Permanent distortion, p.25
Permanent Distortion, page 25
While growing energy demands and the need for solutions to intensive mining constituted areas of pushback, it was also clear that the crypto space was experiencing other growing pains as a by-product of its popularity and maturation. Many of these were playing out in real time. By mid-2021, China went from having nearly three-quarters of the global supply of Bitcoin mined in the country to less than half.50 The amount of electricity required to solve increasingly complex equations by the computers used to create new Bitcoin faced a geographic problem. Miners were relying on platforms that routinely experienced regulatory crackdowns and threats of restrictions or bans on activity.
Global focus on where and how Bitcoin was or should be mined escalated alongside its growing popularity. This was not least because Bitcoin was increasingly seen as a disrupter to the established field of money creation. One way for the prevailing monetary and political hierarchy to clip the crypto movement’s wings and chip away at its growing popularity was to introduce barriers. The stressing of concerns over the amount of energy used for mining served as a barrier of convenience.
In that regard, China wasn’t alone. Few governments embraced Bitcoin as a replacement for their currencies or the prevailing dollar-centric monetary system. In particular, the most powerful governments in the world and their respective central banks saw any alternative to their monetary systems as at least a nuisance and at worst a threat. The primary reason was that the production and use of Bitcoin and other cryptocurrencies were simply not controllable without shutting down the internet. The second concern was that any challenge from a currency outside the realm of traditional central bank authority could reduce the influence, strength, and expansiveness that fiat money enjoyed. For Wall Street, that meant a threat to its throne and to easy money subsidies in times of crisis. The first law of financial power is that those in power want to stay in power. They will do whatever it takes to remain there.
Still, the pandemic brought a fresh wave of investors and billionaire cheerleaders (and some detractors). Similar to the Age of Gatsby, the “Modern 20s” brought speculation to every corner of every market—only this time technology made it all so much easier. People sought both personal financial opportunity and the chance to participate in a revolutionary money paradigm. Twitter’s cofounder and former CEO Jack Dorsey become a champion for the crypto craze. During the first half of 2021, together with rap mogul Jay-Z, he established an endowment fund of 500 Bitcoin (worth an estimated $23.6 million at the time) to develop Bitcoin further. The idea was that the endowment would “make Bitcoin the internet’s currency.” That summer, Dorsey confirmed that Bitcoin would be a “big part” of the company’s future.51 NBA owner and Shark Tank personality Mark Cuban jumped in. Following the Bitcoin volatility wave of May, Cuban took to Dorsey’s social media platform, Twitter, to claim that Bitcoin was “better than gold” and that it was “easy to transfer. Easy to trade. Easy to convert. Doesn’t require an intermediary.”
It was not just Silicon Valley tech stars, music royalty, or sharks jumping into the fray. As China backed away, some political leaders in the US saw opportunity. Energy-rich states like Wyoming began to lean into the crypto space. US senator Cynthia Lummis from Wyoming, who in May 2021 founded the Financial Innovation Caucus, began to push for financial institutions to work with cryptocurrency.52 Wyoming became the first state to establish a pair of laws to charter and establish new banks in cryptocurrency.
Certain city leaders became champions of the crypto trend. As China’s crypto clampdown pushed out those involved in Bitcoin mining and digital ledger development, cities like Miami and San Francisco emerged to pitch their attributes. Miami’s mayor, Francis Suarez, positioned himself as one of the most crypto-friendly politicians in America. During an interview with CNBC from Miami city hall in June 2021, he touted his locale’s low cost of electricity as an enticing factor, stating, “The fact that we have nuclear power means that it’s very inexpensive power.” He added, “The city of Miami understands how fundamentally important it is to our future and how it could change the paradigm in the way people live their lives.”53 The tax revenues crypto platforms and aficionados could bring in was a potentially lucrative side benefit to providing a new home for them.
The Meme Coin and New Money Era
Infamously, one of the more famous altcoins, Dogecoin (pronounced “dohj coin”), began its existence on the back of an internet meme centered around a Shiba Inu dog looking sideways while glancing into the camera. The cryptocurrency was initially created as an inside joke between two software engineers from IBM and Adobe. As the Wall Street Journal reported in June 2021, “It is a satirical homage to Bitcoin, designed to serve no real purpose other than generating a few laughs.”54 Laughs notwithstanding, its value ballooned by 15,000% over the first five months of 2021 alone.55
That stratospheric leap enticed more speculative investors, but it would be short-lived. During Elon Musk’s now infamous monologue on Saturday Night Live, all it took was a series of jokes to rock the boat. In the lead-up to his appearance as guest host, Musk sent out a teaser tweet dubbing himself the “DogeFather.” Speculation swirled. Would he mention the meme-turned-crypto? Would it trigger the cryptocurrency to rise further?
As it turned out, Musk asked his mom to jump in on the craze. Joining him on the Saturday Night Live stage on May 8, 2021, and to the audience’s applause, Maye Musk prompted her son by saying, “I’m excited for my Mother’s Day gift, I just hope it’s not Dogecoin!”56 Not to be outdone, while playing a “financial expert” during the show’s famed “Weekend Update” segment, he was pressed no fewer than six times with the humorous question “What is Dogecoin?” After Musk’s character gave roundabout answers, the segment ended with him saying it was just “a hustle.” The next day Dogecoin tanked, losing 40% of its value.
But then Mark Cuban jumped into the billionaire-class Dogecoin discussion. Cuban ensured that his NBA team, the Dallas Mavericks, offered “special pricing” for those looking to make purchases using Dogecoin. After once stating that Dogecoin was not the best investment option, he claimed that “it’s a medium that can be used for the acquisition of goods and services.”57 His proclamation received affirmation from Elon Musk.58 The billionaire duo’s show of approval prompted Dogecoin to jump nearly 10% within a twenty-four-hour period on August 16, 2021.
Dogecoin wasn’t just for the hyper-elite, though. The English Premier League team based north of London, Watford FC, would sport a Dogecoin logo on their football jerseys during the 2021 season after a crypto sports betting site offered sponsorship.59 The cryptocurrency, which had begun in jest, had literally hit the big leagues.
Although Dogecoin’s origins were based around a joke, it was grounded in something real—human emotion and curiosity. Support for Dogecoin, similar to other trends within the crypto market and meme stocks, was made up of folks from all walks of life seeking something beyond the established monetary systems.
Whether meme investing might have begun as a joke or as a desire for inclusion and control by a broader group of people, the die was cast. With all its confusion and hype, what the frenzy around Dogecoin exposed was a world skeptical enough of investing to view it as meme-worthy in the first place. At worst, meme coins and their volatility revealed the raw nature of what happens when money both means so little and is so scarce that everyone is looking for their shot to get rich quick.
Dogecoin was a harbinger of developments to come in the cryptocurrency world. More altcoins armed with their own retail fan bases and “whale” investor champions will arrive in the crypto world. Most of them will languish. But a small subset of them are poised to become part of a global monetary network in which fiat and cryptocurrencies coexist.
Bitcoin is as much about belief in a new monetary and currency paradigm to displace the old one as it is about the storage of value or an alternative investment. The idea that crypto can be used globally as a unit of buying and selling is an unstoppable train. Crypto investors are buying and holding because they believe in blockchain technology and the raw capability of the digital ledger.
Despite the sharp price swings that come with cryptocurrencies, or perhaps because of them, retail and institutional investors explored other ways to profit from crypto rather than just holding or trading specific coins. Like diversifying a stock or bond portfolio, they pursued collecting different types of cryptocurrencies. In addition, some crypto investors engaged in processes such as crypto “staking,” a way of earning reward or interest by locking up or holding certain crypto coins for a specified period of time.60 Staking provides a way to essentially earn interest on holding crypto, much like keeping money in a savings account, but offers higher rates. Other crypto investors began investing in an ever-expanding list of crypto coins, blockchain-focused companies, and blockchain ETFs.61
All of these trends proved lucrative for the platforms and firms that derived fees from transactions. That made the big guns on Wall Street salivate. By March 2021, Citigroup was suggesting that Bitcoin could one day “become the currency of choice for international trade.”62 Three months later, Citigroup made the bold declaration that it would help its wealthiest clients invest in crypto, forging the path for one of the largest US banks to grab its own chunk of that market.63
Bitcoin’s wild ascent after the pandemic struck caused Wall Street titans to reconsider the future. Big financial names that had likened it to the tulip mania in the Netherlands during the 1600s or the dot-com bubble still chastised cryptocurrency as a fad. But, following budding client interest, demand, and market fascination, the big boys on Wall Street could not remain on the sidelines. Citi established a Digital Assets Group that would “be responsible for developing… future product capabilities, client delivery mechanisms and thought leadership around all digital assets.” The move would only serve to whet more retail and institutional players’ appetites for crypto investing. Goldman Sachs and Morgan Stanley boosted their respective cryptocurrency efforts.
JPMorgan Chase, even with the history of CEO Jamie Dimon having called Bitcoin a fraud, could not be left out. By the summer of 2021, the bank began to roll out access to cryptocurrency funds and products for its wealth management clients.64 Dimon seemed to remain somewhere between negative to ambivalent toward Bitcoin into the end of 2021, though he admitted it could see a tenfold increase in price.65 Profit was profit. Control was something else entirely.
In the meantime, mainstream global business chains were increasingly accepting crypto for payments and transactions. For instance, in July 2021, the world-famous Pavilions resort and hotel chain announced that they would accept several forms of cryptocurrency as payment, and they partnered with Coindirect in Britain to allow guests to pay in crypto throughout their properties.66
Not to be outdone, the casino and gambling scene in Las Vegas embraced the crypto paradigm wholeheartedly. Resorts World Las Vegas, the first new casino to be built from the ground up in Sin City in over a decade, announced that it would build a partnership with a cryptocurrency exchange.67 They sought to develop a system where visitors could use their crypto wallet across the resort. The move was another milestone for crypto, backed by the efforts of CEO Tyler Winklevoss and his Gemini cryptocurrency exchange.
By late summer of 2021, Tel Aviv–based crypto trading platform eToro was riding the crypto wave, aiming to capture sports fans. The firm penned an agreement to be the primary sponsor for several of the UK’s Premier League soccer teams, including my favorite team, Aston Villa.68 From Las Vegas to Wall Street to Brazil to Venezuela to El Salvador to the UK, crypto was increasingly in vogue.69 By the end of 2021, Crypto.com, a Singapore-based company with a roster of sponsorship deals including the Formula One World Championship and Ultimate Fighting Championship, went on to sign the largest naming rights deal ever for an estimated $700 million at the famed Staples Center in Los Angeles, home to the LA Lakers.70
It was as if the very word “crypto” had become a new kind of adornment, adding an element of glitter and future-mindedness wherever it was used. And those who support it as a non-fiat currency, store of value, and future wealth alternative have something in common with another group—so-called goldbugs, who share cryptocurrency enthusiasts’ disdain for fiat currencies. The two groups disagreed about which was a better store of value—gold (the original mined currency and store of value) or Bitcoin (the twenty-first-century emerging one), and whether they could coexist or whether Bitcoin was just a fad. While the debate over Bitcoin versus gold could rage for decades, the central question of power and what informs that discussion is more compelling.71 For all of their divisions, the goldbugs and crypto wizards shared a general suspicion of prevailing monetary policy. What they both recognized is that the epic monetary policies unleashed since the global financial crisis in 2008 had a damning effect on the economy and triggered epic levels of inequality. The permanent distortion between the financial system and the real economy motivated new innovations and enthusiasm in a new age in the evolution of money, as well as nostalgia and comfort with an older, proven, but discarded monetary power peg, gold.
Bitcoin has been dubbed by its supporters as “digital gold.”72 That comparison is no accident. Satoshi specifically chose the verb “mining” to describe the production of a Bitcoin to reflect how gold is mined through a complex set of activities (panning, smelting, refining, etc.). Fiat currencies are much easier to electronically manifest.
Some believed there was room for gold and crypto to coexist. Some argued that Bitcoin was too volatile to be a store of anything—that it was more like a bet or an asset class as opposed to a currency. The reality is that we don’t really know where Bitcoin will be when it’s been around as long as gold. We are in the starting innings of what Bitcoin and other cryptocurrencies could be. The nuance, capability, and technologies are still unfolding. It remains to be seen to what extent society will accept cryptocurrencies for what they can accomplish—as well as their pitfalls.
Central banks are watching closely. That’s why the larger central banks want to expand the existing monetary system to include digital currencies yet tend to shun decentralized ones. If they can colonize crypto, then they can control it. Government leaders want a tax trail on crypto transactions for their own control purposes. Store owners need confidence and assurance from cryptos if there is to be widespread commercial use. They need to know that if they transact in Bitcoin or any other cryptocurrency, they won’t face wild swings in value that could make them lose money in between a sale in the morning and cashing out at the end of the day.
In May 2021, the BIS released a working paper called “The Digitization of Money.” Its abstract warned that “the ongoing digital revolution may lead to a radical departure from the traditional model of monetary exchange.”73 The research offered the caveat that digital currencies could alter the competition between private and public money. If cash was no longer used, payments could be made through digital platforms rather than under banks’ purview. The BIS highlighted these as reasons for governments to offer CBDCs as a virtual form of fiat currency. The BIS was laying the groundwork for central banks to retain ultimate control of the flow of fiat currency, while being able to either regulate or restrict the crypto space as well.
Digital money, the BIS realized, was not going away. It was a trend that spanned China (WeChat and Alipay) and Africa (Safaricom M-Pesa) and even encompassed Facebook’s plans to issue its own currency, the Libra, in the United States. But after the mid-2021 sell-off, the battle lines between those who were against crypto investing due to its volatility and those who were in it for the long haul grew clearer.
Still, by June 2021, the BIS gave its approval for the development of CBDCs, noting that these could be used to “modernize finance” and also to ensure that Big Tech was not able to take control of money.74 The organization estimated that fifty-six central banks and monetary authorities, which collectively represented around 20% of the global population, were exploring digital currencies due to the expansion of online commerce.
“The train has left the station,” said Benoît Cœuré, head of the BIS Innovation Hub, referring to the path for CBDCs to compete with the explosive growth of decentralized cryptocurrencies outside the established monetary and banking system. “It is not that we are getting carried away, we are just looking around.”75
But however those plans evolve, more than 12,000 different cryptocurrencies, representing a myriad of motivations, structures, recognition, and staying power and held by over 100 million people, were revolutionizing the monetary, financial, and retail world.76 They were finding their way beyond trading desks, hedge funds, and individual trading apps. Cryptocurrency investments were being blended into retirement portfolios and marketed under names of established retirement vehicles and crypto monikers, such as CryptoIRA and BitcoinIRA.77 The $22.5 trillion world of IRAs and 401(k)s was a bonanza to crypto-focused asset managers, and by extension to the cryptocurrencies into which those asset managers could pour trillions of dollars’ worth of their funds. The volatile nature of cryptocurrency behavior lends more risk to those portfolios, to be sure, but it can also offer more potential upside. It can offer a way to diversify financial investments away from the traditional asset classes of stocks, bonds, real estate, and precious metals. After all, gold has also known its share of volatility over the millennia. So have fiat currencies not pegged to gold or silver, such as the pound sterling, which has routinely been batted about by hedge funds.78
