Why I hate cryptocurrency

Plus: Biden gets off-message on inflation.

Play stupid games, win stupid prizes: Cryptocurrency values are way down over the last couple of months, but who’s to say whether the new prices or the old prices are right? Crypto markets aren’t like normal financial markets where the price is supposed to tell you something useful about the real economy.

Here’s how a normal financial market works:

• A stock price is supposed to be a discounted present value of a company’s future profits and returned capital per share. The stronger the expected financial performance, the higher the share price.

• A bond price is a discounted present value of expected future payments, adjusted for the risk that the issuing company or government might fail to pay. The safer the borrower, the lower the yield.

• A commodity future price predicts what an actual real-world product will cost in the future, which is helpful if you’re someone whose business involves buying or selling it.

When we talk about markets in these kinds of financial products being in a “bubble,” we compare the actually observed price to a price that we think should arise from underlying fundamentals. For example, you might form a view on Tesla’s future profitability, say what that means the share price should be today, point out that the actually observed price is much higher, and say “Tesla stock is in a bubble.” 

But what should be the price of a cryptocurrency? You can’t use a discounted cash flow model to determine its price because there is no cash flow. Nothing useful underlies the crypto asset. It is merely a store of value — something that’s valuable because you hope someone else will think it’s valuable in the future.

So there are no “fundamentals” to benchmark a cryptocurrency price, and no way to say what the price “ought” to be. No price is correct; no price is incorrect. It’s postmodern investing, entirely subjective.

Of course, if you follow @tiktokinvestors, you’ll find a lot of idiots on social media making claims about asset valuation with no reference to real underlying economic value — green line go up, to the moon, etc. This is a dumb way to think about stocks. But with crypto, really, it’s as good as any other analysis you might do. No person is more or less qualified than ButtFart69 on TikTok to tell you what a Dogecoin should be worth. In fact, maybe ButtFart69 is the best analyst to listen to, because the whole value proposition for your Dogecoin is that you’ll eventually sell it to some idiot like ButtFart69.

I know: I’ve been saying this for nine years, even as Bitcoin and ETH and various former shitcoins went higher and higher and sometimes lower but mostly higher. Yes, I have enjoyed watching crypto prices tumble in the last couple of weeks; and yes, I am salty about the fact that the price trend is still so positive overall.

But here’s the thing: I can say Bitcoin’s price will fall and be proved wrong. But when I say Bitcoin’s price should fall, that statement is unfalsifiable. Even if Bitcoin is at $3,000,000 when I die, I still won’t be proved wrong. And even if you get rich off crypto, I’ll still be right that crypto is stupid. This is the upside of the postmodern nature of crypto: My opinion about it literally can’t be incorrect.

I want to be clear: While I hate the aesthetics of crypto, my complaint here is not principally aesthetic. As someone who is in general more favorable to the social value of finance than a lot of commentators these days — especially on the left but sometimes on the right too — I want finance to be useful, serious, and furthering the production of useful products and services in the real economy.

I want banks lending for the construction of new buildings; equity markets making it possible for the most promising companies to raise funds to build useful products; bond markets making cheap and efficient financing available for public and private activities that will support payment of interest on the bonds. I was a big champion of the Fed’s actions to rescue the financial system in spring 2020 because I know a robust and liquid financial system isn’t just something people on Wall Street like — it’s something that makes it possible to get a mortgage, use a credit card, remain employed at a company, and generally enjoy all the things made possible by a modern economy.

And I am concerned that tens of millions of Americans investing in a stupid market with no such thing as fundamental value — and where prices should not keep going up and up and up, though I’ve grown weary of saying that and watching them do so anyway — is likely to lead to significant financial dislocation and reduced trust in the financial system when a lot of them lose their shirts.

So that’s why crypto bothers me and I lack a sense of humor about it.

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“Message: I care”: It’s clear President Biden finds Fox News White House correspondent Peter Doocy very annoying, and so do a lot of liberals on Twitter. So when Doocy shouted a question with an obvious answer at Biden on Monday — "Do you think inflation is a political liability in the midterms?" — it was understandable as a human matter that Biden snapped at him, calling him a “stupid son of a bitch.”

But look. Unless you are in the independent-newsletter-and-podcast business, you will sometimes need to deal with people at work who you find annoying. And you may need to be professional in those situations. Especially if you are the president of the United States.

My concern about Biden’s answer is not that he was rude to a reporter (reporters have spent far too much time over the last seven years complaining about people being rude to us) and it’s not that he used a profanity (nobody cares about profanity anymore).

It’s that Biden’s answer was off message.

“It’s a great asset — more inflation,” Biden said, before insulting Doocy’s intelligence. I’ve seen people defend this as an on-message answer, with the president’s sarcasm conveying that he understands inflation is a big problem. But that’s wrong. The problem with this answer is it’s about how inflation is a pain in his ass, rather than a pain in the public’s ass.

Reporters have asked stupid questions since the dawn of time, and they will do so forever. What you’re supposed to do with a question like this is not answer it literally — you ignore the invitation to play pundit about your own political fortunes and reiterate your singular political focus on bringing prices down for Americans’ everyday expenses.

Monday’s public event was about Biden’s efforts to fight inflation, but because the president allowed himself to be put on tilt, the message that got out was that he hates Peter Doocy and is annoyed to have to talk about inflation. That’s unfortunate.

I laid out last week some steps the president should take to push prices down (and a few he’s already taking). But actions are not enough. He needs to lovebomb the electorate with empathy for their inflation concerns and his relentless efforts to bring prices down, every time he is asked, even if the form of the question is stupid.

Very Seriously,

Josh