In any case, there are growing reasons to be wary of Bitcoin as a viable long-term value store.
On top of the many reasons I've talked about in previous articles, I'm hearing many more people talk about it as if they are crypto experts. Consequently, it reminds me of the Dot.com bubble. Sure, the Internet continues to boom (but many of the early high-fliers don't exist today). Meanwhile, it's possible crypto will evolve like the Internet, but at this point, it's hard to discern how much of the success in crypto is luck versus skill.
There is a ton of demand and interest. But fear of missing out and enjoying the roller-coaster ride is not the basis of a long-standing Platform. Blockchain is a different story.
Back to Crypto … Even a blind squirrel finds a nut in a forest during a bull market.
Governments have a disincentive to allow alternate currencies (not backed by their government). In addition, another obstacle for cryptocurrency mining is the high cost of energy consumption.
Mining crypto takes a lot of electricity because when people are creating new coins they're really solving complex math puzzles with a 64-digit hexadecimal solution known as a hash. To solve those equations faster than your competitors you need massive data centers which can even overload local infrastructure.
It's increasingly expensive and energy-taxing to mine new coins. For context, it's estimated that the current annual power consumption for Bitcoin alone (not including other cryptocurrencies) rivaled the state of New York, and beat Norway.
To compare it to the tech giants, Bitcoin took 129 terawatt-hours of power consumption … Google took 12, and Facebook only took 5.
Many are looking for ways to decrease the energy consumption of mining cryptocurrency using methods like renewable resources.
Biden campaigned heavily on an economic plan centered around bolstering the middle class, taxing the wealthy, and investing in healthcare and green energy infrastructure. There are other aspects of his plan – but those were the focuses.
During the Robinhood & Gamestop debacle, I wrote an article about r/WallStreetBets where I essentially said that most of the retail investors that frequent the site don't know what they're doing, but there is the occasional real post with strong research you would see at a real firm.
As an example of good research done by the subreddit, here's a link to a post where a user (nobjos) analyzed 66,000+ buy and sell recommendations by financial analysts over the last 10 years to see if they had an edge. Spoiler: maybe, but only if you have sufficient AUM to justify the investment in their research.
There are also posts that show a clear misunderstanding of markets, and more jokes than quality posts, but I saw a great example of correlation ≠ causation.
In the past I've posted about the Superbowl Indicator and the Big Mac Index, but what about Oreos?
The increasingly-depraved debuts of Oreos with more stuffing indicate unstable amounts of greed and leverage in the system, serving as an immediate indicator that the makings of a market crash are in place. Conversely, when the Oreo team reduces the amount of icing in their treats, markets tend to have great bull runs until once again society demands to push the boundaries of how much stuffing is possible.
1987: Big Stuf Oreo released. Black Monday, a 20% single-day crash and a following bear market.
1991: Mini Oreo introduced. Smaller icing ratios coincide with the 1991 Japanese asset price bubble, confirming the correlation works both ways and a reduction of Oreo icing may be a potential solution to preventing a future crash.
2011: Triple Double Oreo introduced. S&P drops 21% in a 5-month bear market
2015: Oreo Thins introduced. A complete lack of icing causes an unprecedented bull run in the S&P for years
2019: The Most Stuf Oreo briefly introduced. Pulled off the shelf before any major market damage could occur.
2021: The Most Stuf Oreo reintroduced. Market response: ???
It's surprisingly good due diligence, but also clearly just meant to be funny. It resonates because we crave order and look for signs that make markets seem a little bit more predictable.
The problem with randomness is that it can appear meaningful.
Wall Street is, unfortunately, inundated with theories that attempt to predict the performance of the stock market and the economy. The only difference between this and other theories is that we openly recognize the ridiculousness of this indicator.
More people than you would hope, or guess, attempt to forecast the market based on gut, ancient wisdom, and prayers.
While hope and prayer are good things … they aren’t good trading strategies.
A good reminder that even if you do the work, if you're looking at the wrong inputs, you'll get a bad answer.
Small distinctions separate wise men from fools. Perhaps one of them has to do with what the wise man deems important.
Socrates' Triple Filter
In ancient Greece, Socrates was reputed to hold knowledge in high esteem. One day an acquaintance met the great philosopher and said, "Do you know what I just heard about your friend?"
"Hold on a minute," Socrates replied. "Before telling me anything, I'd like you to pass a little test. It's called the Triple Filter Test."
"Triple filter?"
"That's right," Socrates continued. "Before you talk to me about my friend, it might be a good idea to take a moment and filter what you're going to say. That's why I call it the triple filter test.
The first filter is Truth. Have you made absolutely sure that what you are about to tell me is true?"
"No," the man said, "Actually I just heard about it and…"
"All right," said Socrates. "So you don't really know if it's true or not. Now let's try the second filter, the filter of Goodness. Is what you are about to tell me about my friend something good?"
"No, on the contrary…"
"So," Socrates continued, "You want to tell me something bad about him, but you're not certain it's true. You may still pass the test though, because there's one filter left. The third filter is Usefulness. Is what you want to tell me about my friend going to be useful to me?"
"No, not really."
"Well," concluded Socrates, "If what you want to tell me is neither true, nor good, nor even useful … then why tell it to me at all?"
With all the divisiveness in both media and in our everyday conversations with friends, family, and strangers … this is a good filter for what you say, what you post, and even how you view markets.
How Does That Apply to Me or Trading?
The concept of Socrates' Triple Filter applies to markets as well.
When I was a technical trader, rather than looking at fundamental data and scouring the news daily, I focused on developing dynamic and adaptive systems and processes to look at the universe of trading algorithms to identify which were in-phase and likely to perform well in the current market environment.
As we've transitioned to using advanced mathematics and AI to understand markets it becomes even more true.
Filter Out What Isn't Good For You.
In contrast, there are too many ways that the media (meaning the techniques, graphics, music, etc.), the people reporting it, and even the news itself, appeals to the fear and greed of human nature.
Likewise, I don't watch TV news anymore either. It seems like story after story is about terrible things. For example, during a recent visit with my mother, I listened to her watch the news. There was a constant stream of "oh no," or "oh my," and "that's terrible". You don't even have to watch the news to know what it says.
It's also true with what you feed your algorithms. Garbage in, garbage out. Just because you can plug in more data, doesn't mean that data is adding value. Deciding what not to do, and what not to listen to is equally as important as deciding what to do.
Artificial intelligence is exciting, but artificial stupidity is terrifying.
What's The Purpose of News for You?
My purpose changes what I'm looking for and the amount of attention I pay to different types of information. Am I reading or watching the news for entertainment, to learn something new, or to find something relevant and actionable?
One of my favorite activities every week is looking for new insights and interesting articles to share with you and my team. If you aren't getting my weekly reading list on Fridays – you're missing out. You can sign up here.
Getting back to Socrates' three filters and the business of trading, I often ask myself: is it important, does it affect our edge, or can I use it as a catalyst for innovation?
There's a lot of noise out there competing for your attention. Stay focused.
I've always been a fan of Blockchain, but I've always been a bit more cautious of cryptocurrencies.
Blockchain is the technology foundation behind cryptocurrencies and an important enabling technology for the next generation of technological innovation.
This makes sense to me because the VCs were able to capitalize on the "Fear of Missing Out" and "Animal Spirits" driving the market without the concentration risk of a particular cryptocurrency. In a sense, it is the same reason I am bullish on Blockchain itself.
Making sense of cryptocurrencies, however, is tougher for me to justify. There are over 1000 currencies out there – and the list is growing. But valuation isn't really about first-mover advantages or features … You also must consider government policies and regulations and a host of other issues.
Consequently, it's hard to recommend putting money in any coin as an investment.
Speculating (or "trading") is a different conversation.
Clearly, there is a lot of money being made and lost … but how much of those gains and losses can be attributed to luck and how much to skill? A better question is … If you traded cryptocurrencies, how much of your gains or losses would be due to luck versus skill?
For the past few years, it felt as if the buzz had died down a little. Despite that, Bitcoin prices and many other cryptocurrencies continued to increase in value – though with much more volatility than normal investments.
This week, Dogecoin (a cryptocurrency that started as a meme) jumped from $.07 a coin to $.35 a coin, capitalizing on press and support from Elon Musk. But it's not the only cryptocurrency doing well.
A lot of the jump in the price of many coins recently coincided with the GameStop trading surge and was likely driven by the sentiment of those same retail traders.
Crypto's are interesting, in part, because they're a digital currency decentralized over a peer-to-peer network.
The more people are willing to accept it as a medium of exchange, the more valuable it becomes (and the more it becomes a stable store of value).
Supposedly, decentralization provides it safety from censorship and government interference – meaning it has value as an international currency, and as a currency for black-market transactions. But, in my opinion, that remains to be seen (and I consider it unlikely for most cryptocurrencies).
Compared to a reserve currency – whose worth is primarily influenced by trade value and other macroeconomic factors – watching crypto's volatility can be scary.
That being said, as adoption increases and more businesses enable it, it's possible that it will continue to legitimize. For the time being, I remain a long-term skeptic because there is too much working against it.
For an extra laugh, here's a still relevant video from 2017 on why you should invest all your money in Bitcoin.
In addition, here's an A.I. remastered World War II cartoon written by Dr. Seuss with a character named Private Snafu. It's one episode of a series of shorts that were banned post-WWII, and it's one of the more tame episodes. For an extra piece of trivia, the name of Private Snafu and his series of shorts was based on the military acronym for "Situation Normal: All F***ed Up".
While produced by Warner Bros., these shorts which were made for the US military did not have to go through the Production Code Administration and thus got away with raunchier humor, foul language, and what we would today categorize as racist propaganda against the Japanese and Germans.
While it's okay to acknowledge that we should be doing better today, I also think it's interesting and informative to watch older materials in the context and time period they were written.
Racism isn't okay, but if you don't know history, you're doomed to repeat it, and art can be discussed and enjoyed within that context as well.
Markets are not the economy, but it's still important to understand and follow economics.
One of the unfortunate "trends" of 2020 was the increase in debt at various levels. Now, debt can be a good thing … it greases the international wheels and can be an important part of long-term financial plans for countries (in the same way you or I might use it.)
But too much of a good thing is a bad thing, and doing that math gets pretty complicated on the national level.
To help put it in perspective, I want to look at the U.S. debt on different scales.
First, you can look at this US Debt Clock for a staggering interactive visualization of the inflows and outflows in America. Click the image to watch it update in real-time. I encourage you to look at some of the components tracked. It made me think about our future differently.
The U.S. has the largest percentage of the world's debt, but Japan has the worst debt-to-GDP rate at over 224% (compared to America's approximately 127%)
During 2020, debt held by the US public increased by $4.2 billion – the largest dollar increase in history. A large part of that increase in debt was due to the federal deficit which was reported at $3.1 billion
To help understand the image, Texas is actually a great case study. Texas's bubble is big because it has one of the highest total debt levels, but is green because its debt ratio is pretty good at 62.5%.
California has the highest total debt, but is very light pink, stating that its debt ratio isn't bad. Some states' liabilities outweigh their assets by a factor of 4x or 5x which is scary.
This is a helpful illustration of the delicate balance of taking on debt. It's okay to take on large amounts of debt if you have a reasonable belief that revenue outstrips interest. To contrast that, some of these states have unsustainable debt levels – and only survive because they're a part of a bigger whole – the U.S. – and have an extra safety net.
What about Consumer Debt?
Most of America's debt is Federal – but consumer debt accounts for a non-trivial portion as well. Here's a chart that shows the change in U.S. Household debt since 2003.
Student, Auto, and Home Owner loans have all increased substantially – with the cost of student loans raising over 500%. Almost every category of consumer debt has increased.
While our country has gotten richer, and the standard of living has increased, we also have more people living in large amounts of debt.
Things To Consider
These charts are startling. Debt is a powerful tool … but comes with risk as well. The question is, are we as a country and individuals managing the risk appropriately?
It's hard to look at these charts and say that there isn't an issue. The hope is that the government stimulus packages will make a difference – but Band-Aids won't fix the root of the problem and can even lull people into a false sense of security.
Last week, Microsoft won a contract to provide the U.S. army augmented reality ("AR") headsets. It's worth up to $21.9 billion over 10 years, and they'll be providing over 120,000 AR headsets. Porn has been the leader in VR/AR innovation, but it's unsurprising that war is also being used to drive innovation. Human nature is human nature.
Virtual reality (VR) and augmented reality have been around for a long time, but there's been a massive boom in innovation and interest over the last 3-5 years. Not only are the technologies becoming more affordable, but the animation is becoming more realistic, headsets are becoming more portable and longer-lasting, and our physical and virtual realities are beginning to blend.
We're moving towards a world where technology envelops every aspect of our lives … figuratively and literally. It's funny because I felt the same way in the late 90s as cell phones and the internet proliferated. It feels quaint in comparison to the ubiquity of technology today. Even our toasters are smart now.
The following (still fictional) video is thought-provoking. What happens when these new technologies are used to influence behavior, decision-making, and even your identity?
Like many things, these technologies make possible awesome new capabilities (if used well) and horrific consequences (if abused or used in authoritarian ways).
Your doctor or nutritionist could help you make better choices for yourself. Your therapist or coach could help you perceive and respond differently to the challenges life presents you. Marketers could better influence your purchases. Employers could better monitor and measure your performance and productivity. And governments will not be far behind … doing what they do. It all toes the line between beneficial and creepy.
Because of where we are in the adoption curve, it is becoming more common to discuss bioethics and AI ethics. Likewise, as we accelerate into an age of exponential technologies and mindsets, be prepared for increasing scrutiny of the promise versus the peril of various new technologies and capabilities.
We live in interesting times, and only getting more interesting as it goes!
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