Cryptocurrency Big Picture: What will we need global money for?
We have 5 basic needs of cryptocurrencies: the need to bet, borrow, hide, earn and pay — in descending order of capital value.
“There is no document of civilisation which is not at the same time a document of barbarism.” Walter Benjamin
The grouping of peoples into nations is a recent hard fork of the blockchain of sociology. Countries have coordinated us for only 500 years. Before nationalism, feudalism enjoyed a longer run from C9 until we stopped mining feudal human blocks in C15. We are in the final days of nationalism on the timeline that matters to our great-grandchildren. We already claim a global citizenship — that is a non-identity. Rather, we are all immigrants on route from our country of origin to new nations of our creation. Our destinations are thematically organised by our personal pursuits into future tribes. We will travel uncontrollably between them without leaving ‘home’ and they will compete for our attention (and all other, less valuable resources.)
A modern narrative extolls nationalist virtues in the context of either individual rights (progressive) or ethnic rights (conservative). The collective economic purpose of organising into countries is lost on us. As defined by the modern benefits of citizenship, nationalism has ended. We are simply borrowing its more useful artefacts i.e. currency, taxes, government and the Olympic Games. The magical captivation of GDP and gross domestic passions within borders has become so effortless that it is invisible — and will remain so for the next 12 to 24 months. Then, “all hell breaks loose.” That future is the topic of this analysis.
Taxes and monetary control will keep us in limbo while we emigrate. It is a temporary and ineffective holding cell. Economic consolidation of nations’ currencies is not yet a certainty. Tribalism, racism, ethnicity and religion still deeply root nationalist narratives. Claiming these un-fungible attributes of personal identity as national, erodes economies. Brexit is recent proof. The paradox is that both tribal and open nations’ currencies will be revalued to test the limit of their governments’ efficiencies. No public policy, whether conservative or progressive, can escape global economic emigration. This trend will define the next decade. Its resolution will be the foundation on which the next era is built. We have begun to write the code for humanity’s next hard fork.
The proverbial 1% that control global capital are ahead of us on this journey. The nations of Switzerland, Ireland, Bermuda, Luxembourg, Cayman Islands, Mauritius, Netherlands, Singapore, Isle of Man, Jersey, Monaco and the Bahamas are the top 10 destinations for their global capital. To make sense of the fact that a chunk of money is globally liquid, economists have already consolidated it into nation-less tiers. M0 to M4 money supplies are a global view of money and a useful simplification for applying its past lessons to a cryptocurrency future. Through the lens of early travellers and an already global marketplace, we understand what truly global citizenship will demand from our money.
The tax havens’ initial function was secrecy. Switzerland led but Luxembourg excels today with more than $1,3Tn in shares of untraceable mutual funds. Roughly twice the value of all blockchain assets is secretly hidden in a tiny landlocked rural nation with just over 500K citizens. Secrecy is our most foundational source of financial security — we can bank this insight and move on to taxes. We don’t want to pay taxes. We call these places ‘havens’ — freedom from taxes is the next security we seek. This impulse excludes no-one.
The tax policies by which the havens compete for capital are in every nation’s future. Common tactics include freedom from capital gains and income taxes, double income tax treaties to stimulate trade and jobs, and/or taxation that excludes or grants exclusive privilege to foreigners. Today’s fastest growing havens offer not just security for capital but also tax-free yield of production within their borders. The city of Dublin now has a property bubble to deal with. These are the first world problems that nations like Ireland hope to have when they create tax incentives. Crafting sustainably successful policy is part skill, part art, part timing and part luck — unintended consequences (good and bad) are a future certainty.
The total currency in global circulation is worth just 0.6% of the value that is invested in global derivatives i.e. 1,2 quadrillion USD. It’s a theoretical maximum estimate; no-one knows for sure. Economists have stopped trying to measure the top tier, M4 money supply. The majority of the world’s capital value lies in assets of our purest production i.e. imagination. Speculation over financial derivatives is our primary mode of value creation although no one of us ants would like to admit to it — least of all, the speculator ants. This anecdote puts Bitcoin in a new perspective. $BTC is just another digital derivative. Its valuation is a pin-prick of a star in that speculative galaxy.
Most of the world’s capital is already owned in digital assets. Most new jobs rely on digital innovation. Our memory and reputation is increasingly offloaded from our brains and persons to web services. Now, we have a DIY tool for the creation of derivatives and for their open trade. Bitcoin is the Myspace of new capital resources. Public blockchains are a passport for the man in the street to join the 1% on their economic emigration. She has packed her bags and is accumulating foreign currency in $BTC, $LTC, $XRP, $ETH etc. Where they will go will depend on their passions and needs. This is not about passions — this is about needs.
A nation’s GDP sums the outputs of its citizens pursuits of money. Currency captivates GDP. Firms captivate free cash flows. These two entities have exclusively captivated capital production for centuries. No net capital is produced outside of nations and firms. Until now.
In both cases, the economic job of the firm and the nation are to find opportunities for scale and coordination value. Population growth provides economic scale to the rising Indian and Chinese economies. Effective public policy and governance adds coordination value. Networks have become our preferred tool for growing firms — using marketplaces, brands, ecosystems, platforms and reputation to build their moats. Because public blockchains are also networks, we mistakenly view them through the lens of the firm. This is flawed thinking; it overvalues the network effects and undervalues the coordination value opportunity.
Public blockchains create a trusted, valuable network entity outside the firm and outside the nation. This is a new option. It will be hybridised before we properly learn to find its coordination value. That value needn’t accrue to shareholders and may not accrue to currencies. We will cling to the philosophically redundant firm-centric marketplaces that yield modern wealth. Network effects are valued because of their success in differentiating firms. From an economist’s perspective, the end-point in the race to build a scalable, efficient blockchain architecture for the planet is the same for all contestants. Network effects matter less when all networks are equally global and liquid. Coordination value will then determine the winners. We are now asset-hackers. Our hacks produce magic beans, hard forks, airdrops and ICOs. It’s a start. We will find better coordination opportunities that better meet our needs of money.
We have 5 basic needs of money — bet, borrow, hide, earn and pay — ranked in descending order of today’s global magnitude of need. This ranking could change but it’s unlikely — we already see the same distribution in blockchain valuations. Vitalik Buterin bemoans the fact that most blockchain values lies at the top of this list. He claims that won’t make the world a better place. He is socially correct but he incorrect economically. Crypto is behaving the same way other money does. It’s a veiled endorsement. Our economic emigration appears certain.
1. We need to bet money
We are driven to speculate. Our biggest capital bet is on derivatives. By measure of economic value, speculation is humanity’s most basic need. Maslow missed this one. The total market for derivatives holds earth’s most valuable grouping of capital. Solutions for legally migrating derivative securities to 24/7 trade on blockchains will soon mature. With discovery of a robust solution to obviate KYC/AML regulatory friction, global money can freely speculate. Behind derivatives, our next biggest investment is in $217 Tn worth of property — a big bet that population, commerce, cities, agriculture and wealth maintain their trajectories. Venture is our next favourite speculation. We are gamblers.
In the blockchain opportunity to fulfil our need to bet, there are many players. Coordination value lies in our new ability to create digital assets and broadly secure and distribute their trade. We will find new ways to aggregate and fractionalize their value into the next hot speculative investments. Today, only one top-10 coin offers DIY asset-hacking tutorials and asset deployment guides on its home page. Ethereum is the most extensibly positioned platform for coordinating our broad needs to bet. Almost all venture bets made on ICOs back assets on the Ethereum blockchain. Whether the Ethereum platform or more vertical solutions extract more coordination value, remains to be seen.
2. We need to borrow money
To back a bet, we usually borrow. Our long-term property bets are mortgaged. Our business ventures are bank-backed. Liquidity providers will thrive on blockchains. All global debt equals only $2Tn less than all global real estate. The need to borrow has a smaller quantum but a stronger pull than the need to bet. We will travel the globe for more favourable terms. Liquidity providers with global pots will meet us half way. Coordination features will help them find liquidity and efficiencies and will automate discovery of optimal risk/yield spreads.
Solutions in this space are nascent and unimaginative. Their ICOs have been well received and liquidity easy to find. This opportunity is far more extensive than “get a loan” and such liquidity will become invisible to consumers. Integration to existing channels will be hit and miss. New banks that are built around new experiences have a good chance to break through now. Crypto exchanges are in a race to zero-rate fees as they realise the opportunity in providing liquidity and controlling a currency. Our need to borrow money on blockchains will be the easiest monetised. You will receive amazing credit card offers in 2020.
3. We need to hide money
In the poem, Mending Wall, Robert Frost claims “”Good fences make good neighbours.” His character muses; “Before I built a wall I’d ask to know, What I was walling in or walling out, And to whom I was like to give offence.” Secrecy feels deceptive but it is our most basic need of money. We don’t discuss our money. Its balance is known only by our bankers. Their role in keeping our secret is now redundant.
While all public blockchain projects offer account-to-owner anonymity, only Monero dominates in account secrecy today. The difference will become more stark as governments begin the task of connecting people to blockchain holdings via exchanges. XMR solves a valuable problem in both the short and long term. Short term, while nations decide policies, Monero is a global clearing house for securing global yields. Long term, it’s a well-walled security in increasing demand, preferably secret to either Luxemborg and Switzerland. There will be no Panama Papers of $XMR. Ranked 13th by market capitalisation, XMR is worth less than 3% of Bitcoin’s value. Its valuation hints at the Monero’s modest origins and no-hype branding. As they put it;
There was no premine or instantmine, and no portion of the block reward goes to development.
At this time of peak greed and confusion, $XMR deserves a shout-out for a sustainable vision and honourable founding moment. That may be what we’re looking for in a ‘secret keeper’. I don’t expect to see air-drops and tip-bots on this one but I fear there will be opportunistic hard forks. I hope Monero makes it — in a world of magic beans, it’s refreshing to see customer value and product vision so well differentiated. A paradox obviously lies in how secrecy may be abused.
4. We need to earn money
If we could easily emigrate today, we would want to be paid in USD. The currency of most earnings is the Dollar. Size counts. The tax havens only compete for some of the cream of M2 cash. The rest goes to the most productive nations.
Finally, near the bottom of the pile, we are talking about the money that we actually talk about. The stuff of our financial magazines. This space is massively underrepresented in blockchain projects. Thus far, only venture capital, outside the firm, has embraced new coordination value (i.e. in ICOs). The ICO mode of project financing will be more productive within firms as well. By way of early example — KIK, having fallen a step behind in the messaging race, has bet yet that we will trade while we chat and have added a coin ($KIN) to their community. Brands need to understand productive patterns in this trend. Investors need to understand whether coordination value is created and how much is extracted. Again — there will be undervalued winners and overvalued losers. The winners will focus their efforts on adding value to our money and our efforts.
This point about our efforts is a peculiar opportunity. We aren’t yet demanding to be paid our salaries in cryptocurrencies. That the global gig economy is remunerated in local currencies now makes no sense. If brands like AirBnB and Uber are to maintain their moats they will have to coordinate global currency value better — either by offering or creating cryptocurrency options. The latter strategy is more valuable and more risky. For an early mover, it could, for example, allow AirBnB to profit from the capital trade in the real estate assets that underly its network — an ‘AirCoin’ would be the only currency that can purely captivate the incremental value in a private property’s rental yields. In a fast growing economy like global short-term rentals, such a currency would accrue large value rapidly. The projects to offer blockchain securities of property assets are underway — but still no AirCoin.
The ability to hack assets gives us the ability to hack jobs. Globally. The third world’s primary economic need is profitable income — we need jobs in Africa. The 1st world’s primary economic risk is the 3rd world. We have an opportunity here. Half the US workforce will be out-of-office soon. Silicon valley engineers have the opportunity to create jobs in Malawi — by coordinating global investment in resources to develop the rich agricultural land on the banks of its massive lake. That food is needed in London. Real valuable problem + real valuable solution. Instead, we work on ‘Paypal 3.0.’
5. We need to pay money
This essay’s job is clearly not to espouse our need to pay. Rather, its job, already done, is to diminish the excess of importance that we place on payments today. “Digital Cash” is the blockchain’s trojan horse. It adds linear, network value but without new coordination of our first four needs, it’s an incremental effort. The revolution is not in Moneygram using $XRP to move the same slither of wealth they do today. A good cryptocurrency, by definition, will disintermediate Moneygram and Western Union first. Their value lies in monetising crypto’s free gift to the world. It’s a fascination but a distraction from the conclusion.
There is an emerging argument that the money we need to pay will become increasingly invisible to us as all resources are made into trade-able assets. Hold more than 3 cryptos for more than 3 days and you’ll come to appreciate the value in this potential future — it’s again coordination value — and it’s likely to be the solution we ultimately choose for global payments. Add your thoughts on who has a horse in this race to the comments.
I prefer to leave you to draw your own conclusions. Please share them in the comments.
This is a macro framework for my team to build models of the market. You’re welcome to use it in your analysis. This is not advice for your investments. This piece is the sequel to the Blockchain Big Picture — Q1, 2018. These thoughts are headed for a book that is looking for US publication — any help there would be appreciated (add me on LinkedIN).
Thank you for reading.
