by UnHerd
Tuesday, 14
September 2021

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.”

Join the discussion

  • 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?

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