the level of blatancy. I share Matt Levine’s aghast-ness at how so many supposed crypto “believers” are open and frank that they are running Ponzi schemes. I want to give them the benefit of the doubt and say, they are trying to be optimistic about a new paradigm of how to store and exchange value.
But there is something inherently cynical about the idea of crypto to begin with. Yes, it is true that fiat currencies are not in reality based on anything but collective belief in the value of the currency. But no fiat currency started off that way. Every traditional currency started off as being back by a claim on some kind of hard asset considered to be of intrinsic value by everyone regardless of who was issuing the currency. People start off trading in, say, gold, then they eventually find this problematic (hard assets are costly to acquire, secure, and transfer), so solve that problem by printing paper which is a theoretical claim on the gold. Then over time they create too many claims on the gold by printing too much paper, they try various tricks to relieve this but eventually they will have to unlink the paper from the gold. At that point it becomes fiat that is backed by the credibility of the issuer. The value of the currency is established by “fiat.”
There is therefore a certain ignorance or dishonesty in claiming that anyone can just create currency which backed by nothing other than the belief in the value of the currency and (cryptographically secured) agreement on the global balance of all accounts. “Fiat” currency is kind of a misnomer in a way. The currency’s value is established by fiat but what actually backs the currency is the decades or centuries of that currency being redeemable for something of value, it used to be gold directly from the treasury of the issuer, now it is gold (in the private market) or something else of real economic value.
Now with crypto you have people going around saying, “Look these coins don’t have anything behind them but belief and agreement yet, but some of these coins might build a narrative of reliably being linked to real economic value, one day.” How can that ever become a true medium of exchange or store of value? It looked like it might work for a while because when money is easy, people feel free betting on the “maybe some day” part, or just purely betting it will go up and not down, or betting that others will bet on it going up for a while and they won’t be left holding the bag.
“You know, my original idea for how to save the world was to use the tools of the Snake to beat them at their own game…
Ego, man, it’s a trip.
Not that I couldn’t pull it off. I really think I could! At first. But before long the project would be corrupted, maybe by me, maybe by someone else. Not intentionally, I’m sure, but eventually, for sure. I mean … this is one of the core stories of the human condition, the hero taking the MacGuffin of Power to do good, only to have it corrupt him over time. You can’t outrun a story like this, no matter how much your ego tells you that you can!”
All I could think about while reading this note was the above section from the Luther Protocol.
Best (and saddest) ET article to date. And that’s saying a lot. That podcast exchange crystalized everything for me, and I thought I was clear on Crypto and Ponzi and oligarchs before reading this. Thank you Ben. Wow.
I never get into Bitcoin (or Bitcoin!) but Ethereum got me back coding - something I enjoyed but had moved away from after college. The early days (for me around 2016) were fun, learning solidity (smart contract language for Ethereum), setting up apps, etc. made some money but not life changing by any means. When DeFi first happened it was interesting seeing how an app could be put together to automate a process that was done by a middleman (e.g. Uniswap) but once Compound issued its token the money grab commenced with DeFi Summer… I have nothing against money in terms of financial freedom (I’m not anti-VC by any means) but I’m completely against cronyism/greed with DeFi…
With NFTs, initially, it was something fun and an easy way to self-identify with a larger group of people (needing a NFT to be able to be validated into a discord server made me think back to the old Bulletin Board Systems [BBS] from my teenage years as well as the 8 bit gaming graphics. It was an online social/gaming club. Then the money came again and commercialized it fully. Once again, it was fear of missing out / get the next cash grab / insatiable greed.
Now with DAOs (decentralized autonomous organizations) - I really like a few of them, like Planner DAO (for financial advisors interested in crypto) and Developer DAO (for coders and those looking to learn)… part of me hopes that there will be some that will remain true to their nature and not sell out. yet, the track record with human nature we know the eventualities…
Web3 started the campaign to financialize/commercialize the entire internet… Yet, the desire to build and explore emerging technologies makes me want to keep searching and developing my skill set (financial / coding skills) for my personal Make-Protect-Teach version.
MacGuffins exist because there exists the possibility for something like a revolution of the human heart—something that, paradoxically, must and can only be pursued both in deep community and through what Nietzsche described as our “loneliest loneliness.”
Brilliant. Proves me right about putting the whole crypto business in what Charlie Munger calls his “too hard” box and moving on.
Great job equating SBF’s “black box” with the MacGuffin, but I would like to bring up an OLD SCHOOL ET topic…Common Knowledge.
I think the Common Knowledge surrounding crypto changed with the Terra/Luna blow up. I’ve tried to warn my friends about the risks Tether poses for the past coupe of years, but their their eyes glazed over every time…last week that changed.
What happens when everyone knows that every knows stablecoins are done?
Crypto Insiders (the only ones who really redeem Tethers) seem to have reacted to this new common knowledge.
I would definitely like to hear Ben’s view on this and if there is anyway the new common knowledge on stable coins can be measured.
@bhunt
Bitcoin is more than just a MacGuffin. Bitcoin really is art. The more I see and hear about the Bitcoin universe, the better I understand my life as a human.
Bitcoin is art. A concept is not in itself a private asset. The story of bitcoin belongs to everyone and like it or not, we all have a walk-on part in the soap opera.
Blair on stage in a suit next to SB Fried in shorts and a T-shirt, aka Bitcoin Revolution uniform, is costume drama.
Most entertaining, 5
stars.
There’s another comment here that this is one of the saddest ET notes, and I tend to agree. There’s some optimism on a personal level, but the overall mood is crushing defeat - and I want to make a case for why I think that’s premature, even if, unfortunately, likely.
A number of people on Twitter argued that this was all true, but Bitcoin is different and needs to be separated. I think that’s right to a large degree - the Bitcoin “community” has an ethos that overlaps significantly with ET, and owning and saving in Bitcoin is an authentic expression of identity (as Ben argued in his In Praise of Bitcoin). But it’s also not entirely true that Bitcoin is different - it’s part of many “crypto” portfolios, many have bought some in a Coinbase/Robinhood account hoping the price rockets, and some % is used to collateralise some of the gross DeFi ™ products. It’s co-opted to a degree.
But Bitcoin is different despite the above. The overwhelming use case for Bitcoiners is saving. I don’t know the exact numbers, but I’d argue this could probably be shown empirically too: supposedly over 80% is stored outside of exchanges, and anecdotally the “stacking” mentality and low time preference dominates. Many welcome that Bitcoin is rejected by crypto people who think it’s outdated or toxic or whatever.
So I agree there is such a thing as Bitcoin ™, and if that’s all Bitcoin was then it’s failed. But that’s not the case, and most of the development and conversation is focused on making it less so: self custody, privacy protocols, more decentralisation of nodes and mining. It’s designed to resist being fully co-opted. Wall Street turning it into products doesn’t stop it being used in the way it’s intended. Even the Eye of Sauron can be thwarted by those who make the effort.
I’m not ready to give up on it. It’s one of the few things we have that is resistance in some part, and it drives a community of people with values that closely align with ET. We can be honest about threats from the oligarchy, but we shouldn’t cast it aside entirely.
Okay fine - wholesome Bitcoiners may be chumps and someone else’s exit liquidity at some point. But I don’t think that has to be true long term if we fight for it.
Hi Blake, thanks for this. For what it’s worth, I agree with most of what you said and your point about Bitcoin! TM and Bitcoin being two separate things is an important one.
The current market meltdown is likely (yet another) opportunity for bitcoin to display its inherent robustness (maybe even a touch of antifragility). Bitcoin-the-price is certainly lower, but Bitcoin-the-open-source-software-network remains exactly as it was.
DeFi! TM might be a fad, but Bitcoin’s decentralised system remains which means that the price may be down (forcing weaker/nervous hands to exit) but the system itself is near impossible to shut down.
Bitcoin!TM might take a serious blow, but Bitcoin itself has no centralised operations to shut down, or CEO to haul in front of anyone. And more importantly, Bitcoin the network improves upon itself after every crisis.
In many ways Bitcoin’s current volatility as it grows in significance is both a pro and con. It’s a con for well…obvious reasons. But it can be a pro due to its ability to build the immunity of the system. This is a terrible metaphor…but perhaps investors in Bitcoin!TM is the infection and current volatility is the system response?
Convergence, co-option, and delightfully ironic timing:
Powerful commentary from the heart…
At the risk of being too impatient to wait for part 2, I would like to raise a little red flag.
As much as I love the article and the inoculating insight of The Macguffin (seriously, thank you!), I also see the need for us to raise a red flag or two of our own.
I have a concern with the idea that “It’s Macguffins all the way down.” It speaks of a potentially disquieting abdication on our part. Clearly there is narrative manipulation at every level of the economy. One of my personal favorite truth-tellers is Jaron Lanier. As he put it in The Social Dilemma,
“In the online world the only way that two people connect is through a sneaky third person who is paying to manipulate those two people. We’ve created an entire global generation of people that were raised within a context where the very meaning of communication and culture is manipulation. We’ve put deceit and sneakiness at the absolute center of everything we do.”
So yes, in a way, it is Macguffins all the way down.
But there is a grave danger in stopping there. For one thing, we can all just smugly look down at all of the poor souls who don’t understand what we understand. Worse though, is that if we adopt this ideology, then we are essentially consenting to the worldview that these Macguffin-makers leverage to justify their actions.
And let’s face it, some of us have engaged in and profited from Macguffin-making ourselves. I know that I have.
I have serious doubts that a revolution of the heart will come from what ultimately amounts to better Macguffin-making.
I fully realize that such questions put us squarely back in the realms of religion and metaphysics and that those are uncomfortable topics in our relativistic age that believes that it has transcended faith.
I just don’t really believe it anymore. I think that we’re all inescapably religious and metaphysical and that until we examine our deepest beliefs, we will continue to go in circles of Macguffin-made power revolutions.
I am having a fair amount of difficulty understanding how you reached this particular conclusion. I don’t think that is what @bhunt was saying. How did you get here?
I’m still fairly new to the Pack, so I’d be surprised if I’m not missing something! I appreciate the understanding of narrative. What I don’t yet understand is what the collective view is of what is the truth? Where’s the line between Bitcoin and Bitcoin!TM? Is it just a matter of degrees?
I hear that Bitcoin is Art while Bitcoin!TM is a lie but I’m not really sure what that means.
I’d love to better understand how we distinguish truth from lies.
You get to the heart of the question here…real world use case. Defi tokens have shown they are simply tools for the transfer of wealth from latecomers to early birds - but Bitcoin as a store of value, long term, could be something. However, until the last coin is mined there is a unit cost for each block. Does anybody know what that cost is on average? If the store of value equivalent in actual currency in circulation goes below that cost, then does your savings use case argument fail? I mean, how willing are the miners to subsidize the ecosystem? And, of course we’ll all be dead by then, but when the last coin is mined and every hodler is saving their coins, what will the value be of a digital relic that started the age of the blockchain ponzi?
I have serious doubts bitcoin network integrity will survive once the block subsidy is gone. If transaction fees are high enough to make it worthwhile for miners to mine, network users will be incentivized to bundle transactions on a layer 2 solution lowering transaction volume on layer 1. Lower transaction volume means decreased revenue for miners… It’s a downward spiral.
Don’t we all! I know I do. If only it were as simple as distinguishing between halves of a binary. “True” or “false” is a narrative structure easy to grok, but this approach assumes human consciousness is capable of more than it is. For example, your question about bitcoin narratives…
Bitcoin is a story written in software. A story often interpreted as a rebellion against a corrupt financial system centrally controlled by kleptocratic elites intent on inflating away the life savings of the working classes. Considering the headline embedded in the genesis block by bitcoin’s author, an argument can be made that this interpretation is directionally aligned with the author’s intent. The story of bitcoin is generally understood as being a way to save/store the fruits of ones labor in a form which cannot be stolen by central banks.
The desire to protect ones life savings is the MacGuffin powering the merry plot of bitcoin. It is a valid desire, and it is supported in the story by plot elements such as decentralization, hard money, censorship resistance, etc. The structure of this story is, I suspect, what Mr. Hunt means when he says bitcoin is “good art”.
Unfortunately, all good art can be copied for personal gain by any ne’re-do-well raccoon intent on enriching themselves at others expense. Bitcoin!™ is the cheap knockoff. It is a story crafted to appear as if it shares the same story arc, but where the plot elements undesirable to the authors have been removed and replaced with plot elements designed to serve the desires of the authors.
So, how does one distinguish between truth and fiction? Well, this is where it gets tricky.
Does preserved life savings lie at the end of bitcoin’s story arc? We don’t know. That story is still being written. Furthermore, even if world events lead to a situation where everybody knows that everybody knows bitcoin is how you preserve life savings, that does not mean this will always be “true”. Other MacGuffins have played the same role bitcoin currently does in the ageless story of preserving life savings. The structure remains even if the role is played by a new actor. For examples, refer to the brilliant post linked below.
The “truth” of bitcoin is entirely determined by common knowledge. If everyone knows that everyone knows bitcoin is how you preserve life savings, then it will be a way of preserving life savings… until it isn’t. All of the roles in all of the ageless stories can be played by any new actor the crowd chooses to play the role. And the crowd’s tastes in leading actor change over time. What was fashionable in one ear is often out of fashion in another. What was useful at one time may be less useful in another.
Truth is less of a rigid binary and more of a dynamic process in which we engage. It’s not so much about figuring out what to do as it is choosing how to be. All truth is stories we make up. It has always been about deciding what kind of story we want to live in. We can either make that decision together as a community or have it “nudged” upon us by others who may not share our values.
The truth of bitcoin is entirely determined by individual conscious and purposeful action. This may be shaped by the individual’s perception of common knowledge or even ‘in a bit of a mood’ thing (different conversation?).
Common knowledge is not incarnate. It is a spontaneous crowd phenomena and secondary to the real flesh of individual preferences and subjective opinions.
Maybe a bit like Ray Liotta munching on a piece of his own fried brain, if he had been thinking about a common narrative when Hannibal cut it out.
Or maybe not, you decide obvs.
“Nobody goes there anymore, it’s too crowded!”
This is a comprehensively researched and modelled problem in Bitcoin, but general consensus is that there won’t be any disruption. Just Google something like “what happens after all the Bitcoin are mined” if you’re keen to wade in.
This 100%.
And why the fact that Bitcoin grows as bottom-up and emergent in terms of value (financial and art) is such a key difference to the status quo. It’s the opposite of fiat, and must continue to resist the temptation of fiat - “Bro Elon digs Bitcoin bro!”.
If your argument against Bitcoin being able to work long term is the fragility of common knowledge (I think it’s a valid, but debatable argument, fwiw) then you need to apply it to all the alternatives too, and then come to a conclusion about what is likely to resist the strongest. I’m always hearing about Bitcoin failing, and getting banned, or getting co-opted, or hacked, with the conclusion being that we should content ourselves with the warm embrace of a fiat bank account, a stock index, and some hyper-monetised real estate as if they’re immune.
Also, from Matt Levine a few months ago, kind of explaining the inevitability of crypto being bastardized in the way Ben argues it has been.
https://www.bloomberg.com/opinion/articles/2022-01-11/who-can-resist-the-crypto-boom
I’ve heard this a few times and nobody has ever been able to actually explain it in a way that distinguishes it from the South Park Underpants Gnomes sock stealing scheme.
BTC is priced in USD. Capital appreciation eventually has to be realized in USD or some other actual, usable currency. “Crush fiat by making computer money that you will have to at some point turn into fiat in order to pay your bills” doesn’t seem like a serious revolution. Imagine organizing a huge community that seeks to make meaningful changes to the way our lives are governed. The community passes laws with great enthusiasm. Then it goes to Congress, hands them the proposed laws, and politely asks them to implement them. Congress asks them if they, you know, vote in local elections. The community starts shouting about how voting would just be validating this sick, grotesque system. Congress then laughs, tosses the paperwork aside, and then goes and does some insider trades. Revolution!
BTC is an awesome way to get money out of or in to places that are otherwise a mess. It’s great for online transactions that otherwise couldn’t be done with traditional means (read; black market). It’s a cool technology. But the maxis have superglued a party hat on a donkey and are calling it a unicorn.
I thought this video was really, really well done.
https://t.co/blOio0kxOz
This.
BTC can exist in its own alternative universe but if it can’t be converted into something real in this one, then its being rich on paper. Until the majority of the world’s utility (transportation, energy, clothing, food, etc) can be accessed in BTC - it remains secondary to the currency in which the world trades. The all-mighty dollar.
Really appreciate the thoughtful reply Tim!
I think that’s a good point. But it’s also the problem for stocks, which in much the exact same way are not real.
The representation of work, products, and resources (aka money) using currencies is fraught with mis-allocations because of the shape-shifting nature of currency pairs and their constant variations. I have watched Gold bugs proselytize the intrinsic value of GOLD for decades. More recently, I have seen BTC fans proselytize the intrinsic value of BITCOIN as if it were DIGITAL GOLD. Which is more likely the PONZI: GOLD or BITCOIN, or BOTH?
A Ponzi scheme involves handing over your money to someone else and believing in their agency and accepting a deliberately propagated common knowledge without adequate question.
Gold and Bitcoin can be about agency of the self in contrast to assimilating unto mass habituation. There is a critical autonomy, a nobility of mind and a will to maintain an autonomy of economic action that was not enough present in the ‘clients’ of Madoff.
25 octal - Agreed!, except I think the agency is not the self but rather the consensus (common knowledge or mass habituation). All currencies are subject to narrative, and so we see the missionaries for the A-listers working hard for their teams. So not a Madoff Ponzi but a consensus Ponzi: I hand over my tokens to the consensus and the growing consensus returns tokens (perhaps another denomination) to me, with which I can acquire more money (work, products, resources) than the original lot. Cheers!
Asad, yours is certainly a full-hearted a post, which I’m sure Pack members all appreciate. I belong to Gen-X, entered the workforce in 1995, and between then and the dot com crash our generation believed we were going to bring fundamental change to the world, and the world was changing and becoming “a smaller place” with more accountability for human rights abuse and environmental damage, but none of that actually happened beyond some tokenism. I feel like every generation is sold the same story, packaged around the technology and zeitgeist of its time, but none of it true and none of it is going to happen. We’ll continue to live in a world similar to the way it has always been, and seeming on a worsening trend for all of us in the present.
Question - why do we still participate in capital markets these days when we know that they are increasingly in the same business as Hollywood? This is becoming a serious question for me. I still harbor dreams of changing the way that people can and do invest. Meanwhile, Ben’s “proof of plant” project is a sobering reminder that nothing true scales.
My personal dream is to help build new technology that offers inoculation against the manipulative technologies of the nudging oligarchy so that people can at least know what’s coming at them and have a little bit more choice in the future that they will help create.
It’s a tough sell in a VC world that only wants to know how we “capture” customers and when will the VC get a huge 100x check.
So, you think that Madoff clients should have questioned the entire broker/dealer infrastructure in the US? That they should have suspected that a registered, highly regulated broker/dealer that had been investigated and cleared by the SEC was not actually engaging in any trading and held any stocks? That they should have known that the court system would ignored SIPA (Securities Investor Protection Act) in favor of bankruptcy courts because SIPC was an underfunded institution that really could not meet an adequate broker/dealer failure?
I wonder how effective is the dot com bubble as a comparable. There was a boom and bust. There were the narratives of how “these technologies will change everything”. There were the few standouts (Google, Amazon) and plenty of imitators. And though the value that the disrupters brought to the table is intuitive to us today, it wasn’t necessarily so clearly apparent in the 90’s.
So on one hand, it’s tempting to overlay the dot com bubble over the crypto universe, and say that, sure, most of the posers will get washed out (along with their investors), but the real deal Bitcoin and some others will weather the storm.
However, I would say that regardless of the historical/social similarities (which I think are more red herrings than predictors), there are the two questions that will determine the path forward:
How much value, to how many individuals, can crypto create/provide?
What kinds of economic/political headwinds will it face?
My ignorant answer to question 1 is that crypto has done a poor job at illustrating mainstream (non-investment) value. (Though the 3rd world currency-alternative story sounds pretty good.)
My ignorant parroting of answers to number 2 is that between the raccoons and the oligarchs, the headwinds for defi will be quite strong.
There’s also a bonus 3rd question: how soon? Because there are plenty of sci fi crypto use cases that are still 10+ years out. That said, online retail, 25 years after the dot com boom, is still just 20% of total retail in the US, which says that A. Slow adoption is not necessarily a problem, but also B. If online retail is so slow to adopt, how slow will adoption of the more complex/non-intuitive crypto use cases be?
So I’m curious to know, what were the neighsayers saying about the dot com boom in the 90s? Did they sound the same as the crypto neighsayers today? Did they sound like me?
“Buying books online? Who the hell buys books online?” “What is this?? A blank page with a logo and a text input line? I don’t get it.”
Hindsight provided pretty robust stories for Amazon and Google. What is the robust hindsight narrative for crypto that turns the lives of its customers upside down, without asking these same customers to turn their own lives upside down first in order to become adopters?
A long term market beating yield of more than 10% p.a. would cause me to look very hard at the profit engine. But then I have hard experience of senior secured bonds and not enough control of ‘pre-packaged’ bankruptcy proceedings.
A Ponzi is defined as an impossible promised yield.
Deception with the intent to steal is common fraud. Didn’t the bankruptcy court reclaim some of the early investors profits in the Madoff case?
Anyone who seeks autonomic action is part of the checks and balances against totalitarianism. The degree of success that they achieve, in respect of the effort that is exerted, would always be relevant to the proximity of impending tyranny and the virtue of their actions must be judged by this measure.
As I am planning to buy some land and plant a bunch of stuff in any case, Proof of Plant would probably satisfy your second criterion. Pleasantly skeptic about the first one (“turn my life upside-down”).
I lived/invested/traded thru Bubble 1.o (obviously there were many bubbles prior to that one but I wasn’t investing). The primary difference is not in the level of skepticism about what might be in the future in new business models. In that era there were not as many pools of capital that could sustain so many “unicorns” so there was less impact on the established capital stock. Most of the money that moved markets was in pension funds, mutual funds, and hedge funds; all active professionals that had prudent man dictates. We would marvel at some of the ridiculous securities that managed to get public, but they were not in the indexes. And, they lacked profits, dividends, or a long enough operating history that failed them as possible investments by organizations with rules. The NYSE and NASD knew the tenets of the capital managers so they used to refuse to let companies get public that couldn’t check the boxes. The private markets were not much of an ecosystem in that era. Once the day traders of that era blew themselves up when the trend changed and the margin calls materialized, the speculative pool of capital in the public market that created the likes of Pets.com was gone.
Disclaimer: I almost didn’t post this because I didn’t have the time to really work it out like I wanted and then ran out of time this weekend and left as a draft since yesterday; but then I reminded myself…
This is a really interesting observation to me. After reading your post-and specifically the line quoted above-I immediately thought about Darwin’s Theory of Evolution, single points of failure and for some reason I thought about Doug Mcllroy’s Unix Philosophy (at least the first two).
Please keep in mind the following post is based more on the feeling and images I had when reading “nothing true scales”. These are not complete thoughts or ideas just what I felt when reading the post. Forgive me for sorting this feeling out on the fly. I would also like to apologize in advance to the OP Richard as I’m afraid my inspiration to post doesn’t really address your question about participation in capital markets directly.
Evolution:
When businesses attempt scaling to capture the largest consumer base possible this seems very similar to how a virus spreads. The virus spreads through out a small and localized population at first. It then mutates and evolves to find the best solution to spread most efficiently throughout an entire population. Is focusing on spreading your product to the largest number of humans a better model than focusing on the best possible product/service you can create?
Another scenario that reminds me of the ‘capture customers at scale’ business model is a comparison to introducing a plant or animal into a new environment aka invasive species.
This invasive species analogy, for me personally, is very similar to that of internet advertising, social media and the surveillance capitalism internet business models that use psychological dopamine hits to create addictive habits in their consumer base. A ‘new species’ of business model where the consumer isn’t required to purchase anything with actual money. The consumers time and attention is the value being extracted not their dollars. Time spent endlessly scrolling, clicking or reading nudging articles is all that is required for a business to profit these days.
These new types of business models are like a predator being introduced into a population of nearly defenseless ‘consumer-prey’ that weren’t able to co-evolve and are now (for moment anyways) not only defenseless but most aren’t even aware they need to be defending themselves.
Single Point of Failure:
We are becoming so dependent on global conglomerates and near monopoly corporations for survival that I can sometimes give myself a bit anxiety thinking about what happens next if either a nuclear war or nation state hack takes down our nations power grid for say…a week…two weeks…a month? How long can we go without power before sh*t gets irreversibly bad?
“Nothing true scales”. Is there maybe a reason why this might be the case? Evolutionary diversity allows multiple points of failure without a species necessarily going extinct. And even though I don’t believe the human race will go extinct if parts of the US power grid go down for a month or so, the way of life as we knew it becomes extinct.
This is my biggest issue with Bitcoin-although I do have a small crypto portfolio regardless. I love the philosophy of Bitcoin and feel that there are interesting things that can be done in the blockchain space outside of money/finance…but what happens when the lights go out? How do I use Bitcoin if the power-grid goes down? The blockchain digital ledger is a great idea but more and more I feel like we need to have analog backup solutions because global power consumption at some point will need to decrease unless we find solid clean uninterrupted energy solutions for the future. Thinking about national energy grids is a source of anxiety for me if you can’t tell.
Which brings me to the…
Unix Philosophy:
Do one thing well. Expect your programs output, to be the input of another program.
What if this type of philosophy was applied to businesses? Don’t worry about maximum growth or maximum profits. Focus on doing one thing well and supporting the local communities labor force.
If I didn’t make my point clear above: I think corporations act like viruses. It concerns me how the global population is now the targeted consumer base of corporations. I’m not a fan of corporate homogeneity created not for the advancement of humanity but to simply generate profits and wealth; which has lead to a society of living human beings who now walk around with no less than 3-10 visible corporate logos on their person anytime they leave their home.
Although I don’t fully agree that ‘nothing true scales’; I do believe it scales at a cost to humans. Whether the cost becomes single point of failure corporations (one baby formula maker can create a national shortage? Really? And how did we not realize this when it was first shutdown?). Or how living humans have become free walking billboards for corporate brands and worse…are judged or admired by the brands they display over who they are as human beings.
Very over simplified. Very much not a coordinated cohesive thought out idea or personal philosophy per say. This post was simply based on some feelings that came up after reading the OP Richards quote “nothing true scales”.
In a nutshell: I think capitalism can be better than it is. I think we as a species need to focus on smaller localized economies and businesses as job sources moving forward. Community and tribes solving problems vs being pushed solutions from monopoly corporations who are focused on shareholder profits not the consumer.
Please feel free to comment or address anything if you get the urge. I’m here to learn as much as I am here for a dumping ground of random thoughts my friends and family have long since stopped listening and engaging me in.
Don’t be surprised if I edit this multiple times. I sometimes fear rereading ‘off the top of my head’ posts like this because I often never send them due to a ‘never good enough’ editing loop I fall into. Best to post and fix, than never post at all (from my perspective anyways!).
Edit: fixed spelling mistake.
I agree! ‘Nothing true scales’ (@drrms) is an interesting phrase because at least from my perspective, the meaning goes both ways: It could mean that scaling is achieved through deceit, misrepresentation, financialization, marketing and the like, or it could mean that pursuit of accuracy, precision, the answer, is not that valuable because such is likely slow.
The Unix Philosophy is a case in point. In the 60’s and early 70’s, RAM was at a premium, and so efficiency and accuracy were at a premium. Programming was tedious and slow. Then RAM and fast external storage (e.g. hard drives) evolved so that programming became a speed test. Accuracy devolved (blue screens and restarts), but some operating systems scaled (MSDOS). My understanding is that UNIX was originally from the culture of assembler language: no bugs, no bombs, no hacks: accurate.
Bash shell in Linux is Unix, Apple macOS shell also (until 2019 Catalina).
The most useful ‘truth’ always scales. It is then the most apparent, yet even having reached this point, not an absolute.
Our linguistic ability to put such a variety of adjectives next to the word, uncovers a slippery truth. I guess that is why disinformation governance is unfeasible, at scale. So yeah, in context, the truth never scales.
“A lie gets halfway around the world before the truth has a chance to get its pants on.”
Churchill
This is not the definition of a Ponzi. A Ponzi is a scheme whereby a quick/high return is funded by the participation of new participants to the scheme with a pyramid style, eventually run out of greater fools.
Madoff was operating as a highly regulated broker/dealer where there was no reason to suspect that customer assets would be funding other customers withdrawal, promising a modest yield relative to other hedge fund participants and where the underlying profit engine was a quantitative engine engaging in arbitrage of financial markets. A strategy that was successful at many of the massive quant houses of the time (DE Shaw, Renaissance, Citadel, Millenium, to name a few). There were also a series of laws on the books (SIPA) that existed to manage fraud in broker/dealers.
I will say this again, the government wrote an insurance contract it couldn’t meet (SIPC 250k guarantee), failed in its regulatory obligations as well and then abdicated all responsibility and threw it all into bankruptcy court where a bunch of entrenched lawyers and judges decided to spend 12 years fucking around with everyone involved, to the benefit of nearly no one except the well paid judges and attorneys.
In order to make all this work, they deemed that all of Madoff’s customers should have known it was a Ponzi scheme ex-ante and as such were not entitled to the usual fraud protections for opening accounts at a broker/dealer and instead were divided into net winners/losers according to arbitrary time formulas and basically made to make each other whole.
The fraud here was perpetrated by government in collusion with Madoff on the investors in Madoff.
Beautifully said! If we replace “Madoff” with fill-in-the-blank, I bet we could come up with a LONG list of frauds that follow this same pattern.
Love the Churchill quote from 010101 above too.
Why and how this happens over and over again throughout history - and whether or not this is really all that happens in history - would be an incredible thing to deeply understand.
The OG pyramid scam that Charles Ponzi ran involved the pretence that very large profits could be had by arbitraging the currency pair movements and the redemption value of International Reply Coupons, bought outside the US with the local currency. There were only 27000 coupons outstanding and the financial scale of Ponzi’s business would have required well over 100 million.
“I was astonished. They never even looked at my stock records. If investigators had checked with the Depository Trust Company, a central securities depository, it would’ve been easy for them to see. If you’re looking for a Ponzi scheme, it’s the first thing you do.”
Madoff talking about the 2003 investigation.
Indeed, while I mostly agree with what Zenzei says, it is my understanding of the whole thing that there were signs, mostly for those who knew what to look for, but some also for the simply diligent.
Yup. I know that quote well. Twice the SEC did not check DTC one in the early 1990s and the other in 2007 (which is when I think the second SEC investigation happened). The fraud was discovered in 2008.
I know investors that did try and check DTC records, but of course DTC would not talk to them because it was a regulated relationship with a broker/dealer.
Of course, try and explain that to the bankruptcy court or to the trustee. All that you get back is - “you have to prove that you didn’t know it was a Ponzi scheme”. So riddle me this batman, how do you prove a negative?
That is the narrative that the trustee has put out there. It is a false narrative. All of the “signs” only make sense when applied to a hedge fund and not a broker/dealer which is what Madoff was.
There was a lot of discussion about how Madoff made money, and whether it was possible that he was somehow engaging in a non-sanctioned activity such as front-running brokerage clients or some such. I know of several serious folks that investigated all those angles.
At no point in time, however, have I met a single person who can credibly say:
“I knew there was no trading going on. I knew it was a Ponzi scheme. I knew that SIPC and SIPA would not apply”.
There is a very long report by the SEC themselves on their own investigations as well as several court cases where serious fault has been found with the regulators. However, since the regulators can’t be sued because they are a government agency…clients are left holding the bag.
Madoff also had accounts at various money center banks (JP Morgan being the main one) and had as clients 4 extremely large banks (that I know of). All highly regulated, all required to do KYC, all required to be vigilant for these kinds of frauds. Detected by none.
Finally, you would think that the people that were allowing all the brokerage statements to be stamped with the SIPC guarantee would have done some work to validate the insurance policy they were touting. But nope, it turns out that SIPC does zero due-diligence on any of the B/Ds it protects.
The regulators didn’t do what they should have no doubt. But sorry, I’m not convinced. Madoff may have said he was a broker/dealer but it sure sounds like he was acting like a hedge fund 'investing" (used loosely and sarcastically) OPM and taking $$ from feeder funds.
Not personally meeting a single person who thought it was a ponzi doesn’t mean that the signs weren’t there. Greed blinds people (and the people in institutions) to the signs, numerical and/or psychological. IE:
"Financial analyst Harry Markopolos was one of the earliest whistleblowers. In 1999, he calculated in the space of an afternoon that Madoff had to be lying. He filed his first SEC complaint against Madoff in 2000, but the regulator ignored him.
In a scathing 2005 letter to the Securities and Exchange Commission (SEC), Markopolos wrote, “Madoff Securities is the world’s largest Ponzi Scheme. In this case, there is no SEC reward payment due to the whistle-blower so basically I’m turning this case in because it’s the right thing to do.”
"Madoff’s firm claimed to be making money even when the S&P was falling, which made no mathematical sense, based on what Madoff claimed he was investing in. "
Sign: what is a broker/dealer doing managing other people’s money? Broker-Dealer Definition
Sign: Anyone with a modicum of market/option experience should be suspicious of claims of consistent, zero vol 10-20% returns investing solely in blue chip stocks.
Sign: All while using a split strike conversion strategy. The perfect “secret sauce” teaser that “you just don’t understand Mr. Client”. Knowing a smidge of sales psychology might trigger this one.
Sign: The fact that no one was allowed to do due diligence was another big sign.
Sign: Secret club for only the chosen few.
Sherlock Holmes “the dog that didn’t bark in the night”
This seems like a silly point to make. Of course thats the case in a situation like this but I fail to see how it removes culpability from anyone involved.
The individuals who got caught up in this can be forgiven for forgetting the one piece of investment advice that will forever stand the test of time. If it’s too good to be true, it probably is. The fund of funds and other feeders that typically argue due diligence as a reason for their management + incentive fee structure is much harder for me.
Not sure how you would use this, but since you asked….
In evolutionary biology all mutations occur randomly. Whether they become useful or not depends on the host environment.
Love the analogy here.
I do have a thesis about why “nothing true scales.” I think that it has to do with our bodies. We are embodied beings and yet we have been culturally consumed with disembodiment. What is the so-called metaverse if not the ultimate disembodiment.
Bodies don’t scale. (The “proof-of-plant” thought experiment of @bhunt comes to mind here too.)
I think back to the mortgage crisis. It never would have happened if lenders had to still KNOW their borrowers and SEE the properties that they loaned against.
Instead, financial engineering made it possible for the whole process to be disembodied. No one needed to KNOW anyone else. No one needed to LOOK at anything. Everyone could screw everyone else with impunity because we didn’t KNOW each other.
Finance seems to be the ultimate form of a disembodied society. Which seems to me to be why finance is increasingly consuming the whole economy (and why the internet itself is financial).
Financialization has gone too far and the pendulum is now swinging back in the other direction - deleveraging, less complexity, more locality, more embodiment.
It’s a painful process but I think that it’s the right direction in the end. We have to better understand the networking limits of embodiment and start integrating those limitations into our economic systems.
Good point and something I’ll think about. I do feel that, for me at least, some of the internet business models felt a bit random at first. Giving away a product/service free and profiting from the data generated by the user or advertisements wasn’t random per se but without to much of a stretch it could be seen as a mutation with an unknown outcome…yeah, that’s not really getting me closer to random is it. Will need dust off some old books and give this one a think.
I’ve continued to work on that post a little in my free time and will make a note of your observation. If I get something I feel explains my thoughts better I may post a revision to a new thread for further feedback. I don’t want to hijack this discussion-a note by Ben himself, no less!-any further but welcome continued feedback from anyone who wishes to share.
Seriously appreciate you taking the time to post some feedback @RobMann . Thanks again.
The last two days of comments on this note, humbly, speak to the essence of Epsilon Theory. A synergistic feedback loop within the pack, as I await Part II.
I love this ‘cast of characters’.
Jim H
Sigh. Life is easy in hindsight isn’t it?
Next time you dial 911 and find out that what you thought was real, isn’t,try and remember this conversation.
Please elaborate as I’m lost on the point you’re trying to make here. You seem much more knowledgeable on the topic than I, so I’m going solely off of your comments but if anything they seem to prove my point. Which, is only -it’s hard for me to forgive the role the allocators/feeders played in this tragedy
I am presuming you’re talking about allocators here and not the individuals who invested directly. So there is “a lot of discussion” about whether the returns he was generating were being done so in an illegal manner. Sounds like outright fraud wasn’t considered but illegal activity nonetheless, and the collective response was to keep allocating? Come on man
Two great pieces Ben. I find that this here is why I’m NGMI.
I feel that if I participate in the casino that is Wall Street, I’ll get burnt for sure. Having known better, I’m not confident about my ability to shrug it off.
This is rhetorical however, what’s a person to do?
I’d like to agree with this but the problem for me is convertibility. For the foreseeable future, you can’t really do anything with BTC unless you can convert it easily into USD. And for that, you need exchanges, you need middlemen, you need centralization, you need KYC. How does that change?
You are obsessed with the fraud, and I am talking about the events after the fraud and how the government bailed on all their responsibilities and let the individual investors fry in bankruptcy court hell.
What Madoff did was bad enough, what the government did was morally inexcusable.
Also GenX and I hold out hope that it will change. What I have seen in my involvement in local churches, what I see happening in other social systems, and what I read in the Fourth Turning, I think GenX will be successful at BTFD. Future generations will have a mostly clean slate to establish something better than what existed before. Either this, or nuclear rockets start flying. I really don’t see much chance of anything in the middle.
Lots of institutional dollars with boards deciding allocation to managers / strategies. No doubt there were members of each investment committee expressing concern. But after one more year of stable market beating returns those members were replaced and even greater allocation to Madoff resulted. “I just saw Bernie at the gala last night, obviously he’s an upstanding citizen.” In their own minds, committee members would reassure themselves that if it’s fraud, lots of other institutional funds will suffer the same fate. And Joe Smith, who left our committee last year, wasn’t at the gala.
We’re going to have a chance to learn this lesson again, only it will be far worse.
“Also GenX and I hold out hope that it will change. What I have seen in my involvement in local churches, what I see happening in other social systems, and what I read in the Fourth Turning, I think GenX will be successful at BTFD. Future generations will have a mostly clean slate to establish something better than what existed before. Either this, or nuclear rockets start flying. I really don’t see much chance of anything in the middle.”
Aaron,
GenX is my children’s generation. My read of the Fourth Turning is Generation Z (my grandchildren) who will hopefully rise to the occasion.
Greta Thunberg comes to mind, “How dare you!”
Jim
Yes. That’s what I was saying. After GenX BITFD. GenZ will build it back up. But I would also include Y in there.
I have mentored Adam since 7th grade, more actively (weekly) starting in his 20’s, less actively in recent years. He was just chosen as senior pastor (from associate and youth before that) of St. Mark, a pretty good sized church - top 5 in South Bend / Elkhart.
Karl, an older Gen X, is one of the most gifted people I have ever met. He was a youth pastor to Adam. He left one church (where my wife and I volunteered for the youth group) and a hundred kids and their families followed him to St. Mark. But Karl was never going to be senior pastor. The baby boomer pastor (a decent guy) wasn’t ready to retire and certainly wasn’t prepared to have parishioners more connected with Karl. He certainly wasn’t willing to integrate any of Karl’s ideas. So Karl had to go. He now teaches junior high math. But when Adam suggested the same things 10 years later, the senior pastor jumped on them. That’s what got Adam promoted from youth pastor to associate pastor.
Here’s Dr. Cami, intro’d by Adam. She sang in our wedding when in 7th grade.
https://www.youtube.com/watch?v=UwCWLqjRbr4Another former youth, Trace Rorie, is now executive pastor for the largest church in the area, Granger Community Church. He moved up from leading worship. School principals, community leaders, teachers, successful business people, and active parents. It’s really amazing the impact Karl’s youth are having around the world.
Churches in our area (like everywhere) are struggling to figure out how to recover post covid. Many are still led by baby boomers that struggled to connect through Zoom / FB church and are happy to close that down. St. Mark is beyond where it was pre-covid by any measure except average age of attendee.
And Karl is teaching math. A noble profession of course. And he’s humble enough that he wouldn’t ever take credit for any of it. These next generations are going to change everything. Just look at @harperhunt and how she tolerates our old ways. Sometimes on office hours I mute my camera to hide my grinning at her patience, or is it tolerance. Either way, it’s gracious. I’m looking forward to when she starts telling us how to pave the way for her generation of world changers.
This will all happen as older generations get out of their way. For those that won’t, GenX will happily force the issue, and then quickly remove ourselves - Rage Against the Machine and all. That’s exactly what Karl did. No thanks or appreciation needed. Our parents didn’t thank us latch-key kids for not burning down the house when they got home from work.
Aaron,
Thank you.
It’s all about the old stories. The Old Testament is one of them, IMO. Not necessarily THE ONE, but a one. One that served me well in my youth and continues to serve others their whole lives.
Note that the old stories give us MacGuffins.
The present me feels, man the tool maker’s greatest attribute is her tool of language. The medium is more powerful than its message.
And through the limits of language, the message, in the words of George Carlin, often conceals more than it reveals.
Two quotes:
Our core freedom – our autonomy of mind and spirit – is not granted to us by the State or the Oligarchs. It is not theirs to give. It is not a reward for good behavior or an allocation from a central pot. It is, as Kant writes, our birthright. It has always been our birthright. It cannot be taken away.
But we can give it away.
-Ben Hunt
I recall an audience member once asking Joseph Campbell, that great student of myth, ''Do you believe in God?" “Which one,” he responded, “there have been hundreds of thousands, you know.” Immediately we were transported to a different plane.
~James Hollis
Peace,
Jim
Not the sort of returns anyone would associate with a “hedge” fund. This type of asset allocation doesn’t work. At all. In a deleveraging cycle.
https://www.bloomberg.com/news/articles/2022-06-02/tiger-global-losses-for-the-year-reach-52-after-drop-in-may?srnd=premium&sref=iK07QD37
In case the link is behind a pay wall, a Tiger Cub is down 52% YTD, long all sorts of companies that trade on multiples of revenue both public and private.
Oh, and they are creating side pockets for all of the private equity positions where there is no bid. If you want your money back, you can’t get it! But, they did lower the management fee 50 bps so there is that.
Jim,
Not sure if you thought my posting that video had anything to do with the content… it didn’t. It was absolutely to show how this GenX and a few of my friends have completely BITFD and disappeared before anyone noticed while leaving some very talented people from later generations (Y/Z) around to build it up quite skillfully. And then went into my usual too much detail of my observations of how I come to that conclusion.
Cami and Adam are both amazing. It’s amazing to think about them in 7th grade, then through high school and college, and early career, to where they are now. It’s also refreshing to see that the life-altering trials that Karl (and others) from my GenX suffered that opened the doors for them to step into those roles.
It’s why I hold out hope for the Indiana judiciary, and have come to a place of being ok with my fun dragging on indefinitely. The longer it sits there, the more future generations see and can learn and resolve to do it different. And they can decide that before becoming so embedded that it’s impossible for them to escape. And that usually happens when they are too naive to realize it.
BTC is not Bitcoin (sorry it’s long but that’s just how complex things go)
“Cryptos” are just blockchain networks (web browsers also use cryptographic hashes for security; the use of cryptographic hashes is not particular novel). The value of a network is derived from users using a network. In a free market, users exchange their goods or services, via fiat, for the ability to process a transaction on a public blockchain because of their self-interest (the utility of a transaction > cost of transaction). What will drive the value of each blockchain network? The competitiveness of its useable, security, scalability, and cost. What was novel about Bitcoin? It laid outs a brilliant economic model to incentivize trust between unrelated third parties. Bitcoin uses computer code to drive via economic incentives unrelated miners to consensus about the validity of transactions being processed.
The Bitcoin Civil War
Back in July of 2017, bitcoin miners locked-in a software upgrade called the Bitcoin Improvement Proposal (BIP) 91, which created “Segwit.” Segwit enables layer 2 networks to run onto of the bitcoin blockchain protocol, such as the Lightning Network (which does not work well or securely). The Bitcoin protocol split into two camps – those that adopted the “digital gold” narrative and kept small blocks (trying to do transactions on layer 2) and those that wanted bitcoin to remain a transactional network. Bitcoin Cash did not add Segwit, instead they upgraded the original bitcoin protocol to allow larger blocks (i.e. more data = transactions per block). Later in November of 2018, Roger Ver’s camp declined to further increase the block size of the Bitcoin Cash network, while another group decided to continue upgrading the block size on the original bitcoin protocol. This “big blockers” have allowed the original bitcoin protocol to continue to upgrade the size of the blocks being processed (block size was never mentioned in the white paper). This blockchain processed one block of 3.82GB on April 5, 2022, which contained 2,512,670 transactions (Block #733689).
Why did the Bitcoin community fracture?
What is the purpose of a public blockchain? Speculation and tax avoidance? Small blockers decided that upgrading the block size would mean the network would become too centralized. Why did they not want centralization which is a center piece of the capitalist system’s efficiency? Tax avoidance. The small blockers tend to be anti-government, anti-law, pro-drug, and live in tax havens like the Bahamas (Sam Bankman-Fried), Bermuda (Arthur Hayes), and Saint Kitts and Nevis (Roger Ver) so they can continue to evade taxes.
Why the Bitcoin with larger blocks will win?
Because it is useful for economic exchange. This was the original point of Bitcoin. From the “Bitcoin: A Peer-to-Peer Electronic Cash System” whitepaper written by Satoshi Nakamoto – “What is needed is an electronic payment system based on cryptographic proof instead of trust, allowing any two willing parties to transact directly with each other without the need for a trusted third party.” By not upgrading the block size, BTC did not follow this vision. BTC chose tax avoidance instead of utility, which was clearly the original intension of the whitepaper.
Mining
The Bitcoin protocol limits total coins to 21 million and cuts the block subsidy in half every four years. This block subsidy was put in place to incentivize mining before transaction volumes took off. In 2024, the block subsidy will decline to 3.125 coins (in block 840,000) from 6.25 coins today. Why was this system put in place? Every block (10 minutes), miners receive the block subsidy (which eventually goes to zero) + transaction fees. On the virtually useless, BTC network the block subsidy is 6.25 BTC + the transaction fees of ~0.125BTC per block (an average of 17.78 BTC per day over the last 30 days, see - transaction-fees divided by the 240 blocks per day). This blockchain network will become economically unviable as the block subsidy goes to zero. In contrast, a network with significant levels of transactions which people are willing to pay to use will remain healthy. One branch of the original Bitcoin protocol has continued to upgrade its block sizes gradually and safely. On Block #733689, which processed 2,512,670 transactions, had transaction revenues of 9.757 coins. Miners received 6.25 coins from the block subsidy plus the 9.757 coins from transactions. Even without the block subsidy, miners are economically incentivized to move from BTC to this Bitcoin protocol. From the user perspective, converted to fiat at current market values, the cost per transaction on this network was $0.00038 in this block. Each version of the bitcoin protocol has the same block subsidy + transaction model. Miners will eventually move to the network which does the most transactions because they make more money (capitalist economic incentives work).
Valuation
Can finite digital assets have value? Yes. Which ones should have the most value? The blockchain networks which have the most utility should be the most valuable. The network’s utility drives demand. Demand to use the network drives the price, not a pyramid scheme economy which early buyers benefit from later buyers. Demand for transactions causes people to exchange their goods and services, via fiat money, for a coin, which allows them to do secure transactions on the internet. Why is Segwit an awful idea? The ability to layer another network onto of Bitcoin removes transactions from the network, and transaction utility drives the value of a network.
Why have you never heard of this?
Because the Bitcoin narrative got highjacked by BTC’s implementation. The tax evaders who favored small blocks created a giant economically useless pyramid scheme. This network became more valuable because of the simplicity of the narrative, not because the network has much economic use. Furthermore, the anti-law segment of this Bitcoin community decided it was okay to pump the price of BTC with suspect Tethers (which accesses a few dollars through Bahamas-based Deltec Bank). Bitcoin is not digital gold. That’s a narrative; that’s an ad campaign. BTC is worth what a Bored Ape is worth – whatever the next person will pay for it. In an economic sense, BTC is close to worthless (Webster’s definition of worthless is “having no real value or use”).
Thank you for this Joel. I am personally persuaded by this line of thinking as well. I’ve invested in multiple BSV-based ventures. Of all of the networks that I’ve seen, the BSV network seems to be actually DOING all the things that the crypto community says should be done but never seem to be able to actually get done.
I’m not literate enough in all of the technology / dynamics to say that BSV is THE ONE. I just know that I’m seeing viable development happening at super-low transaction costs. Tokenized, Handcash and Run are all examples of projects based on BSV that are demonstrating to me that proof-of-work blockchains are viable. (I think that so-called “proof of stake” blockchains are antithetical to the very idea of blockchain.)
Anyways - again, I’m not trying to present myself as an authority here but rather engaging in this dialogue.
Thanks for posting.
Quite the Ecosystem these Raccoons have created.
I saw that article on Bloomberg and found it fascinating that these crypto lending platforms include actual bounties for mercenaries who succeed in “liquidating” leveraged debtors:
I don’t believe that the Racoons create the ecosystems, I believe that they simply find all the trash bins that result from an agglomeration of activity and go to town eventually finding ways to exploit them and transform them.
I just wanted to point out that I finally listened to that Odd Lots SBF episode, and I wanted to quote what SBF said about VCs, because as Ben and Joe Weisenthal point out, he is right that VCs are often just chasing momentum and FOMOing into what’s hot. It’s interesting because SBF was saying something quite cynical about yield farming and crypto, however, I think maybe his ultimate point was that the speculative VC investment generally is only slightly less cynical/stupid. Their is theoretically an economic case but the numbers and projections are completely made up to just attract funding, because the real aim is just to just speculate on the next big thing. In that sense, crypto and VC investment really aren’t that different but one is considered legitimate and the other a scam? That’s why he said the crypto ponzi system has a “surprising amount of legitimacy.”
Posting this after Ben’s re post of the original note today. I have been watching for the demise of Tether and today marks another important step with the market cap of tether reaching an all time high when measured in Bitcoin. Right now Tether total EV represents 23% of BTC total EV - I get this is a big simplification but as this percentage keeps increasing it means it will be more and more difficult for the primary (BTC) to support what should otherwise be a subsidiary (Tether) - this is a different version of the classic convertible crunch where the fixed amount of convert (Tether) will at some point become so big relative to BTC that it can’t be supported - or put another way Tether can’t print Tether and convert to BTC manufacture reserves
So the question - Does anyone know how to short Tether without taking credit risk on a crypto asset / exchange?