The crypto challenge

Cutting through the noise

For years, the world has been engulfed in accelerating debates full of fear and fascination about Bitcoin, altcoins, and blockchain economies. Just look at January 2018, which brought threats and announcements of state regulation over cryptocurrency in some jurisdictions, bans of exchanges, rumors of impending restrictions alongside news pointing to the opposite, reporting on both startups and legacy companies that are venturing into initial coin offerings (ICOs), and speculation on the intentions of governments seeking to create their own blockchain economies, crypto-coins, or sovereign digital currencies. (See glossary for an explanation of these cryptic terms).

A peculiar noise this past month emanated from the cryptocurrency trade. It is so replete with extreme volatility that January seemed to be accompanied at every turn by warnings that the cryptocurrency skies were falling and that the Bitcoin crash had arrived, or was just around the corner. This clutter of chatter was aided by, on the one hand, the reality of excessive fluctuation in Bitcoin, and on the other hand, the cryptocurrency trade environment, which lacks any visible interruption by holidays or off hours.

Bitcoin, the market-capitalization leader in the crypto realm, went up and down like a yo-yo throughout the month, adding roughly $70 billion in market cap between January 1 and 7, only to see it drop by $72 billion in the following week—and so forth. By late January, when some trade augurs were waxing lyrical about Fibonacci lines, a momentary environment of relative calm seemed to exist and Bitcoin was trading in the range of $11,000 a coin.

As for the cumulative market cap of cryptocurrencies, since the beginning of the time display on May 1, 2013, the estimated value grew from $1.4 billion to $8.4 billion on May 1, 2016—or almost sixfold over three years. The next year saw a massive acceleration: By May 1, 2017, the market cap was cited at an eye-popping $37.9 billion, having grown more than fourfold in a single year, followed by the really crazy rise to $600 billion at end of last year. At the end of January, the market cap was $550 billion.

Moves by the second and nanosecond

Notwithstanding that the trading of cryptocurrencies in the last few years has seen periods of almost normal market insanity, what truly matters in this domain is not the year and day, but the minute, or even the second, that you look at this market. Regardless of its degree of volatility at any time, the intensity of this market remains disturbing, unless you happen to be an algorithm. Even if one, for example, were aiming to implement a contrarian strategy in the current heap of cryptocurrencies (of which at least 70 percent, but possibly over 90 percent, appear to move in lockstep, while their overall number is growing daily), how could such a strategy be designed and implemented with human capacities to process information and act with a human mixture of experience, technical knowledge, information, and people-reading skills?   

Further adding to this muddled trading environment are marketing departments screaming of the next ICO and counting down its presale “offering” in pop-up ads on numerous sites dedicated to digital-economy news (with unknown percentages of fake news presumably strewn in), blatantly partisan cryptocurrency opinionating, and annoying coin promotions. To complete January’s chaos, just mix color into the picture in the form of mutually contradicting comments by economic celebrities, from Facebook CEO Mark Zuckerberg to investor legend Warren Buffet to popular economist Robert Shiller.

Zuckerberg praised cryptocurrency as a way to “take power from centralized systems and put it back into people’s hands.” Buffet appeared in a brief TV interview in mid-January with the ominous  prediction that cryptocurrencies “will come to a bad ending” (while mainly saying that he has other investments and will not partake in a sector about which he knows little, nor will he take positions on cryptocurrency futures). And Shiller said in a debate at the World Economic Forum that Bitcoin was an “interesting experiment” after oracling in interviews that Bitcoin was in a bubble state, but that bubbles with strong narratives could last thousands of years.    

It seems daring to assume that a load of brief cryptocurrency remarks to media will contribute to clarity, rather than just pile more noise onto the shaky ground of digital money and the historically incomparable reality of an already confused world’s digital transformation. But certainly not all economic noise is bad noise that merely obfuscates and distracts from core cryptocurrency concerns.

Some good things can come from noise

One important value of the recent hype lies in increasing the general curiosity about cryptocurrencies. Back after the first wave of attention to Bitcoin in 2013 and 2014, when its use for buying drugs on the online Silk Road marketplace and the shuttering of then-leading Bitcoin exchange Mt. Gox in Tokyo made news, cryptocurrencies were considered by some to have evolved from a subcultural phenomenon to a reference point in mainstream public debates. However, according to media reports and the Statista website, polls from December 2013 suggested that basic awareness of Bitcoin’s existence was below half the population in the United States at 48 percent, and between 13 and 45 percent in a number of developing countries. Moreover, responses in the US indicating willingness to invest in Bitcoin were far below basic awareness; only 13 percent said they would prefer Bitcoin investing over gold investing.

More recently, surveys from late 2017 in South Korea, Japan, and the United States—which are currently the three leading countries in the global cryptocurrency economy—indicated that basic awareness in both South Korea and Japan was around 90 percent, with the combined medium or high understanding of Bitcoin (but not blockchain) in South Korea exceeding 45 percent.

A November 2017 survey from Ditto, a cryptocurrency-focused public-relations firm in the United States, showed that almost three-quarters of a panel of 500 people polled via Google Surveys had heard of Bitcoin, but that 70 percent also responded that they were “not familiar” with cryptocurrencies. According to Ditto, relatively few respondents had heard of cryptocurrencies other than Bitcoin, and only 10 percent of all survey participants said they knew what an initial coin offering was.

When also taking into account anecdotal evidence from conversations in Lebanon with financial professionals and others, the impression at this time is of strong curiosity about Bitcoin and comparatively low but growing interest in the rest of the cryptocurrency realm. There appears to be a huge amount of space for further education on all aspects of the issue, especially if coming months and years see continued price rises of Bitcoin or future periods of boom following retrenchments.

But it is not all about enabling new players. An announcement of an upcoming initial coin offering illuminates that legacy companies, under specific circumstances, can ride the wave to their advantage. Eastman Kodak, a corporation with an exceptional history in photography throughout the 20th century, saw its regular shares receive a substantial boost immediately after the company declared on January 9 that it was planning to release KodakCoin, a “photo-centric cryptocurrency” on the basis of blockchain technology in conjunction with a platform for managing rights to digital images.

Notably, the Kodak share price soared from $3.10 on January 8 to $10.70 on January 10, and the stock kept trading above or around $10 until the time of writing on January 27. This boost seems even more noteworthy considering that the company had languished for quite some time since it emerged from bankruptcy protection in 2013. It reached a relative peak in January 2014 at $36.88, but had been on a long decline from there and saw shares trade in the $3 dollar range throughout the fourth quarter of 2017.

Ahmad Barclay & Thomas Schellen

Beneath the noise

Partially obfuscated by the noise around cryptocurrencies are the three development streams of technology innovation and technologically enhanced human behavior that underlie the cryptocurrency issue. The first of these streams is the Bitcoin stream which is rooted in cryptography. In the knowledge economy and information age, the art of encryption and decryption has become immensely sophisticated, and it makes up the crypto part of any cryptocurrency.

The second element in the successful creation of Bitcoin was the quest for a digital system able to substitute for money as means of value transfer. The concept of creating money for use in make-believe environments has fascinated human game creators and innovative minds throughout various phases of capitalism—and might have especially spurred them on during periods when capitalism was in one of its great crises. One can perhaps regard the Monopoly board game’s initial rise in the 1930s Great Depression as an indicator of the attractiveness of private money.

The quest to develop virtual money or online currencies was part of the narrative of the New Economy up until the bubble burst in the early 2000s. The idea of virtual money lost some gloss in the real world immediately afterwards, as online finance initiatives dwindled, but virtual money and virtual gold continued to thrive in the realms of strategy video games and massive multiplayer online games.      

In the narrative of Bitcoin that tends to wander into the realm of urban myths, it is the pseudonymous Satoshi Nakamoto who is associated with the successful crossbreeding of cryptography and virtual money, boosted by the external impact shock of the Great Recession, into the first true cryptocurrency.     

Taken from technological and economic points of view, the third element, blockchain and ICOs, are much lighter fare than Bitcoin, even as, in technical terms, the pure variety of the former is inextricable from the Bitcoin idea, and the latter appears to be largely a derivative of its success. Blockchain technology is still in flux and its economic and social uses have yet to be seen (see comment and interview). The relationship between blockchain and banking is also closer to an engagement for marriage than to unbridled marital bliss as of yet (see explainer).

The trajectory of the ICO story, on the other hand, strongly suggests that digital progress can do nothing to modify human behaviors away from patterns that have tormented men and women (while negatively impacting male behavior more directly than female behavior) throughout the history of boom-bust capitalism and recurrent bubbles. There is no eradicating overconfidence and irrational exuberance; thus, it simply looks as if the short history of the internet will see its second bubble not too far into the future.

As an added concern, initial coin offerings, as they are currently handled absent supervision, could weaken the process of sorting out bad business ideas and channeling investments into startups that, by existing criteria, deserve to be funded. “The problem is that you allow lousy startups to fund themselves,” says Henri Azzam, director of the Masters of Finance program at the Olayan Business School of the American University of Beirut.

Azzam argues that an uncritical process of indiscriminately churning out coin offerings, on for example the Ethereum blockchain, can facilitate the funding of inefficient startups and the creation of zombie companies, resulting in detrimental impacts on the larger economy. “An initial coin offering is a crazy idea that startups, instead of selling part of their business to investors so that the investors become shareholders, are selling them coins with the promise: ‘You can use these coins to buy my services as soon as I am up and running.’ I want good startups, people who can pass criteria of selection,” he says.

The Bitcoin worldview

When compared with the dangers and the potentials of altcoins, ICOs, and quasi-decentralized but existentially third-party controlled blockchains, Bitcoin and its original blockchain are in a wholly different ontological category. Bitcoin is underpinned by libertarian anarchist thought, and thus is situated outside of the realm of most of the concerns that have plagued the 20th century. The question in regard to Bitcoin is whether it is just another hare-brained idea like almost all grand concepts to explain the world out of human comprehension, a viable alternative to the current rule of government-issued money, or even, more simply, a better option for money. Does Bitcoin compel humankind to use it because it is superior to the previous forms of money that humans created almost instinctively and without the a priori deliberation that would be able to hold water when compared with the consequences of the monetary creation, such as fiat money?

This question is a non-starter for Saifedean Ammous, a professor at the Adnan Kassar Business School of the Lebanese American University, who thinks of Bitcoin as a take-it-or-leave-it proposition. Ammous, who is currently finalizing a book on Bitcoin in the context of the history of money as he sees it, tells Executive, “Bitcoin removes trust from the issuance of money. It takes us from a world where we elect people, and then pray that they will not be corrupt as we entrust them with our money in the hope that they will create a financial future for us, and moves from there to making [money] into a force of nature as it was with gold.”

His arguments, laid out in his book that is slated to be published in April as “The Bitcoin Standard,” more than hint at a perspective on Bitcoin that is based on a concept of it being digital gold. One has to accept, in order to fully embrace this book, that one of the worst mistakes of the last 150 years was to give up the gold standard as the firm foundation of “sound money” and the foolish selection of “easy money” that can be printed or issued at will in paper or electronic forms by the governments that control them.

In his view, many of the world’s problems can be attributed to the very existence of governments as they are today. Problems such as misfiring World Bank interventions in national economies anywhere, or an over-reliance on credit for financing of consumption, will be no-brainers once there is no way in which governments can control money. “In the world of Bitcoin, the power of credit comes from saving, while right now, the power of credit comes from government,” says Ammous, explaining, “The whole point of Bitcoin is not that it easy to transact because it’s fast; the whole point of Bitcoin is that nobody can control it.”   

From this perspective, Bitcoin is “zero percent trust and 100 percent verification,” he writes in his upcoming book. He posits that anyone who does not understand the value proposition of this sound money is free to refuse it, but will see his world crumble, while the world built with Bitcoin will see investors into Bitcoin rewarded. “If we move the world to a Bitcoin system, people who use it will see their savings rise, while people who stick to the old system of conventional money will see it collapse. This is based on the assumption that government power is not effective against ideas and technology,” he enthuses.

The specificity in Ammous’s approach is not so much a matter of like or dislike. But it comes across as intellectually bipolar: partly 21st century, with excellent comprehension of Bitcoin’s technical and economic complexity, and partly an expression of concepts that preexisted not only cryptocurrencies, but the entire internet. Thus, some of these views are not novel—and some of the arguments that are presented by Ammous in discussion are borrowed from writings by economists such as Friedrich Hayek and Murray Rothbard (each referenced multiple times in The Bitcoin Standard), of whom the latter was said to have coined the happy term anarcho-capitalist, which appears well suited to labeling Ammous.

In explaining the concept and some implications of Bitcoin that he sees as desirable, Ammous provides not just food but a whole banquet for thought, and more insights than a gazillion cute YouTube cryptocurrency tutorials, “documentaries,” or media stories that lack in everything but inadequate simplifications. One does not have to share the views that drive his perspective on the history of money, the value of Marxist thought (“I don’t consider anything that has ever come from any Marxist to be worthwhile of study”), Keynesianism and monetarism, and contemporary academics—whose original sin to him is that they have succumbed to government, their ultimate employer, and thus cannot talk about the problem that is government.

What he tells Executive about his views of the World Bank and International Monetary Fund (“Communist organizations”) is, at the very least, refreshingly different from the statements one hears at World Bank meetings. Ammous has unshakable views on the role of governments. After governments took control of money in 1914, “the world went to shit,” he declares, saying categorically, “Government creates a problem, then pretends to solve it and makes it worse.” This view is perfectly logical as a continuation of his saying earlier in the interview, “I refuse the idea that the state is the representation of anything good in society,” but instead the “highest expression of sociopathy, the narcissism in people, and the evil in people.”

As he speaks, the impression grows continuously stronger that the story of Bitcoin cannot entirely be appreciated without noting that libertarian thought and refusal to submit to state violence is woven perhaps not into the code, but into the DNA of Bitcoin. This is why Bitcoin appears to qualify as a worldview, perhaps more than anything else.

In practical terms, Ammous very reasonably says that he does not like to see Bitcoin discussed in terms of definitions that date back to days when Bitcoin did not exist, arguing convincingly that it does not make sense to discuss Bitcoin in such terms because it breaks old categories. He considers studying Bitcoin hugely important for Lebanon, and advises that Banque du Liban start thinking about adding Bitcoin to its portfolio of reserves. He agrees with Lebanon’s central bank governor, who warned institutions under its supervision against dealing in Bitcoin. “It’s perfectly reasonable to tell their own financial institutions not to deal with Bitcoin because those financial institutions are guaranteed by the central bank,” he explains. “The point is not to buy it right now. The point is to understand how it functions and try to understand how it can be integrated,” he opines, very conciliatorily.

The question of trust

It opens a whole new can of worms if one pivots to an approach of regarding cryptocurrency from the perspective of it representing a worldview. Not only are the consequences of adopting a worldview very tricky for individuals and societies, but worldviews have figured prominently in history—with very mixed outcomes.

Bitcoin is an ideological challenge to conventional forms of money in two ways: by provoking “sedimented beliefs about money and by exposing the forms of exploitation, risk, and even violence inherent in the existing system of state authorized credit money,” wrote Ole Bjerg of the Copenhagen Business School in 2015, in a contemplation of the philosophical ontology of Bitcoin. The question of interest, then, is: Can digital currencies remedy or ameliorate these aspects of existence, and what will be the trade-offs and societal or ontological costs that have to be considered? More simply, could the challenge of Bitcoin turn out to be that this payment system is shaking the foundations of our ruling monetary mythologies about the human being, society, and state?

In research done for the European Parliament, another academic cautioned in several papers that the most profound impact of cryptocurrency development could be in contributing “to subtle changes in broad social values and structures.” The sociologist Philip Boucher specifically addresses the blockchain concept that technically underlies the existence of cryptocurrency. All technologies come with their strings attached to values and politics, “usually representing the interests of their creators,” he elaborates, so that “each time we use a distributed ledger we participate in a shift of power from central authorities to non-hierarchical and peer-to-peer structures.”

According to him, usage of blockchain, in every case, will contribute to a societal shift toward prioritizing “transparency over anonymity” and “to diminishing trust in traditional financial and governance institutions, and to expect greater levels of accountability and responsibility in all aspects of our lives.”

If digital capitalism will be the coming incarnation of capitalism that is exponentially more dominant in human life than any previous version of capitalism, if we are about to leap from Kaletsky’s capitalism 4.1 to an exponential capitalism 42 in the real, financial, and digital economies, and if cryptocurrencies are to emerge as key enablers of this much more intense capitalism, what societal consequences and new sociological concepts should we prepare for?

How will we handle freedom that does not come at the price of eternal vigilance or with a counterweight of responsibly? What would be needed to be done to achieve realignment of historically entrenched social values when society and individuals undergo a shift toward greater freedom from the state, or even through dilution of interpersonal bonds and into a new trust relationship—camouflaged as verification—with a self-contained, presumably sovereign, technology? What are the ontological, existential, or, if you wish, spiritual implications of money that has aspects of digital gold in combination with aspects of statehood without a government and aspects of credit that is unencumbered by the currency of trust?

These might be naïve questions that will never become acute concerns in anyone’s life, but at the very least it is to be noted here that the real story of Bitcoin, cryptocurrencies, and ICOs is not about transforming electricity and processing power into truth, or about short-term investment prospects, enrichment opportunities, and present-day stability in cryptocurrency market cap, or the absence thereof. Nor is this about accidental losses of hard drives, criminal abuses, dope buyers, and computer hackers, or the possibility to order your pepperoni pizza with Bitcoin, or about early-stage design issues in smart contracts and Digital Autonomous Organizations, details of cryptography, or the deliberate mystification of Satoshi Nakamoto.

It seems the bottom line is that cryptocurrency tech will greatly change our lives, while at the same time more questions and uncertainties are bound to emerge with every further contemplation of the cryptocurrency realm, and the global digital economy. As societal paradigm shifts, affected in part by the digitization of our lives, appear to continue unabated and actually seem prone to further accelerate along with the proliferation of digital capitalism, it may indeed be unwise and counterproductive to keep questioning if Bitcoin is a bubble, how large the volatility in the cryptocurrency market will be next month or next year, or forever ponder academic constructs about the nature of money.

On the other hand, throwing all thought to the wind and just getting down to make some (digital or conventional) money will not bring nations or the global community any closer to drafting, as French President Emmanuel Macron asked for at the World Economic Forum on January 25, a new social contract or set of compacts based on the duty to protect, the duty to share, and the duty to invest, that help improve life in our world. Posing this monumental challenge, he also asked for this process to entail regulation of Bitcoin, cryptocurrencies, and shadow banking in the world of finance, as well as today’s corporate superpowers in the digital realm. Achieving a balance between economies speeding or leapfrogging into greater digital compatibility, managing the rise and use of digital currencies, and creating new ethics, values, and traditions for digitalized societies could well be the tallest order in at least a century, but, in 2018 more than ever, it appears to be a challenge that will not be denied.

Thomas Schellen

Thomas Schellen is Executive's editor-at-large. He has been reporting on Middle Eastern business and economy for over 20 years.