Distributed economies are screaming at traditional economic thought from every angle imaginable. Blockchain and distributed digital asset technologies are seemingly trying to rip pages out of economic textbooks and BURN THEM. Aggregate Supply, aggregate demand, marginal production of labor, Philips curves, money supply, interest rates, inflation, deflation, and………Technology Shocks.
Digital Asset Technology Shocks may prove to be bigger and faster than we’ve ever seen. It’s a combination of Artificial Intelligence, Big Data, Automation, Smart Contracts, Cryptography, and Micro-Economics. All leading us through an era we might someday call - The Connected Renaissance.
This note is not meant to be a comprehensive analysis, but seeks to inspire new ways of thinking. In no way shape or form is this a recommendation to buy or sell anything at all, nor should it be construed as such. This is not advice.
Let’s look at a few things.
1. The Micro-Macro Paradigm.
2. The Bitcoin Economy components (The Distributed and Digital Portion – not users who barter or trade with it.)
3. The Hard Fork – Paradigm Shift. 4. Price Action
Blockchain is enabling micro economies to exist where they otherwise couldn’t. Many of these micro economies have macro influence and send shock waves through public and private methods of governance and profitability- rattling them to their core. What’s interesting here is that each blockchain represents its own economy. Each blockchain economy has its own labor force, output, technological influences, governance, and consensus.
Over the last five years, my passion for blockchain has led to many people ask me: What is it? What backs it? Instead of getting into technical details about what it is, Cryptography, Miners, Tokens, Blocks, Consensus, Decentralized Autonomous Organizations, etc. - sometimes it’s easier to think about what could it do - in a frame of reference most of us can sink our teeth into - Golf.
If you’re new to the concepts, think about this trivial idea (maybe not so trivial for the VC crowd).
Have you ever been to a golf range before? Blockchain economies are like a golf range. It only exists for the purpose of golf. Inside is a micro-economy full of automation. Its inputs are fuel, ball-pickers, humans, wages, balls, land etc. With use of a Token, you can access a micro-economy and its economic value.
In 5-10 years, you arrive at your favorite golf course. You put on your beloved sunglasses which are equipped with 5G wireless technology and 4k resolution holographic augmented reality. Your tee time is in 1hr, so you decided to head to the practice green. With voice commands, you ask to simulate the #1 handicap hole, #16. In your glasses and earpiece, you see and hear a drone flyover with commentary about the weather, conditions, tee placement, and common mistakes driven by cloud A.I. analytics. It places you on a failed approach to landing short you ended up at last time. After practice, at tee-off you have similar tools- hole previews, GPS, and post-shot swing analysis driven by sensors and 360-degree cameras on the tee-box markers. All day long you utilize the high-intensity augmented reality pushing and pulling data and content back and forth between sensors, network switches, wireless services, sustainable energy, wireless charging services, and cloud-based AI platforms. Your experience was powered by a Token. A Token that allowed you a trustless connection to a variety of automated resources packaged into a seamless micro payment system.
Now, imagine driverless cars – Some technology will be on-board, and some will be off-vessel. To be efficient, driverless cars will pass through Districts of various real-estate ownership, wireless connectivity, utilities, power stations, wireless charging arrays, and data transfer stations. Digital Assets or Tokens will help enable a self-governing ecosystem of payments and trust with 100% traceability.
Bitcoin Economy Components.
Bitcoin(BTC) is one of many blockchain economies. There are now over 1200 different blockchain economies and all of them are vastly different. However, let’s isolate Bitcoin in a simple form before we examine a fork.
Labor = Miners: Miners are Labor. They eat food (energy from the grid) to power their bodies(CPUs) to crack codes that unlock storage space (Blocks) which are used to record transactions. Miners vote on change to the economy.Units of production could be Blocks and Transactions - Processing New transactions and unlocking new storage for more transactions. The Labor force(Miners) are incentivized to earn currency (bitcoins) by using their hashing power to unlock new storage space(blocks) and confirm transactions in the network. They also all store a carbon copy of all confirmed transactions on the entire network acting as one of many nodes in the decentralized storage network. Technology – For simplicity, Technology is the CPU, software code, and the Blocks coded into the software. Blocks have a size limit before Miners need to hurry up and crack another code. As more blocks are unlocked(mined), the hard it gets to find more of the finite supply. This also naturally causes transaction speeds to slow. They can either innovate the hardware to keep up with Demand, innovate the code logic in transaction verification, or develop new code to allow for a bigger Block of transactions.Currency - Bitcoin (Token) essentially represents its own Nation. The Nation of Bitcoin. Its only product is a distributed and very resilient (possibly immutable) transaction ledger. Additionally, like Gold or any other Currency, can be a store of value.
The Hard Fork Paradigm Shift.
Working in finance for a decade has taught me many things on perception and peoples emotional response to money. However, it’s been amazing to see the number of “non-finance” people (bless your soul) who seem to think a stock split is like a huge dividend. “I had 100 shares and now I have 200!!- I hope it splits again!” If life were only that easy….
If you didn’t know, Bitcoin has split (forked) several times. Each time there’s a fork, a group of the labor force(miners) decided to use their version of a new improved technology to speed up the transactions and scale. In this, they migrate to new code, create their own currency and borders, and attempt make the original blockchain more scalable in efforts to create a bigger stronger economy. In this event, if you had 100 BTC the following day you had 100 Bitcoin + 100 of the Forked Token (albeit you had to be savvy enough to configure your digital wallet to accept the forked token.) At the time of the split (hard fork), the Price of Bitcoin is not necessarily affected. If you were in Bitcoin Core land before, one could cross borders and spend those in the new Forked-Bitcoin ecosystem. Unlike a stock split, where the stock price is cut in half (for a 2:1 split) while the shares outstanding are doubled. The bitcoin chain split creates a new token out of thin air. The weird thing that some people may misunderstand is that this is not a free lunch. One way to look at this is the new currency represents a new Nation. A new Nation which believes the originating nation should conform to its standards. The risk here is that the “labor forces” (miners) collide and attempt to de-throne each other through their processing power. A Civil Crypto-War if you will. The Split token is akin to War-Time Money Printing. There’s risk of inflation ahead, but if we win the war, our economy will be stronger than ever. Additionally, you only get the helicopter money if you are in war and have skin in the game. If you say you are with us, you get newly printed currency to put back into our cause.
From a different perspective, in terms of the entire Cryptocurrency Economy and ignoring the outside economies and internal characteristics like proof of stake vs proof of work economics, these forks represent an economic Technology Shock. These Technology Shocks in relative terms, can create deflationary events if the new technology increases output at a lower cost with a smaller labor force. Technology Shocks for the slower Nations create inflation as their currency becomes less valuable in the face of a faster growing trade partner with higher return on investment. Commonly with War Time printing, it manifests hyperinflation for the weaker currency. As Crypto currencies experience more technology shocks, propensity for growth as an asset class seems to rise. What doesn’t kill them, only makes them stronger. It begs to question, who’s really at war here? From several angles one could say Distributed Economies are at war with Fiat or centralized economies, on the other hand, Distributed Economies are at war with each other staking their new ground.
From the outsiders’ frame of reference within the centralized banking world, an entirely new dimension of Time and the Value of Money seems to exist in the Digital Asset Blockchain Realm. Is this new paradigm exporting inflation to all other centralized economies? i.e. Devaluing Centralized Currencies. Technology Shocks in the Digital Asset Realm are seemingly propelling digital asset currencies in a loop of growth fighting external deflationary pressures (in terms of the currency demand) with helicopter money driven by micro-civil wars in a world where demand is rising rapidly. As upward pressure is placed on the currency – in turn, it automatically drives incentives for the labor force(miners) higher. They’ve migrated to new Nations, explored new land, and are risking their own extinction by attacking each other with potentially the same means to an altruistic end. The common knowledge has been disrupted.
As one may see, there are shifting paradigms in a world where micro economic schisms are sending shocks through the entire global financial system.
If behavioral economics can play part in helping us understand the price movements in BTC, it may have to do with the fact people see the free lunch mirage - Or - are they are risk-takers seeing the potential in a new paradigm of capital markets and the programmable economy. Quite conceivably, both. The recent run on a relative basis for BTC clearly can be driven by several factors. However, the one I find most intriguing and underappreciated is the emotional attraction to a free lunch mirage. i.e. Investors want their free fork-split token! Now that the Fork is suspended, it’s not surprising at all that the fallen soldiers (non BTC tokens) have a renewed strength.
Structurally, the other pressure seems to be the unprecedented amount of Hedge Funds bringing institutional flows into the Digital Asset space. Some of these are investors, while a huge number are likely High-Frequency Traders using potentially illegal market manipulation techniques which take advantage of less sophisticated investors. For a large pool of money to access the ecosystem, one generally needs to do so by buying BTC first, then converting into another asset. The primary reason for this is that the exchange platforms are reluctant to price assets in fiat currency due to laws and regulations. Additionally, they’re reluctant to allow large flows of money in any domicile unless AML and KYC measures are taken. As such, BTC has had a head start on being integrated. Don’t let that fool you, the entire ecosystem is still the Wild-Wild West.
Talking heads and market influencers have arguably provided nothing but negativity with some of the most respected and powerful in finance stating Bitcoin is going to Zero. Yet, their opinion hasn’t stopped the momentum at all. One caution into the wind is that they might be right. In that, I would point out that most all of them – to my knowledge - have said this only about Bitcoin. BTC is not the only Digital Asset using Blockchain Technology and there are others which incorporate Smart Contracts, AI, Deep Learning, and code that is theoretically - Quantum Proof.
Pioneering new land in search of something more is certainly an extreme quest. A more conservative approach to thinking about the Digital Asset space may be to recognize there are real publicly traded companies with real balance sheets, cash dividend payments, and trusted relationships, who are applying blockchain and digital asset technologies to the industries of which they serve. The Centralized World and Distributed Economy paradigms are converging every day. Where are you looking?