Now Is This Winter of Our Crypto Discontent Turned to Glorious Summer by... Niall Ferguson?
I confess that Niall Ferguson as the sole remaining intellectual defender of crypto was not what I had on my Bingo card for December 2023. Everyone else long since moved on to hyping “AI”…
Somebody very smart, who knows a lot, and who thinks enough like me for me to easily follow and agree with what he says—until, suddenly, all at once, he goes not off the rails but completely in another dimension, with something to which I have the same reaction as if he were to suddenly switch gears and write something like:
And, of course, all this rests on the Shoggoths, and whoever controls them controls the universe!…
For example: Niall Ferguson.
Let me start by drawing distinctions between:
Investment: You can construct a reasonable Bayesian distribution of likely future outcomes (or you can borrow the one revealed by market prices), and with reasonable confidence commit your wealth to support activities that will yield in the future produce valued goods and services in excess of their production cost, and hence are likely to profit.
Speculation: You cannot construct any reasonable Bayesian distribution of likely future outcomes for new technologies. Why not? Because, as Friedrich von Hayek wisely observed, if we could do so we would already be much further along in deploying those technologies than we are. Hence we are in Knightian uncertainty rather than Bayesian risk. There may be activities that will yield in the future produce valued goods and services in excess of their production cost, and hence they may be future profit. But do not ask the odds. Nobody knows, and nobody has any business claiming that they know.
Gambling: This is easy: No money is coming into the system. So what one participant wins, another must lose: zero sum. You can do this, if it gives you a dopamine thrill. But don’t think that you are even speculating. And never think you are doing anything that might be rightly termed “investing”.
Yesterday evening a friend sent me, with an attached note saying “!”, this: Niall Ferguson (2023): “If You Held On for Dear Life, It’s a Merry Cryptomas!” <https://www.wealthmanagement.com/alternative-investments/if-you-held-dear-life-its-merry-cryptomas>. And let me start by quoting this from it:
Crypto’s first bull market was almost entirely driven by belief in Bitcoin’s potential to provide censorship-resistant digital cash…. This era ended in 2013 and 2014… the collapse of the Mt. Gox exchange….
Crypto’s second bull market… 2016… Ethereum… ICOs… smart-contract blockchains…. It became clear that these networks hosted very little useful… yet another winter….
The 2020 bull market seemed to answer these doubts about utility, beginning with “DeFi Summer” and followed by crazes for decentralized autonomous organizations (DAOs) and nonfungible tokens (NFTs). It appeared… crypto networks were now hosting activity from actual users…. [But] excessive risk levels and poor financial engineering… caused the downfall of projects such as Terra and the blowup of funds such as Three Arrows Capital…
All quite reasonable, no?
Right now DAOs and NFTs are definitely not in favor—all of their former enthusiasts who made the buzz are off chasing “AI”. And so the next paragraph to follow in Ferguson’s piece should have been something about the falloff of venture money flowing into and of “innovations” in crypto, and something to the effect that prices will fluctuate, but that fundamentals do not look good. Thus one would expect the next paragraph to be how crypto was never investment, but always rather speculation, and it has now become gambling.
But NO!! Instead, next the Shoggoths arrive!