by UnHerd
Tuesday, 14
September 2021
Audio
15:00

Tyler Cowen changes his mind on crypto

The influential thinker says he is no longer a sceptic
by UnHerd

Tyler Cowen is one of America’s big thinkers. A libertarian with liberal social views, the economist is regularly cited as one of the most influential thinkers on the Right. So it is always significant when he offers his opinion on anything, be it Haitian voodoo flags, Beethoven’s 32 piano sonatas or America’s bloated bureaucratic system. He’s also unafraid to change his mind — as he did with Brexit following the early success of Britain’s vaccine rollout.

And this week, Cowen has changed his mind on a different topic, namely cryptocurrency. On ‘The Ezra Klein Show’, he said that he was being “slowly converted” to the crypto cause, and no longer believes it to be a bubble. His full answer is below, or you can listen to the podcast above (around the 41:00 mark):

Tyler Cowen

“Well, I had been a sceptic for quite a few years. But I am slowly being converted. And I would say most intelligent people outside of crypto still underrate them, because they don’t get it. It’s clear to me now it’s not a bubble. It is consistently attracting talent. Even with advances in normal payments technologies, the interest — extreme interest — in somehow using blockchain and crypto to make financial transacting and also borrowing and lending better, there’s just so much force behind it.

To me, it just looks very much like something that is going to succeed and be significant. So I think too many people have the Paul Krugman attitude, like it’s all a scam, it’s a bubble. But I think it’s past that stage. It looks like it’s for real.”

Ezra Klein

“I want to double click on something you said there, which I think is interesting as a heuristic, and has been one of mine on crypto, too, which is using the clustering of talent in an area as evidence of whether or not it is going to succeed. Not just through the idea of — maybe that area is attractive to talent, but through the idea that where talent clusters, they will figure out a way to make it succeed. Can you talk about watching talent as a way of forecasting?”

Tyler Cowen

“Crypto talent comes from all over the world, which I think is phenomenal. Crypto talent is often so positive and so creative. I think Vitalik Buterin in particular is just one of the most important thinkers today.”

Ezra Klein

“Vitalik Buterin, being a co-founder and the leader of Ethereum.”

Tyler Cowen

“Ethereum, yes. When you’re in on crypto conversations, they have an excitement, a positivity, that you just don’t really get elsewhere. And a focus on building things, doing things — and I’ve just seen that now so consistently. That’s what’s converted me. The “can you fully articulate the actual use case?” Maybe I’d get a B- or a C+. But I’m bullish on it. Moving to using more crypto will involve big disruptions to our financial institutions.

We won’t be ready for it. We’ll do it poorly, just like with many of these other breakthroughs in world history, but I think it’s going to happen and probably should happen.”

Ezra Klein

“…I suspect that crypto is going have a — if it matures in the way people want it to, once again, a huge number of centralising middlemen-y big companies that end up being the winners. Do you think I’m being pessimistic on that?”

Tyler Cowen

“I don’t know if that’s pessimistic or optimistic. I think there will be both centralised and decentralised crypto. I’m not sure in what ratio. I suspect centralised crypto will be considerably larger, but decentralised crypto, if only as an alternative, could still be incredibly significant, because it will limit and constrain what centralised crypto can do, right, in terms of sort of implicitly taxing your users or customers.”

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Jon Hawksley
Jon Hawksley
1 year ago

Assessing the intellect of participants might be a way to choose a religion but unless they are mathematicians it is a foolish way of looking at cryptocurrency. The characteristics of money are:
1.      It is a promise by a creditworthy party, typically governments or banks, that they will give you value in the future.
2.      The party promising has to be trusted to fulfil that promise. Governments have resources to repay you from assets taxes. Banks hold the assets they spend your money on and are supervised to ensure they can recover the money they lend in order to repay you.
3.      The future value has to be predictable. Generally maintained by reference to a currency issued by a government who is expected to keep its value within a narrow band of inflation or deflation.
4.      The evidence of that promise has to be convenient. It can be evidenced in a piece of paper that is hard to forge or a ledger maintained by a bank.
With a bitcoin:
1.      There is no one promising anything, it is an asset with no intrinsic value, a tedious to compute number. Your money goes to the seller, it is not used to buy assets, there is no fund available to repay you.
2.      There is no one for you to sue to get value for it. You have to hope that someone wants to buy when you wish to sell it.
3.      There is no defined future value. If no one wants to buy it its value is zero. As in tulip mania in 1637.
4.      There is no record of who owns a bitcoin. When you want to sell your number has to be checked for validity in a database, a blockchain. Compared with a bank transfer it is cumbersome and requires time for computations to be made before it can be validated. The buyer takes a risk that it is a duplicate. That risk reduces over time, convention is the initial validation might take ten minutes but on a large transaction you should wait for an hour.
When you deposit money in a bank you have recourse to the assets of the bank which includes the money you deposit. If a million people each put £1,000 in a bank the bank will hold £1 billion and can repay them unless it loses on the loans it makes.
Even with a Ponzi scheme your money goes into the fund, you get some back from the inflated dividends that attract depositors, some stays in the fund, some goes in costs and often some is stolen.
When you buy a bitcoin none of your money goes into the bitcoin, it is all paid out to the existing holders who sells their bitcoins to you.  The supply is fixed at any point in time. A sudden influx of buyers pushes the price up until it has attracted sellers. A sudden rush of sellers pushes the price down until it attracts buyers.
A bitcoin is not a promise it is an asset and should therefore be compared to other assets that have been used as money (held for future value rather than utility value) such as gold, silver, chocolate, cigarettes or tulips. When used as money they have all had sharp rises and falls in price from imbalance between demand and supply. Gold, silver and tulips have had self-fulfilling dramatic price rises based upon greed. Excess demand increases the price which convinces purchasers the price will go on going up thereby increasing demand and making the price go up. At some point enough people see that the tide will turn and they try to sell before the price goes down. That drives the price down faster. In the case of tulips they crashed in value in February 1637 and have not been used as money since then. A bitcoin has less intrinsic value than a tulip.
As with pyramid selling the key is where you are in the chain of buyers – are there enough greedy buyers still out there to sell to at a profit or has reality dawned, are you the sucker that will make the loss that pays for the early buyer’s profits?
Bitcoins are not rocket science the maths is tedious rather than complex. Security is based on the second generation of a secure hash algorithm, SHA 256, that relies on the difficulty in reversing a calculation because it can only be done by trial and error. It is not clear what impact quantum computers will have on this. Bitcoins are described as free from regulation but they are actually regulated by consensus between the owners of the computers that calculate new bitcoins and verify transactions. Those computers are key to the security of the validation of a bitcoin in transactions and were increasingly in China, who has now clamped down on them. The consensus is motivated by maintaining value for new bitcoins. That community spends a substantial amount on electricity to keep the computers going. If the computers are shut down, compromised or taken over bitcoins will face an existential risk.
The only justification for buying a bitcoin is greed. Can you morally justify doing so when you know that to satisfy your greed you must pass the ultimate risk of it being worthless onto a buyer?

Gordon Black
Gordon Black
1 year ago
Reply to  Jon Hawksley

Got it … Thank You. On Unherd, I am increasingly speed-reading articles for the gist to get to the comments for detailed insight.

Franz Von Peppercorn
Franz Von Peppercorn
1 year ago
Reply to  Jon Hawksley

That’s all correct. Crypto is not a currency.

And they are convertible only because banks allow them to be convertible.

Galeti Tavas
Galeti Tavas
1 year ago
Reply to  Jon Hawksley

“When you deposit money in a bank you have recourse to the assets of the bank which includes the money you deposit. If a million people each put £1,000 in a bank the bank will hold £1 billion and can repay them unless it loses on the loans it makes.”

The bank only holds a tiny fraction of the billion. It loans out the rest and keeps a reserve with the Central Bank – and just has enough to give cash to customers and settle checks and debits, and not even really enough for that….

Franz Von Peppercorn
Franz Von Peppercorn
1 year ago
Reply to  Galeti Tavas

Common misunderstanding. Electronic deposits don’t add to the reserves of a bank. They are a liability for the bank which would have to be paid by the reserves if the owner withdraws cash. The bank doesn’t use deposits to fund loans, instead when a loan is made new money is created.

Robert Hochbaum
Robert Hochbaum
1 year ago

I listened to this interview a few days ago and like most others regarding bitcoin/blockchain there was no mention of the energy required to manage the system or that fact is given short shrift. From what I’ve read, and even the biggest supporters acknowledge this, it’s staggering. This seems like a huge Achille’s heel of crypto that will eventually become an issue in this ‘climate change’ political world we are living in.

Last edited 1 year ago by Robert Hochbaum
ralph bell
ralph bell
1 year ago

Its never stopped other energy siphoning industries/technologies.
Crypto mining is increasingly using green energy or energy by products that would otherwise go to waste for mining e.g. in South America

G A
G A
1 year ago

Everything uses energy. As an argument it’s a non-starter, imo.

Emre Emre
Emre Emre
1 year ago

You’re right with Bitcoin which uses a proof-of-work model that’s highly energy intensive. There are newer cryptos which use proof-of-stake where the energy usage is no different to online banking. The second biggest crypto Ethereum by market cap is about to move from PoW to PoS and had some recent success in that transition.

Galeti Tavas
Galeti Tavas
1 year ago

Bit coin is not an asset as such as it is backed by nothing but speculation, faith someone will buy it from you. Same with all the cryptos – over 12,000 of them exist, almost all worth zero.

Block Chain, as is used by ‘Crypto’ is a method of verifying provenance, is pretty un-corruptible and shows ownership. Blockchain is revolutionary, my guess is Fiat-currency and contracts, deeds, titles, copyrights and so on will use it pretty soon.

Soon all Central Banks will have Blockchain Digital Fiat money, like China already with the ‘CBDC’ digital Yuan. The ECB, the Fed, and the rest expect to be releasing theirs in a few years.

But the thing is they will NOT tolerate Bit coin unless the world is utterly different. The only thing which makes government function is that its Fiat Currency is the legal tender, so the Central bank can control it through Fiscal and Monetary policy. Having some rogue currency taking market share would wreck government utility. The Central Banks will collude to destroy independent crypto.

BUT!!!! CBDC (Central Bank Digital Currency) means all will have digital ‘Wallets’ on their phones -WITH the central Bank rather than Private banks – making the Banking industry almost superfluous!! This changes the entire paradigm of Money as it has always existed.

Under all the world since 1600s Banking – it is Banks which ‘Create Money’! here is how it works:

You borrow $100,000 to buy a house, the bank vets you and the house – and it is a go. The bank FIRST enters the $100,000 you promise to repay with interest in its Ledger as an ASSET. Then it enters the $100,000 to pay out as a Liability, and thus the books balance, the money they pay out is covered by the asset of the ‘Note’ (a note is a promise to pay) you signed (how they pay it out is complex, and involves all kinds of weird mechanisms (read on ‘Fractional reserve banking, and such). $100,000 was just ‘Loaned Into Existence’! They have no huge box of money, or stash of deposits to cover this – it was merely created – this is how all the money in the world is created – it is Loaned Into Existence. Now some asset backed it, as do you, but the Money did not exist till the Loan! COOL, isn’t it? (Same as the US Treasury issues Bonds, ‘Treasuries’ which it sells, and some the Fed buys to regulate Monetary policy) It is all very weird.

But here is the thing – MMT, Modern Monetary Theory, which states the Government can print all the money it wants, because the money is backed by nothing but its self – this will not work now as the Debt created to print the money is privately heal and has to be serviced by interest. BUT if the Central Bank makes the money just out of air – poof – and loads it into your digital wallet, well all the rules are utterly changed!

Now they can put Negative Interest on your wallet, can inflate it away, can time some of it out, where if not spent it just vanishes – it can tax it – it can make the money do anything they want!

They can issue UBI to half the population, and run a negative interest rate on the savings of the other half (the well off and middle class) and make it balance. They can lock your wallet if you do something they do not like, they can incentivize, like everyone gets a free $10000 to buy a new electric car, they can disincentivize (You are buying too much wine, so your wine sales tax just doubled)

Every penny you get, and spend, is not just logged – it is geolocated, with all the people around you (best not be selling drugs on the corner, unless allowed)

But what of the Banks? A huge part of the global economy? And the stock market? Well Central banking can be done from your CBDC wallet too – as can your mortgage application, and your child support, and parking ticket and speeding ticket (they know where you are, what vehicle you are in, and how fast)..

It gets a lot weirder – USA holds the Global Reserve Currency – this is a HUGE asset to USA, but that will not survive – but what of the competing CBDCs competing for market share?

Anyway Blockchain and crypto and digital currency means the world will have changed forever. But blockchain and Eterrium – I cannot believe they will not be crushed.

Jon Hawksley
Jon Hawksley
1 year ago
Reply to  Galeti Tavas

If you own a bitcoin you own a number. If you tell someone else the number they can spend it. If you lose it, it is gone forever, google “computer lost in Welsh rubbish tip”. The blockchain does not record the owner, it records the transactions so if that person sells your bitcoin before you do the transaction is recorded in the blockchain and you can no longer sell it yourself. This gives anonymity. It is very inefficient because adding transactions to the blockchain requires substantial computing power to verify it is an unspent bitcoin. This takes time and is mathematically never certain. In practise most people do not hold their bitcoin, they have an account with a company that holds it for them with all the attendants risks of being cheated. The anonymity is only on transfers of bitcoins – transfers to fiat money are recorded in accounts with owners.
Governments want to know who owns what in order to stop crime and collect taxes. They will increase supervision of the interface with fiat money and I think blockchains of this type will fall out of fashion. What if you can only sell your house if you dig up a rubbish tip?

Galeti Tavas
Galeti Tavas
1 year ago
Reply to  Jon Hawksley

“I think blockchains of this type will fall out of fashion. What if you can only sell your house if you dig up a rubbish tip”

It just takes understanding this, and recording backups – the system can accommodate such issues where public record is also kept, like deeds..

David Bell
David Bell
1 year ago

You can be sure that a bubble is about to burst when prominent folk like this throw in the towel and become converts. Stick to gold, it’s been a store of value for thousands of years.

Jon Redman
Jon Redman
1 year ago
Reply to  David Bell

Thing about gold is that it’s a currency as well as a commodity.