by Allen Farrington and Julia Tourianski

*

Barbie has generated as many takes as a Kubrick film, except they’re all bad. It’s asserted to be a podium for women’s rights yet it simultaneously doesn’t measure up to any authentic progressive goals. It’s a misandrist, virtue-signaling mess, yet a sophisticated, pandering commercial. Barbie is somehow frothing feminist propaganda but also a vapid dog whistle to approved female norms. Cultural commentators on both sides of the political spectrum either misunderstand this film or are purposely shoving Barbie into their audience capture box.

We can’t be sure, but if this was anticipated by writer and director Greta Gerwig, it’s nothing short of brilliant; these commentators have misunderstood her joke, the punchline of which is their misunderstanding of the joke.

The typical mainstream outlets took the bait (The Guardian and Variety) but even more hysterical are the reflexive takes of conservative talking heads. Ben Shapiro called it “one of the most woke movies” he has ever seen and uploaded a 43-minute “DESTRUCTION” of the film to his YouTube channel. Piers Morgan got himself all hot and bothered, warning his viewers that, “Barbie’s message is that the only solution to all this dreadful patriarchal state of affairs is obviously for women to rule the world, and preferably to do so on their own without horrible men to ruin it.” Matt Walsh lamented it, “bombs innocent families with feminist propaganda,” summarizing his own analytical method in declaring, “I don’t need to watch Barbie to know that it’s bad.”

Please, someone, get these hoodie merch suggestions to Matt Walsh: “I assume, therefore I know,” and “I seethe, therefore I’m right.”

Walsh bases his analysis on the Variety article cited above and argues the message of the movie is the object of its satire rather than the satire itself, conjuring up a circular meta-hilarity the reader owes it to themselves to experience. Even the Wall Street Journal got in on embarrassing themselves, claiming, “its script is like a grumpier-than-average women’s studies seminar.” We thought the right can meme? Their takes about this movie are just as humorless and stale as the left’s, but far funnier because they more densely missed the point.

Barbie is the most caustic critique of contemporary “feminism” that has ever been remotely popular, never mind a box office hit. Its producers combined one of the most culturally powerful pieces of intellectual property with the weight of a major Hollywood studio to trick just about everybody into watching a brilliantly self-aware and admirably nuanced social commentary. Laced with first-rate acting, and stunning aesthetics, Barbie could have stopped there. Instead, it went in a direction that those willing to pay attention are still surprised by; it held an empty pink mirror frame to itself and laughed, then muffled the laugh with layers of relentless absurdist and slapstick humor.

What’s even funnier is that Barbie isn’t actually about Barbie. The character of Barbie is used as a guide through a narrative that’s actually about other people. This should be obvious since she’s literally a doll, and that’s what dolls do: they’re avatars, and we use them to live out our potential narratives. Barbie takes us on a pink snowmobile ride of both validating and invalidating the experience of everyone she encounters, including men. The biggest irony of the film is that the character that’s repeatedly referred to as inconsequential (Ken) is the necessary counterpart to Barbie, has a less-forced character arc, and conveys insightful cultural commentary from the masculine perspective.

Even knowing where to begin with our analysis is tricky given one is tempted to walk through every single scene and point out the tongue-in-cheek self-awareness that apparently wasn’t perceived by these reviewers. The lengths to which the movie goes to signpost itself as satire makes any misunderstanding in this respect embarrassing in the extreme. For example, the opening sequence is a shot-for-shot remake of 2001: A Space Odyssey suggesting that the original Barbie doll literally changed the course of history for girls and catalyzed their evolution to a higher state of womanly consciousness. Do they believe this is serious? Or do they just not get the reference? Impossible, we know for a fact there are no Zoomers employed at the Wall Street Journal.

An exceptionally devastating interpretation of the plotline is that the movie is not-so-subtly arguing that the “real world” is an oppressive patriarchy, salvageable only by Barbie-esque girlbossing. There are many clues sprinkled throughout the movie of just how much of a false ideal this is. Just over midway through the film, the fourth wall is broken to treat the audience to a commercial for the “new depression Barbie” who, “spent 7 hours today on Instagram looking at her estranged best friend’s engagement photos while eating a family-sized bag of starbursts,” and who, “is going to watch the BBC’s Pride And Prejudice for the seventh time.” Again, what do they think this is making fun of, exactly? The Patriarchy, or women themselves?

Speaking of The Patriarchy, when Ken encounters it in “the real world” he’s completely enthralled, to the point of misunderstanding everything. To him “patriarchy” is everywhere and is fantastic. He’s unshaken in this revelation when — in reality — he’s rejected from every single role for which he applies, with “man” as the only entry on his CV. And he’s undeterred in returning to Barbieland and, “explaining to [the Barbies], the immaculate, impeccable, seamless garment of logic that is patriarchy.” Later in this exchange with Barbie, in a line so over-the-top in satirical signposting you wouldn’t think anybody could continue to miss the message, Ken declares,

“If it weren’t for these technicalities like MBAs, medical degrees, and, I don’t know, swim lessons, I could have ruled that world.”

We would suggest a more enlightened reading of the plotline as follows: if the only context you have for evaluation is a ridiculous ideal then your assessment will dramatically overshoot. In Ken’s case, he only knows the absurd (and absurdist) matriarchy of Barbieland. Naturally, he falsely interprets the real world as a glorious patriarchy, even in the face of direct experience to the contrary. What this suggests about unidimensional feminist analysis operating on naïve ideals of womanhood, we will let the reader contemplate on their own.

The movie clearly paints Barbie and Ken at the opposite extremes of naïve idealism. In Barbieworld, women can effortlessly be anything and everything, and yet they’re perfectly interchangeable with one another. Men exist only to be “in the warm gaze” of the Barbies, and are more or less ignored. When conquered and reimagined as Kendom, the roles are flipped to the other comical extreme. All men embody a delusional fantastical masculinity and seem to have no purpose beyond living up to this stereotype. Women exist only to wait on and congratulate the pseudo-achievements of the Kens. There is a line in the film that points to this being a call-out for the surface achievements of feminism when it comes to the male struggle: “I’m a liberated man, I know crying’s not weak!” cries out Ken while concealing the fact that he’s crying. Touché.

In the end, the Kens’ arc is highlighted by an incredible musical act, where every movement is deliberate and every joke lands. The Kens steal the show and defy their inconsequentialism.

In the “real world” we find further dualities. Sasha (the daughter) and the (nameless) Mattel CEO embody the opposite extreme of cynicism, within which they represent resignation to victimhood and exploitation. In Sasha’s first appearance, she delivers a speech that superficially conveys a rad-fem excoriation of Barbie as a capitalistic exploitation of women. The irony is that, given her age and experience, she could not possibly have arrived at this view herself and is merely repeating what she has picked up elsewhere that she deems to be edgy enough to fit her early teenage rebellion-by-default. In perhaps the funniest line of the film, Sasha drops on Barbie that favorite insult of context-challenged leftists: “fascist.” Barbie runs away in tears, and next reflects on this bizarre exchange, “She thinks I’m a fascist!? I don’t control the railways or the flow of commerce!”

The Mattel CEO represents the inverse of this cynicism: he goes totally over-the-top to signal his virtue du jour, whilst barely concealing the underlying motivation of appealing to everybody to sell them his product. Sasha is innocent but is desperate to come across as cynical, while the Mattel CEO is cynical but is desperate to come across as innocent.

Sasha’s mother Gloria on the other hand, encompasses absolute balance. Her movie-defining monologue could easily have been one-sidedly cringe in the hands of a less talented or more politicized production. Instead, it’s refreshingly sane. She never blames “the patriarchy.” Her speech eschews Sasha’s cynical victimhood and Barbie’s naïve idealism alike. It acknowledges the difficulties of the female experience while celebrating female agency. Gloria seems to understand that ideals are worth striving for, but not worth obsessing over because they can’t actually be reached. The more a woman mindlessly strives for perfection, the less human, and ultimately the less woman, she becomes.

Gloria’s realism is the glue that holds the film together. Recall that Sasha’s tirade does not reflect her own experience, the CEO’s worldview is highly self-deluded, Barbie’s various musings do not reflect anybody’s experiences, and that Ken’s experience is completely misinformed. Gloria’s experience alone is real, and she gives voice to this realness. Like her idea for an “ordinary Barbie,” she’s an ordinary person.

In being real, Gloria is necessarily a woman. Coming as a shock to precisely nobody, the narrative of Barbie highlights the perspectives and experiences of women, as encapsulated in Gloria’s monologue. But in order for this to be at all coherent, the movie and the viewer alike must subscribe to the foundational premise that men and women are different.

The extremities of the characters reinforce this: it’s hard to imagine a teenage boy delivering Sasha’s faux-radical assessment of Barbie’s impact on girls, nor would it be anywhere near as funny for a female CEO to rhetorically ask, “Do you think I spent my entire life in boardrooms because of a bottom line? No, I got into this business because of little girls and their dreams!” Likewise, the delusional extremes of Barbieworld and Kendom are not mirror images but are tailored to the sexes: for Barbies, the intrinsic motivation is to achieve as much as possible, with indifference to the presence of Kens; for Kens, the intrinsic motivation is to be as cool as possible, and to impress Barbies. Without real-world cynicism as to the differences between men and women, Barbies are tricked by Kens simply asserting their supposed dominance, whereas Kens are tricked by Barbies triggering their jealousy. Men doubt women; women only doubt themselves.

We’re surprised that conservatives aren’t latching onto and even celebrating this honesty. It’s something they’ve been screaming for endlessly and getting through to precisely nobody who didn’t already believe them. All it took was Gerwig lathering the message in hot pink and sprinkling in three hundred sarcastic usages of the word “patriarchy” to rope in little girls and woke women alike — demographics Ben Shapiro was oh-so-close to cracking. Barbie is also unapologetically pro-motherhood. Again, where are the conservatives celebrating this? Gloria’s arc and the “empowerment” Barbie catalyzes does not push her to climb the corporate ladder but to be a better mother. Given the cultural moment, this profound championing of gender realism and motherhood makes Barbie categorically reactionary.

To be clear, Barbie is by no means a conservative movie. We think it’s best described as a first-wave feminist movie with a dash of contemporary inclusivity and reactionary honesty. Its message is one of equality, but one that isn’t forced and that is mindful of difference; that rejects cynicism on the one hand and naivety on the other; and that realizes its pursuit will be a constant struggle, but that the struggle will be worth it. What’s funny in its own right is that we live in such stupid times that gender realism is reactionary and yet not conservative; we think this says more about the right than the left.

Beyond the movie itself, we encourage the reader to pay attention to Gerwig’s interviews and the precise way in which she uses the word “feminist.” And this is not to mention her extreme care to avoid telling the audience what they’re supposed to think, lest the range of objects of her mockery be let in on the joke. Thinking back to Lady Bird and Little Women, Gerwig’s first and second outings as director, one has to come away thinking, wow, Gerwig is a brilliant artist who wants to tell stories about women. To instead react with, wow, she must hate men, is frankly insane.

Barbie isn’t perfect. There are flaws to which we must draw attention given they sour even the above analysis. Some superficial disappointments include an out-of-place, obnoxious line about killing Native Americans with smallpox and pushing the joke about the weirdness of a pregnant doll a little too close to implying pregnancy itself is weird.

More substantively, the movie’s main issue is because Barbie isn’t really about Barbie, she’s artificially forced into the role of main character. There are obvious commercial reasons for this, but it doesn’t really work.

After Barbie has her character arc, she can’t just go back to being a perfect doll. Her arc was basically a series of jokes that carried the development of everyone around her. Once the joke has been told, the real plot of (for example) Gloria’s arc has nowhere else to go, so we spend fifteen minutes awkwardly tying up the loose ends that Barbie’s arc has created along the way. If it isn’t pushing the analysis too far, we actually think Gerwig was aware of this problem and tried to self-aware-flex her way out of it with the tangential non-explanation that “Barbie isn’t supposed to have an ending,” but it’s too clever by half. In trying too hard to satisfy, it does the exact opposite.

All in all, we think the ending can be disregarded as forced, sub-par, commercially driven writing unbecoming of the brilliance of the rest of the film.

And the rest of the film is brilliant. All its misreadings point to Barbie being a work of genius satire and to Gerwig being a superb satirist. One is tempted to conclude that the inability to detect satire is something of an intelligence test in and of itself. With AI all the rage these days, we feel compelled to note that this won’t work as a Turing Test due to its high fail rate by humans.

Barbie’s detractors reveal their myopic extremism; their resolute desire to condemn the other tribe’s creed in whatever guise it even seems to appear, regardless of nuance and impervious to satire. Barbie skewers all such unidimensional attitudes with its raw wit. Barbie uses its pink magic to both highlight and mock the pain and frustration of women, men, mothers, daughters, average people, high achieving people, the weird, the beautiful, the outcasted, and the stereotypical. If it has a prescription, it’s incrementalism in place of revolution. If it has a message, it’s that life is hard for everyone and that it’s okay to just be a normal person. It’s not that profound and it’s not trying to be.

Ken puts it perfectly,

“I’m just Ken and I’m enough, and I’m good at doing stuff.”

*

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#npub1sfhflz2msx45rfzjyf5tyj0x35pv4qtq3hh4v2jf8nhrtl79cavsl2ymqt

don’t follow Julia because she is a luddite.

Introduction

Ever since Bitcoin has had a market price, and ever since scarcely imaginable Twitter clout has been up for grabs in attempting to predict it, such predictions have been readily forthcoming. We assume familiarity with a range of such prior models and will not recount here the spectrum of silliness on which they sit.

While Bitcoin has many intriguing properties worth considering as model inputs, in our opinion, all previous attempts overlook the only characteristic of Bitcoin that is truly novel: its revolutionary Number Go Up technology. Only NGU truly sets Bitcoin apart from altcoins, gold, and any other asset we might consider a competitor. It behooves us to explore this property more rigorously.

To start with, we must surely ask ourselves, with respect to what does the number go up? When does this happen?

In time, that’s when.[i]

We must also ask ourselves, is anything more important than Number Go Up? Is it possible, even in theory, that there are other factors involved?

Nah, I don’t think so.

Our task is therefore to build a price model for Bitcoin that uses as its independent variable time, and time alone. Let us work from first principles to build as rigorous a model as we possibly can, justifying every construction with logic, and backing up every data point with facts. Let’s sit down in our thinking chair and think. Let’s build the NGU Model.

Intuition

Since Bitcoin is a network and benefits from network effects in the form of positive feedback, it makes sense to assume the number will go up exponentially.[ii]

Therefore, let us take the entire price history of Bitcoin, regress it logarithmically, and find a growth rate at which we think the number is likely going up as the core of our thesis, per Figure 1:

As the reader can see, the R² of the regression is 0.87, which is pretty high for having put no thought into this whatsoever. This suggests we are tiptoeing towards a profound and almost certainly causal relationship between Bitcoin’s value and our identification of the fundamental breakthrough of the underlying Number Go Up technology. If we keep tweaking it to better fit the data we might really be onto something. Let us continue.

To make our model more realistic, we should note that the problem with Number Go Up is that sometimes the number goes down. This is most mysterious given the issuance schedule is perfectly well known over literally every period of time. We might hypothesize that there are recurring phases of excitement, perhaps caused by misleading memes on social media that cause a wave of larping in on false hopes and, naturally, larping out again when these hopes fail to materialize. Animal spirits and whatnot, as Keynes rightly observed.

Starting from our assumption of exponential growth, we can modulate the path of growth by adding a sinusoidal component, as demonstrated in the figures below.

In Figure 2 we see an exponential growth curve in red and a sine wave that has been shifted entirely above the x-axis in blue:

Consider the product of these two:

In Figure 3 we see this new function overlaid in green:

It is perhaps easier to conceptualize what is really happening here if we adjust the y-axis to a logarithmic scale, as below in Figure 4. Here the exponential increase is a straight line, and the sinusoidal modulation fluctuates around this line but demonstrates the same long-term rate of growth:

This is also easier to then compare to Bitcoin given we arguably need a logarithmic y-axis for the price to adequately capture its history.[iii]

Another idea might be that when people get all excited by price memes, larp in and larp out, etc., that tends to happen pretty quickly, whereas the fallout tends to take up a longer stretch of the periodicity. Bear markets are for building, after all.[iv]

We can address this by “compressing” and “stretching” our sinusoidal modulation, so to speak, as follows. Rather than f(x) = sin(x), consider instead something like f(x) = sin(x — cos(x)).

This alters the sine wave, with the original in red, and the “quick up and down then long pause” version in blue in Figure 6 below :

If we now go back to the logarithmic view, we can compare exponential growth (in blue), exponential growth modulated by a regular sinusoidal wave (in red) to exponential growth modulated by our “quick up and down” wave (in green) in Figure 7:

This seems sensible. We might also think that the underlying exponential growth, and possibly the amplitudes of the sine waves, should be dampened. This could conceivably be because silly memes that encourage larpiness have a decaying effectiveness across periodic cycles as more and more people get used to them. Let us introduce a decay term as follows:

Where f(t) increases monotonically in t and simply slows down the growth rate without ever turning it negative (number goes up, remember — this is very important). Hence, we might compare our above “quick up and down” modulated exponential growth (in green) to one that also dampens over time (in blue), in Figure 8:

There is a final element of market prices we ought to try to capture as well: they wibble wobble. When the number sometimes goes down, this rarely happens in so smooth a way as the preceding discussion suggests. This is readily explained by psychology.

We propose to introduce a wibble wobble factor in the form of another sinusoidal modulation with a faster integer period, as demonstrated below in Figure 9, in the simple case as compared to a sine wave.

Such that their product is a wibbly wobbly bigger sinusoidal function, per Figure 10 below:

With these simple, logical, and reasonable assumptions in mind, let’s put together a model that captures all of the above. This will take the form:

Where r is the regression coefficient derived from Figure 1, the f(t)’s are the monotonic dampening of this coefficient and the sinusoidal modulations, as captured in Figure 8, g(t) parameterizes how we input “time” such that the amplitude, frequency, shift, and so on, of the sinusoidal functions are suitable for this domain, and h(t) makes it all wibbly wobbly.

Figure 11 compares our model to the historical data from December 2011 to the present.[v]

This model has an R² of 0.97. You would probably have to run the universe three or four times in order to encounter such a correlation by chance. This suggests a relationship between Bitcoin’s value and time so profound as to be barely comprehensible.

Figure 12 extends this incomprehensibility into the far-flung future such that we might at least attempt to comprehend what is coming (apologies in advance to the reader if this is too much to handle):

Alternatively, here is the price on Jan 1st at 3-year intervals for the next 27 years. Given the astounding accuracy of the model, it is safe to say that only 3% of the actual price on these dates will not be explained by these predictions:

The full numerical specification is as follows:

Or:

Although this may look complicated, note that, as promised, there is only one independent variable:

time.

Let’s not draw too much attention to all these numbers that, okay, admittedly, define the model. Instead, let us propose the perfectly reasonable interpretation that:

The above analysis essentially proves that the price of Bitcoin is — and only is — a function of time, exactly as the Number Go Up thesis predicted. It’s unclear why we would care about any other potential input. We will move straight to questions the reader may naturally have.

Questions

What is the physical significance of the model’s parameters? What are their dimensions? Can they be derived analytically? Do the physical inputs have numerical components that bear any relation?

These are natural questions to want to ask, but that’s not how Science works. These parameters were chosen because they make the backfitted R² very high, which in turn means we have to assume we have stumbled into a fundamental principle of economics. The onus is on us to work with these constants to derive further insights into marginal analysis, methodological individualism, and human action, not the other way around. This isn’t some Proof-of-Stake circle jerk, guys; we have to do the work.

Are we happy with the numeraire?

This is an excellent question (well done!) given it is core to our thesis that the number will continue to go up until Bitcoin is the only money in the world, and possibly the only asset with any value whatsoever. This means we ought to at least be suspicious of non-Bitcoiny ways of measuring value lest the model begin to reflexively feed on itself in ways that, while not impossible to mathematically capture, are probably really hard.[vi] Thankfully, this is not a concern in this case because we have chosen an extremely robust measure of consistent purchasing power: the US Dollar.

It’s very impressive that you created such a model with only one independent variable, but have you considered any confounding variables?

Firstly, thank you. As to your question, no, time is an SI Unit, meaning it literally can’t be explained in terms of anything else. Typically, yes, you should always rack your brain to consider what other, simpler phenomena - potentially with fewer or zero parameters - might explain roughly similar behavior to what you have observed in the dependent variable. But we are not going to do that.

Does this have anything to do with fractals?

No.

The model clearly works astonishingly — almost scarily — well, but doesn’t it bother you that we don’t really know why it’s so accurate? Can we push our analysis further? What does it mean?

This is a relatable urge, but it betrays a lack of understanding of the fundamental purpose of economic analysis. The goal of the enterprise is to paramaterize the macroscopic outcome of economic activity in the past and extrapolate it to the future, not to try to understand why anybody is doing anything.

Besides, how would you even measure that? It is intrinsic to our analysis that people are kinda stupid (see the discussion preceding Figures 2 through 7) and may or may not believe any old meme rather than acting strictly rationally and in light of perfect information perfectly available to them as to Bitcoin’s properties in the future.[vii]

We see, therefore, that Number Go Up doesn’t really have a meaning, as such. It transcends such petty mathemetizations. What is the meaning of a baby’s laugh? What is the meaning of the smell of morning dew? Number Go Up is more of a vibe …

Conclusion

Bitcoin is the first manifestation of Number Go Up technology the world has ever seen. Surely this relationship with time has value? In this article, I quantify Number Go Up and use Number Go Up to model Bitcoin’s value.

A statistically significant relationship between time and market value exists. The likelihood that the relationship between Number Go Up and market value is caused by chance is close to zero.

Adding confidence in the model:

• It was derived from first principles, not spurious real-world observations.
• It has one variable.
• That variable is “time.”
• Time is the only truly scarce asset.
• Did we just model scarcity also?
• 🤔

Regardless, the model clearly proves that for the price of Bitcoin at a given point in the future, the number will probably have gone up.

follow me on nostr for more mind-blowing market analysis: #npub1sfhflz2msx45rfzjyf5tyj0x35pv4qtq3hh4v2jf8nhrtl79cavsl2ymqt

and twitter @allenf32

***

ENDNOTES:

[i]: Gigi’s Bitcoin Is Time already proved this rigorously, but it is good to go from first principles and not rely on the work of others. Interesting areas for further research beyond the scope of this study might be to explore Bitcoin’s value as a function of Hope, Venice, and Potatoes.

[ii]: negative feedback, on the other hand, will lead to being blocked.

[iii]: one of the more exciting intrinsic properties of Bitcoin is that not only does the number go up, it goes up fast.

[iv]: Building models, that is.

[v]: Technically, price data is available since July of 2010, but it messes up the model, seemingly no matter how we parametrize it. It’s important not to hamstring ourselves by taking these things too literally. The data on which a model is built and the rhetoric we use to discuss it needn’t be isomorphic.

[vi]: The mathematical term for what is being conceptually approached here is that the system may become “nonlinear.” While I have a first in mathematics from the highest-ranked undergraduate department in the United Kingdom, we only covered linear systems at that level of instruction. Nonlinear systems are waaaaay harder and their study typically begins at postgraduate level. Unfortunately, I got a job in finance, stumbled into Bitcoin, then stumbled into the present analysis.

[vii]: We note the distinct possibility that, having published this mind-blowingly accurate model, the entirety of the behavior of market participants will change. It is further possible that such an occurrence would refute many of the assumptions that went into building the model, but it’s also possible that this won’t happen.

A precocious child once asked me, “Allen, do you ever regret cornering the niche market for bitcoin/crypto twitter shitposting about the exact legal, financial, and ethical nature of “securities” in an effort to simultaneously shill Only The Strong Survive and act as possibly the only public Liquid bull in existence? You could have outsourced it all piecemeal to Preston Byrne, Adam Back, and Lisa Neigut. Have you even made a net positive contribution? Are you happy with your decisions? Are you happy with your life?”

“Yes,” I said, dismounting my stallion, “and besides, if you don’t believe me or don’t get it, I don’t have time to try to convince you, sorry.”

That child grew up to be Satoshi Nakamoto, and on June 15th 2023, BlackRock filed with the SEC to launch a Bitcoin Shmoogleblop.

Pull up a chair and I’ll tell you a tale.

Securities Law, Baby

What seems to have confused most commenters on the topic is that a lot of large, established, reputable, and uncontroversial ETFs are structured as trusts in the same way as is proposed for the BlackRock Shmooplebob, such as GLD, the ~$60bn SPDR Gold MiniShares Trust, to give it its proper title. What gives? Are these not mutually exclusive concepts after all? Can ETFs be trusts, and vice versa?

The super-duper pedantic answer is that, no, a “trust” and a “fund” are distinct. However, GLD is a perfect example of a trust that is exchange-traded, and, in fact, the mechanics of which are very, very similar to that for “real” funds (“40 Act” Exchange Traded products, to be introduced just below). Hence the idea that “ETFs can be trusts” is true enough in practice to be worth explaining rather than dismissing on the basis of definitions.

In the US, typically any collective investment vehicle will be considered to be subject to the requirements of the Investment Company Act of 1940 (“40 Act” hereafter) unless the managers can credibly make the case that it is specifically exempt. I won’t go through all such permutations of rationale, but there are essentially four good reasons that many investment vehicles are able to opt for the Securities Act of 1933 instead (“33 Act,” ditto). Keep in mind while pondering all this that 40 Act vehicles are much more heavily regulated than 33 Acts and so if you can find a plausible rationale to go for the latter, you do.

1) Tax: trusts are highly disadvantaged on capital flows. It’s more complex than this, but, in short, if there is income on the assets held in trust (dividends, interest, lease payments, liquidations, something more exotic, potentially) that creates an extremely inconvenient tax liability for the beneficiaries, as it is not taxed as corporate income like you might expect of an “investment vehicle,” and is the case for a fund/40 Act.

2) Issuance & Redemption: in a fund/40 Act, that is also open-ended as opposed to closed-ended, the manager is legally compelled to issue and redeem shares at Net Asset Value (“NAV” — the aggregate value the underlying assets are selling at individually) — not to the public, to be clear, but to an intermediary called an “Authorized Participant,” on which I will elaborate shortly. In a trust/33 Act, the manager is not so compelled (n.b. technically this role is called a “sponsor” in a trust, but I will keep using “manager” as it means the same thing).

3) Diversification: 40 Acts/funds pretty much assume diversification by virtue of their purpose, whereas 33 Acts/trusts tend not to allow it (again, more complex than this, but this is the gist).

Eric Balchunas on Twitter: "Here's the guy who used to run $GLD explaining why a grantor trust (which is the structure of the BlackRock bitcoin filing) is used for some ETFs vs a traditional open-end fund structure (via my first book on ETFs): pic.twitter.com/4IbyKHLeeQ / Twitter"

Here's the guy who used to run $GLD explaining why a grantor trust (which is the structure of the BlackRock bitcoin filing) is used for some ETFs vs a traditional open-end fund structure (via my first book on ETFs): pic.twitter.com/4IbyKHLeeQ

4) Ownership: in a fund/40 Act, holders own shares in the company and are collectively engaged in an Investment Management Agreement with the manager. In a trust/33 Act, the holder owns the underlying assets, and the manager is the trustee.

So far, so incredibly arcane.

So why is GLD a trust?

Because i) it only holds one asset with no yield, so there are no tax concerns; ii) it is impossible to commit to continuous issuance and redemption because the underlying is not a security that can be purchased on the open market. Delivery in both directions must be physical, which takes actual time, money, and logistics, and has to be at the manager’s discretion in order for the vehicle to be mechanically viable in the first place; and, iii) it is definitionally not at all diversified (Point 4 above is not yet relevant but we will come back to it).

These details handily explain further why many commodities “ETFs” are technically trusts, not just GLD. If the manager is comfortable enough handling the issuance and redemption process (which is likely a function of i) the exchange qualities of the underlying commodity and, ii) the size of the vehicle, hence its operating budget) they can make a decent effort to issue and redeem as if it were an ETF. So technically they are not, but saying they are is often true enough in practice. A final thorn here is that the word “fund” is often colloquially used to mean something like “a generic investment vehicle,” inviting the assumption that it can be appended with “exchange-traded” as an adjective, even though the full expression “exchange-traded fund” has the more technical meaning just covered.

I will grant that none of this is really a big deal unless you are providing exactly this kind of infuriatingly pedantic analysis.

I also want to quickly clarify that I couldn’t care less about GBTC. Yes, it sucks. Yes, it’s a trust. Is this better? Maybe, but “not GBTC” is not synonymous with “good.”

So what about the BlackRock Shmurdlebloop? How pedantic do we need to be? Well, anon, how much do you care?

Do You Care?

Whether or not you care probably depends on your perspective. A potential holder of shares of this instrument probably could not care less. Ditto for the surrounding infrastructure in tradfi. With GLD as the obvious comparison once again, most holders have likely literally never once contemplated the exact legal structure of the issuing entity, or why that is better, worse, or different in any way from any other:

Eric Balchunas on Twitter: "To all those saying the BlackRock filing is a trust and not an ETF. Do you consider $GLD to be an ETF? Well, this is same thing. Lot of structures under "ETF" umbrella. Nothing like $GBTC. This is the real deal. pic.twitter.com/p75ZKHGxK0 / Twitter"

To all those saying the BlackRock filing is a trust and not an ETF. Do you consider $GLD to be an ETF? Well, this is same thing. Lot of structures under "ETF" umbrella. Nothing like $GBTC. This is the real deal. pic.twitter.com/p75ZKHGxK0

But let me divert your attention back to point 2 above: the managers of this 33 Act vehicle do not have to redeem. How about now, anon? Shitting yourself? No? What about point 4? Do you care if you own shares or the underlying assets? ANSWER ME, ANON! ARE YOU PAYING ATTENTION YET?

Let us return to this weird detail of “Authorized Participant.” What’s that all about?

Members of the public do not buy ETFs or ETF-like trusts directly from the issuer. A group of intermediaries called Authorized Participants has the right to both create/redeem shares in the vehicle by buying/selling the underlying assets on the open market and either handing them over to the issuer for shares or giving shares in exchange for the underlying assets, to then turn around and sell. Everybody else buys in the secondary market from Authorized Participants or each other.

The incentives that keep all this spinning are that if the secondary market price deviates much at all from the NAV, the Authorized Participants can make an arbitrage profit from the above arrangement. Hence their involvement ought to keep the secondary market price close to NAV, which is useful for price discovery — or more like, for avoiding weird, inaccurate price discovery emerging due to the circumstances of participants as opposed to anything related to the underlying assets.

So to return to point 2 above: in a 40 Act, the manager is compelled to issue and redeem, per the terms of their SEC regulation. In a 33 Act, they are not. This might seem bizarre on its own, but if we bring in point 4 and the reminder that 40 Acts are more heavily regulated than 33 Acts, it will all start to come together:

In a 40 Act fund, the manager is bound by their IMA. This has more complex relevance if the fund is actively managed, but for a passive fund (i.e. an “index”, like everything discussed so far) the mandate and the constraints of the IMA are very simple: mimic the price of the underlying, gross of fees. If the manager neglects to correct a massive discount to NAV, they are in violation. And, recall, the Authorized Participants are strongly incentivized to do this anyway, meaning there isn’t really even any effort required from the manager. They just need to not be incompetent or recalcitrant.

So, to be extra clear: the owner of a passive fund unit is contractually engaged with the fund manager to be provided with an issuance and redemption opportunity via the Authorized Participants that tracks the value of the underlying assets. That is what ownership of this asset means.

On the other hand, the owner of a passive trust owns the underlying assets. They literally own them directly. Hence it doesn’t matter if the manager is being a dick and won’t cooperate with the Authorized Participants because the owner is legally unaffected. They have no right to value, they have a right to assets, and the manager and trust sitting around doing nothing affect their rights not one bit.

BUT! They do not have the right to physical redemption. Only Authorized Participants do, and even then only at the discretion of the manager. Even before getting to why this is just really, truly, awful in our case, it’s worth clarifying that even if this were a real ETF, regular holders would not be able to redeem for Bitcoin. That’s just not how this works, even with regular ETFs and regular commodities.

Now for most (if not literally all, ever) trusts, refusing to redeem would still be extremely stupid behavior. The manager makes money from a management fee, meaning the more assets they manage, the more money they make. If ever even attempted, the kind of shenanigans mentioned above would immediately become publicly known, the manager’s reputation would be ruined, and no new assets would ever flow in. So, what am I so riled up about?

This Time Is Different?

Look, maybe BlackRock are all perfectly nice guys and just want to support Bitcoin adoption, starting domestically but eventually rolling out to The Global South? Maybe we orange-pilled them? Maybe it was Bitcoin Is Venice that got them over the line?

Maybe I’m just paranoid? This isn’t entirely sarcastic; BlackRock is an asset manager after all, and Bitcoin is a valuable asset. But even this doesn’t provide much comfort given I would argue BlackRock’s entire purpose is to poorly solve a problem Bitcoin solves well. Even if more bumbling than conspiratorial, Bitcoin “succeeding” is not in BlackRock’s interest.

So, even if only for the sake of argument, I’m going to outline exactly what I worry BlackRock is going to try to do with this, and you can just thank me in 10 years when it fails due to what I suggest after to counter it.

First, if this is approved, you can guarantee it will attract a metric fuck ton (finance jargon) of inflows. That will clearly pump the Bitcoin price in both the short and medium term. That’s why all the high time preference Bitcoiners are happy. NgU bro! Trust me bro!

Second, BlackRock will be Coinbase’s biggest customer by some orders of magnitude such that Coinbase will become a subsidiary, for all intents and purposes. No alternative “ETF” (real or otherwise) will be able to use Coinbase. They’ll have to use Binance LOLOLOLOL — jokes, they just won’t be able to launch at all. Obviously, this will loop back to point 1 above.

Third, expect an onslaught of FUD in tradfi (not on Twitter, sadly) on “tainted coins” so as to make even the idea of a physically redeemable spot Bitcoin whatever completely beyond the pale. None of the “reasoning” will make any fucking sense whatsoever, but that also won’t matter. Remember “Blockchain not Bitcoin”? Remember “Strawberries on the Blockchain”?

Yeah baby, it’s highly regarded season again. BlackRock’s novel inclusion of market surveillance will serve as an easy wedge for the SEC to once again turn against everybody else:

Eric Balchunas on Twitter: "NOTEWORTHY: BlackRock is teaming up with Nasdaq to enter a surveillance-sharing agreement, which would mitigate manipulation. This is interesting as no one has done this in a filing before. Great catch (yet again) by @CoinDesk https://t.co/rDqCeVjfJZ pic.twitter.com/VEJr03joYL / Twitter"

NOTEWORTHY: BlackRock is teaming up with Nasdaq to enter a surveillance-sharing agreement, which would mitigate manipulation. This is interesting as no one has done this in a filing before. Great catch (yet again) by @CoinDesk https://t.co/rDqCeVjfJZ pic.twitter.com/VEJr03joYL

Obviously, this will all loop back to points 1 and 2 above.

Fourth, expect the SEC to LAP. THIS. UP. UTXOs in the BlackRock Stack O’Sats™ will be definitionally “clean.” Coins not yet in it (“precoins,” if you will) will be suspect, but capable of salvation. Coins that have ever left this safe space (“nocoins”) will be blacklisted. Why are you trying to move your coins, anon? What are you, a money launderer or something? What’s wrong with our IOUs? Again, this reinforces everything else.

Kuriitaasuki Ijiikieru on Twitter: "Get ready for Bitcoin Uncle Sam's Vision. / Twitter"

Get ready for Bitcoin Uncle Sam's Vision.

Speaking of which, fifth, expect BlackRock to turn around and shill this to banks, and in particular big banks, such that JPMorgan, for example, can itself turn around and offer “Bitcoin” to its own clients. Of course, it will be an IOU to the BlackRock Stack O’Sats™ that you can transfer to your friend’s Bank Of America Bitcoin IOU account at your leisure. In other words, in short order, the entirety of the Blue Banks’ asset base becomes a funnel into the matrix of the pseudo-Bitcoin narrative attack vector (2h 42m 5s if the timestamp doesn’t work):

Sixth, on the back of all the previous points, expect BlackRock and Coinbase to dominate flows and hence effectively control pricing.

Seventh, in a move that makes me question its conspiratorial chops after all, BlackRock has decided to openly admit that it might have to / want to / get to pull a NYA 2.0:

Anil ⚡ on Twitter: "A hidden gem in the BlackRock ETF filing.#GetForked https://t.co/tER6xxZPui pic.twitter.com/Qdt8BZ2OEZ / Twitter"

A hidden gem in the BlackRock ETF filing.#GetForked https://t.co/tER6xxZPui pic.twitter.com/Qdt8BZ2OEZ

Before you laugh, and even keeping in mind that this kind of “hard fork risk” language appears to be standard in similar filings, keep in mind the impact of all previous points on points one and six in particular: a metric fuck ton of Bitcoin, with control over how that Bitcoin is priced, can create a metric fuck ton of malicious economic incentives, especially with “no guarantee that the Sponsor will choose the digital asset that is ultimately the most valuable fork.” Success may not be guaranteed, but some amount of fuckery seems to be.

Eighth (and probably not even “finally” but I’ve listed a lot and I want to move on) even assuming some brave soul manages to get through this wave of propagandistic bullshit, BlackRock simply won’t redeem BECAUSE SECURITIES LAW (see above, sections everything through everything else). They will buy back in the secondary market anybody trying to redeem and their Stack O’Sats™ will grow and grow until a NYA 2.0 seems worth a shot.

I’m sorry to break it to you, but this last point really is key. If it were a real ETF, refusing to redeem would trigger lawsuits immediately. Hence if any of points one through seven were suspected to be coming into force in a way that would be detrimental to shareholders, they would sell down (AP mechanics re: NAV and all) and go find a way to buy real Bitcoin, or at least something better than this, meaning BlackRock would have to sell its Stack O’Sats™ to meet redemptions. But it is clear from this setup — BECAUSE IT IS NOT A FUND — that BlackRock can just say no.

Which Way, Anon?

I first want to preempt a criticism of this entire post and my Twitter shenanigans on Black Thursday: that the ETF-or-not issue is a MacGuffin. And actually, I think that’s right. It is. That’s not what either this post or my frustration is really about.

I am frustrated because, if you know the difference, if you have some understanding of securities law, and if you see that BlackRock is filing for a 33 Act Trust that everybody is calling a “spot ETF”, you should not be celebrating; you should be suspicious! MacGuffins aren’t non-sequiturs. They at least get the plot going, and you are smack dab in the middle of the plot now, anon, believe you me …

Anyway, let’s try to end on a positive note. One thing to immediately point out is that Bitcoin Doesn’t Care. All this garbage will fail on a long enough time horizon. As has also recently been picked up on, the US is rapidly losing not only financial prestige but even the financial power to prevent (natively digital) innovation from simply moving elsewhere:

nic 🌠 carter on Twitter: "HK policy is literally the direct opposite of the US Whether or not you think it's the US or Hong Kong that's being prudent, it's starkly clear - HK sees failed American policy as a huge opportunity for themhttps://t.co/sm6LuYs87O pic.twitter.com/1COlAfXC9S / Twitter"

HK policy is literally the direct opposite of the US Whether or not you think it's the US or Hong Kong that's being prudent, it's starkly clear - HK sees failed American policy as a huge opportunity for themhttps://t.co/sm6LuYs87O pic.twitter.com/1COlAfXC9S

But as ma boi Keynes knows, in the long run we are all dead, so it is still worth pointing out that a lot of Bitcoiners are going to care if BlackRock gets away with it.

It’s also worth pointing out that “self-custody” is not an answer. I’m sorry if that also triggers you, but the idea that self-custody is viable for literally anybody with any fiduciary responsibility (financial jargon … no, really) at all, never mind for the likes of a bank, a mutual fund, or a public company, for example, is laughable. All it says is that you have no experience whatsoever of financial services or really any kind of commerce at a scale beyond friends and family.

Obi Nwosu has a great anecdote to illustrate this at an even simpler and more personal level than is required to appreciate the much more complex environment of corporate finance (5m 10s if the timestamp doesn’t work):

If we want “the institutions” to “come to Bitcoin” (and hey, maybe we don’t?) we need better custody solutions, and better legal and audit schemes around these solutions, ideally utilizing cryptographic attestations rather than … well … trust.

This, of course, is the gap in the market that BlackRock is ostensibly trying to fill here, in the nonparanoid reading. If the bajillions of likely clients could just go to Coinbase (or Coinkite 🤪) they would. But they can’t, so they are waiting for an ETF, real or otherwise.

If I really am just paranoid, then this will all amount to a stepping stone on the way to better and better custody practices. Or if my paranoia is spot-on but people wake up and outflank them, we can create and promote these practices before it’s too late.

And so, apart from whining about securities law and BlackRock to no actionable end, I think the real “lesson” of this piece is the following:

The opposite of good third-party custody is not first-party custody, it is no custody at all, hence BlackRock.

Or,

Don’t get mad, get even.

Obi telling the story above is no coincidence given Fedi potentially provides one such technical solution, or at least a tool with which to build appropriate solutions. OP_VAULT is likely another, on a longer time horizon.

Unchained’s collaborative custody model is clearly a foundational commercial alternative to BlackRock, hence the likes of what OnRamp and AnchorWatch are bringing to market on the back of Unchained’s work will likely be key too. Deciding to trust others at all likewise necessitates viable Proof Of Reserves and Proof Of Liabilities schemes. There will be many more innovations to this end that I haven’t thought of, am not aware of, or that have not yet been invented.

Technicalities aside, what we are looking for is a path to third-party custody that enables as wide a base of asset ownership as possible, but prevents what I think BlackRock is up to: namely, a black hole out of which sats will never return.

WERE THIS A REAL ETF, there would at least be a legal means of preventing this, and that would certainly be a good start, but technical means are even better. I would even go as far to say that over the course of writing this post, I have come to believe that non-first-party custody with the technical option of redemption onchain may be the holy grail of mass adoption — that is, defined as widespread sovereignty over UTXOs, not the price of whitelisted paper Bitcoin.

What will not lead to mass adoption is bullshit pseudo-ETFs that pave the way for Bitcoin Uncle Sam’s Vision. And what will actively harm mass adoption is financially illiterate Bitcoiners cheering on the SEC and simping for BlackRock.

When Larry Fink drops a Bitcoin Shmoodleplonk and says, “trust me, bro,” don’t trust.

Verify.

Thanks to Steven Lubka and Nic Carter for edits and contributions.

follow me on nostr: #npub1sfhflz2msx45rfzjyf5tyj0x35pv4qtq3hh4v2jf8nhrtl79cavsl2ymqt

and twitter @allenf32

Among all the chortling over the demise of FTX, one hilariously timed document stands out: Sequoia Capital’s puff piece from a mere six weeks ago. Now deleted, but archived here for your reading pleasure, Adam Fischer boasted to the world that, in effect, Sam Bankman-Fried is the most brilliant, unorthodox, and ethical entrepreneur alive today and possibly who has ever lived, and Sequoia is oh-so-very wise to have backed him.

Given we now know that SBF pulled off securities fraud on an unprecedented scale (and may yet find out more — it’s only been 3 days) and is not so much an entrepreneur as a brilliant, unorthodox, unethical con artist, one wonders: who could possibly have seen this coming?

But then one actually reads the puff piece and thinks to oneself: are you fucking kidding me? How many red flags do you need before you decide not to destroy billions of dollars of other people’s money on the stupidest idea you’ve ever heard? At a certain point, at a certain fiduciary responsibility, and at a certain ability to see things coming, you have to wonder if maybe this is partly your fault too …

I really do encourage the reader to peruse this rather long article for themselves but to pick out what to me are the two most hilarious examples: first, SBF tells the writer that he “doesn’t read books,” and that, “if you wrote a book, you fucked up, and it should have been a six-paragraph blog post.” Rather than an intelligent response to such an utterance such as, what a fucking moron, our intrepid explorer of SBF’s mind thinks to himself:

“Wouldn’t someone with IQ points to spare realize that dismissing books — all books — as essentially worthless might rile a writer? Was he playing with me? Is this fun? Is this humor? I’m satisfied with my meta-analysis until I realize that one can always increment the level of strategic play in this sort of game. It’s like poker. Level one is just thinking about how to strengthen your own hand. Level two is thinking about what your opponent’s hand is. Level three is thinking about what your opponent thinks your hand is. And so on. And, since SBF is obviously a genius, I should simply assume that, compared with me, SBF will always be playing at level N+1. Which makes my analysis of the intent behind SBF’s “books are for losers” idea spiral into infinity and crash, like a computer program stuck in a loop.”

Second, Fischer writes that FTX’s competitive advantage is “ethical behavior.”

No, really.

No, stop laughing and just read it, I swear I’m not making this up.

And so we are forced to ask, why would a blue-chip Silicon Valley firm think this person is trustworthy? Why would you boast about this exchange to your LPs rather than never, ever mention it again and tell him keep his god damned mouth shut when journalists ask him these kinds of questions? What is actually wrong with these people and why do they have so much capital to deploy?

My learned opinion is that although your average toxic Bitcoin maximalist might be able to sniff out this bullshit a mile away, Silicon Valley cannot, because Crypto is peak Silicon Valley, and Silicon Valley has sadly become peak fiat.

It isn’t just that they misunderstand the innovation that Bitcoin represents. It is deeper and more cultural than this: they cannot understand Bitcoin because Bitcoin is fundamentally counter to the socio-economic trends Silicon Valley has come to embody and to emanate — trends which are, at root, the inevitable result of the fiat corruption of prices, information, incentives, and everything else in between. Trends that overpower and distract from any real understanding of capital, money, and the principles of economics, and overwhelm you into thinking something as obviously ridiculous, dangerous, and parasitic as FTX is a good idea.

I will highlight three such trends here but will leave it to the reader’s imagination to ponder the likely many, many more threads to be followed: yield-chasing, dematerialization, and monopolization of access.

Yield Chasing

Silicon Valley’s increased perceived economic and social importance does not, as they would have you believe, follow from their brilliance in identifying technological disruption and making the world a better place. It is not a function of the capital they allocate, but rather the capital that is allocated to them. It is a function of the fundamental insolvency of pension funds all over the world, but particularly in the US.

Of course, this is very much a fiat problem. Global asset management is 10x the size it would need to be if it were possible for individuals to store their wealth in functioning money. The demand for its service in the first place originates from the desperate and perpetual chase for yield that inflationary money inflicts on those further and further from the fiat spigot. In other words, Bitcoin fixes this.

The extent of leverage, unavoidable capital misallocation, and structurally necessary progressive lowering of interest rates that inevitably follows from fiat means that even the funds themselves increasingly need to chase yield. This, and this alone, explains Silicon Valley as a cultural phenomenon. Far more important, more impactful, and more high-returning investments were made by Silicon Valley in the 70s and 80s, and yet the average person had never heard of this metonym. It is only in the past 30 years, and especially the past 10, that the self-importance and cultural cachet of the cohort has ballooned out of any explicability.

Naturally, what has followed is an explosion of profitless, jam-tomorrow, so-called tech companies that makes the problem of capital misallocation even worse in sum. It is easy to see that Crypto is exacly this, on steroids. The shift in return requirements inevitably leads to investment theses comprising increasingly low probabilities of increasingly high payoffs, to the point that there aren’t even coherent grounds to object to obvious stupidity and fraud because, hey, it might work!

Case in point: for FTX, stupidity and fraud did actually work for quite a long time.

Throw in the novel (to Silicon Valley) component of increasingly high exit liquidity, and you check the last fiat box of ultra-high time preference and indifference to real capital formation over long periods of time. Once emblematic of low time preference investing, Silicon Valley has been pwned by fiat to the other extreme: Crypto.

Dematerialization

Silicon Valley used to make and sell useful stuff. While the following is clearly a crude generalization, it is accurate per the median investment and per the shift in cultural norm: it has gradually transitioned to making and selling software, then to renting access to software, then to renting access to useful stuff.

This isn’t packaged as dematerialization but as disruption; not as dystopian but as efficient. Of course, the reality is that it is incredibly high time preference. It is a form of leverage, too. Leverage needn’t be debt, specifically, but can be understood more in the abstract as an induced vulnerability to shocks traded for a magnified gain in their absence.

Bitcoin opposes this trend across multiple dimensions, given it is clearly averse to leverage and goes to great pains to avoid introducing new vectors of attack, and hence more vulnerabilities, by prioritizing censorship resistance by way of decentralization. But also, an even simpler defense against vulnerability of any kind is reliable savings. The social vision of Bitcoin is to get you off the hamster wheel. In other words, Bitcoin fixes this too.

Renting access to stuff you need is fine so long as your need for it is perfectly predictable but calling this “efficient” is an intellectual scam. Once the immature and pseudo-intellectual appeal of disrupting “ownership” is rightly rejected, one realizes there is nothing more inefficient than not having control over resources you require.

Crypto is the idiotic apotheosis of this trend, where they just sell you nothing at all. You give them money, and they give you the warm, fuzzy feeling of having broken into the Old Boys Club of world-changing technology investors. What you are buying is most charitably described as ephemeral cachet and least charitably described with lots and lots of swear words.

Dan Held amusingly captured the pseudo-intellectual appeal of this investment approach in his January 2021 newsletter, writing, “ICOs “disrupted” the VC model. What more meta way to invest than investing in something that is disrupting yourself.”

Investing in the disruption of investing. Dude. Woah. You will own nothing and you will be happy.

Monopolization of Access

The pre-Crypto stopping point of the march to owning nothing was renting access to useful stuff, or platform marketplaces. As economic phenomena, these represent a kind of Faustian bargain because while users do undeniably gain transactional efficiency, they do so at the cost of signing over the rights to rent seek in the long term.

A uniform marketplace is great insofar as what has been made uniform is not access but information. This is kind of like saying: as long as it’s predicated on an open-source protocol. But Crypto has again taken this to the idiotic extremity of not only needing to use their marketplace but also needing to use their money.

This immediately leads us down the well-worn path of the fight for liquidity, the pointlessness of re-introducing barter, the technical necessity of decentralization, the applicability of securities law, and so on and so forth.

It is a precise inversion of the legitimate promise offered by Bitcoin: a better money for everything, not a worse money for one thing, which can be easily integrated into open source protocols to better monetize decentralized access to a marketplace that no longer needs to be manifested as a single, monopolistic entity. Last but not least, Bitcoin fixes this as well.

We are all well-versed in these arguments, but I want to focus for a moment longer not on why these arguments are valid, but rather from what intellectual starting point one would be inclined to regard them as invalid — and in particular for reasons of cultural bias rather than intellectual seriousness.

The answer is very simply that this model, were it to make any economic or technical sense, is a wet dream to the degenerate Silicon Valley psyche. The idea is, in essence, to extend closed systems of user control to the money required to commercially engage with the system itself; embrace, extend, and extinguish salability … except, via exchanges they also control.

Anybody know a good exchange worth investing in?

Once again, should blue-chip Silicon Valley investment firms have known that SBF was a moron and FTX a scam?

One needn’t even point to the hilariously fiat traits of what was effectively a fractional reserve credit crisis that knocked over the first domino and from which FTX limped along, half-alive, not-at-all-solvent until finally being put out of its misery.

One can instead realize that the corrupting power of fiat has corrupted Silicon Valley to the extreme. It has warped the incentives of capital allocation so monstrously as to create a bullhorn blasting the cultural noise of high time preference through every price signal and every media channel alike. Bitcoin is the antithesis of Silicon Valley. They don’t get it because they constitutionally can’t.

Once again, how could Sequoia Capital do this? Why would they think it was a good idea? Why would they brag about it in cringe-worthy fan fiction?

Honestly, why would they not?

follow me on twiter @allenf32

Thanks to Giacomo Zucco for contributions in conversation.

If a company’s cash conversion cycle halved, what would that do to its ROE? This question may seem peculiarly unanswerable. Surely, we need more information, assuming this information alone is relevant in the first place? In fact, we do not. There is more than enough information across the financial statements to make immediate sense of the question and apply it to every returns ratio we ultimately might care about.

I aim to solve the problem posed above with an invented metric I call days of capital returns. While I reserve the exclusive right to use this expression as the title of an eventual memoir, I define it as something fairly mundane that for some reason is not a part of traditional financial analysis literature.

I suspect part of the reason is an obsession with the income statement and all the effectively meaningless valuation metrics derived from it that people like to quote. Painful as this is for me to have to say, nothing written here constitutes investment advice. 99% is criticism of one method of financial analysis and advocation of another, and in the 1% I mention actual companies, the information is publicly available and no commentary is provided.

My central thesis is that while the cash flow statement is true, the balance sheet is a little made-up and the income statement is a lot made-up. In the words of Clifford ‘Method Man’ Smith of the esteemed rap group The Wu-Tang Clan:

“Cash rules everything around me. C.R.E.A.M. Get the money. Dollar, dollar bill, y’all.”

The problem we are trying to solve

I begin with a basic observation: ROE is, fundamentally, a growth rate. Given the equity invested in a business, over the course of one year, what proportion of that equity is generated as earnings that can be reinvested the following year? Hence, by what proportion can equity grow and, all else equal, how much can the whole company grow if the same process is repeated with this stated growth rate in its equity financing.

Fair enough, this is textbook stuff. But how about this: when did those earnings happen? If ROE is 10%, does that mean that after investing $100 on day 0, we got back $10 on day 365? Notice that this is important because we couldn’t possibly have gotten it on day 1, unless we also happened to not reinvest at all, such that equity and earnings remained unchanged for 364 days. If we got back $10 any time before day 365 and we reinvested it, then ROE would have been above 10%.

Here’s a more teasing way of approaching the same problem: say company 1 has an ROE of x% and each unit of earnings took on average y months to arrive after being initially provided as equity investment. Now say company 2 takes z months to achieve this. Say this company 2 somehow took z arbitrarily close to zero, over a time period t. What ROE defined over t rather than over one year would give the same ROE, x%, as company 1 over one year? In other words, if equity invested immediately produced earnings that could be reinvested, what would happen to ROE? Can equity continuously compound, and does this involve the natural logarithm, the greatest Scottish invention of all time? Yes, and yes. This is getting more interesting, but can we calculate any of it? Yes …

Funding, Working Capital, and Operating Assets

We often split the balance sheet into short-term and long-term assets and liabilities. The distinction between being ‘short term’ and ‘long term’ is a fairly arbitrary one, which is actually based on different criteria for assets than it is for liabilities. The starting point of this approach is to observe that a better distinction is between working capital and everything else.

This doesn’t require much fiddling with the balance sheet. It is intended to reflect a theoretical difference, not an accounting one. When a business gets funding (non-working capital liabilities) it will spend it on assets and then operate the assets. It is through this process that a working capital position develops, but the causal direction is key and cannot be reversed. An easy way to conceive of this is to imagine taking out a loan (liabilities up, cash up) and deciding whether to spend the cash on a widget-making machine or on accounts receivable.

Having made this distinction, it becomes easy to think of the ‘everything else’ — as distinguished from working capital — as ‘operational’ in the case of assets, and ‘funding’ in the case of liabilities. The idea behind the entire theory can be handily summed up at this point before we dive into the details: ‘Working capital’ is a measure of efficiency, not of output. In the simplest returns equation of all, money / stuff, an efficient working capital position should subtract from stuff, not add to money.

With this distinction in mind, the first new metric we come across is Funds From Operations, or FFO. To get this, you go down the lines of Operating Cash Flow (OCF) and reverse what is usually the final alteration, changes in working capital. This metric isn’t quoted often, but it is in almost every credit rating agency report you will ever see.

Rating agencies don’t like the income statement because, as I mentioned, it is all made up, but the reason they seem to prefer FFO to OCF is that it captures the causal distinction between ‘working capital’ and ‘operating assets’. Working capital swings may or may not be connected to the core business and can even be manipulated. Credit agencies prefer to monitor the long-term stability of the debt position, and so will typically talk about ‘FFO/Net Debt’.

Of course, Free Cash Flow (FCF) is often thought of as a kind of sturdier representation of cash generation than either OCF, which assumes no maintenance costs, or EBITDA or EBIT. Maintenance costs are important — crucially so if we are theorising about the sustainability of cash generation — but we have just done away with OCF.

A new metric, which I call Cash Profit, is FFO minus either maintenance capex if known, or depreciation and amortization if not. I think that this is a good representation of: how much cash was generated in an essentially sustainable way? Another potentially helpful way to think about this is that FFO is a kind of cash proxy for EBDA, since the ‘I’ and ‘T’ have already been stripped by that point in the OCF calculation. Given that I want to then subtract ‘DA’ as well, and explicitly avoid working capital movements, which also don’t affect net income, ‘Cash Profit’ is a kind of cash proxy for Net Income.

But what about growth? Well, we are actually only a few steps away from approximating the DuPont analysis for ROE. I also think the steps have clear correspondents, but we have to first return to the theoretical differences between working capital and operating assets to tease them out.

The first is easy: you can’t invest in accounts receivable. Nor can you invest in cash. If by ‘invest’ we mean, spend funding for the business on stuff for the business, you can only really invest in fixed assets, intangibles, goodwill, and investment assets. But of course, if a business is already up and running, it will have a Net Working Capital (NWC) position. We should add this too. I will define ‘Net Operating Assets’ as the sum of net fixed assets, intangibles, goodwill, investment assets, and NWC. I realize there are other definitions of ‘Net Operating Assets’ but I can’t think of anything clearer for what I mean here. Suggestions welcome.

This deserves a tad more attention since NWC could be negative (which would be a good thing? A bad thing? Can we say for sure?). Returning to the idea of ‘spending funding for the business on stuff for the business’, imagine we want to buy some stuff — some fixed assets, intangibles, goodwill, investment assets — worth $10m. But imagine also that our NWC is negative $1m. What this means is that our business model is giving us a $1m interest-free loan in cash through the efficiency of the ongoing working capital position. So, assuming we can pay it back without issue, we only need $9m in funding now, not $10m. We need the other $1m at the end of the cash conversion cycle, but maybe we have actually earned the cash with this investment by then anyway.

If we interpret this as potential equity holders who thought they needed to finance a capital raise with $10m, but actually it turns out only need to give $9m for the same thing, it should be clear why this is a good thing after all. Of course, this is provided the working capital position is sustainable and is not a temporary blip that may reverse.

So now we can work out Sales/Net Operating Assets. This is very much like asset turnover, clearly, except that we have a more nuanced view of what assets matter and why.

We can also work out Cash Profit/Sales, which is very much like Net Profit Margin, but with a greater emphasis on solid cash earnings rather than accruals-based earnings.

Finally, we can work out Net Operating Assets/Equity, which is very much like the leverage multiplier, but in the sense of financial leverage only: the portion of leverage provided by working capital I would argue is worth splitting out.

These are interesting on their own, but when multiplied together we get ‘Cash Profit/Equity’, which is very much like ROE:

Not meaning to pile on the math, but there is one final adjustment to be made to get a really helpful number. We need to account for the fact that equity may be diluted. The same stuff goes in and the same money comes out, but in the background, we are getting a smaller return than this ratio suggests. So we need to finally take this ‘CP/E’ figure and multiply it by (1-equity issued/total equity). It may be reassuring that most of the time, this will mean multiplying by a number very close to 1. They will only differ markedly in situations that really ought to get our attention anyway.

Readers may have noticed that I have ticked off every balance sheet entry other than ‘cash and cash equivalents’. Surely a highly productive asset base that neither pays down debt nor distributes or reinvests earnings, but just lets the cash accumulate, ought to muck up the concept of ‘growth’ we are trying to capture?

As frustrating as this may be, the reader will have to trust me that the necessary calculation to adjust the individual metrics in light of the potential for hoarding cash is so obscenely complex as to not be worth wasting time even understanding, never mind implementing. It also almost never changes the above metrics in any meaningful way and so I will skip over it.

As a kind of handwavy justification of this, consider that we would only care about such a circumstance if the disproportionate cash hoarding was meaning that this ‘fundamental growth’ number we are after was a poor reflection of the growth of the business. This could only really happen if both a large proportion of the generated cash was going into cash and not operating assets, and the dormant cash pile was much, much bigger than the operating assets.

For example, operating assets of $10m produce Cash Profit of $5m, of which all is put back into a cash pile that starts at $90m. The cash return on operating assets is 50%, but the cash return to the business is 5%. If the same thing happens next year, the business will ‘grow’ by 4.8%, not 50%, and this will asymptotically approach zero over time. However, it would surely be obvious that a business that is 90% cash and only generates 5% of its cash pile each year ought not to be valued on the basis of any conception of ‘growth’ in the first place. For ‘normal’ businesses, I argue that this adjustment is not relevant.

I’d also point out that no matter how bad it is, it can’t change the final figure we are aiming for at all, which is Cash Profit / Equity, arrived at by multiplying out lots of other individually helpful metrics. Whether we multiply out (Sales / Assets) * (Assets / Equity) or (Sales / Net Op Assets) * (Net Op Assets / Equity) we get the same numerical answer. All I’m arguing is that the latter presentation is just more helpful as it gives a better idea of what is actually going on; it treats working capital as a measure of efficiency, not of output.

We can easily imagine two scenarios in which this analysis is superior. Firstly, imagine a company that makes little or no profit because what in spirit are investments have to be accounted for as expenses, and yet mysteriously grows its equity base every year, forever (the way you ought to treat this, by the way, is to move these expenses off the income statement, from CFO to CFI, add them to an intangible asset on the balance sheet, amortize that asset, and put amortization back on the income statement). CPRE will be much higher than ROE and will almost certainly capture the growth in book value nearly perfectly.

Secondly, imagine a company that is an absolute wizard at inventory management. By the ROE DuPont analysis it may well look very levered on Assets / Equity and not very productive on Sales / Assets. Yet this would be extremely misleading given this “leverage” is in the form of an interest-free loan generated my managing working capital efficiently. Under CPRE, Net Op Assets / Equity will be much lower (i.e. not levered) and Sales / Net Op Assets will be much higher (i.e. super productive).

CPRE will be very similar, if not identical, to ROE, but the DuPont breakdown will be a far more accurate analysis of the business. For readers curious to play around with this more, I suggest running the numbers on Salesforce and Inditex.

Having made the dilution adjustment to ‘Cash Profit/Equity’, we arrive at a metric I call Cash Profit Return to Equity (CPRE). We won’t use this again, as it is just FFO we want to continue working with, but the adjustments we make to the DuPont to get clearer on the difference between working capital, operating assets, and funding were worth the tangent. Also, I will refer to ROE throughout, in order to strictly solve the problem I originally posed, but I contend that CPRE makes a lot more sense, and the two can be swapped in and out at any point in the following discussion.

Cash Profit is cash that has come only from essentially sustainable sources and hence is available for paying down debt, distributing, or reinvesting in operating assets. It may be useful in determining the attractiveness of a valuation in a variety of circumstances for which other metrics make a perfectly healthy company look hideously expensive or misleadingly risky. With all these distinctions at front of mind, we can return to our original problem.

How Quickly Do Investments Produce Cash?

What we now want is a kind of invested-capital-only proxy of the cash conversion cycle. As a reminder, the cash conversion cycle tells you for how many days the business must cover its need for liquidity brought about by the differing demands of suppliers and customers. It is of course possible for the cash conversion cycle to be negative, which is a very good thing provided it can be sustained, in that it effectively means that the business is being paid for the end good produced before it pays for the components that go into making it.

We can in turn think of this as the extent to which the business has a float it can earn interest on. With apologies for the confusing negatives flipping around, a negative cash conversion cycle gives a positive float on which interest can be earned, while a positive cash conversion cycle is a financing need on which interest must be paid. But this is all assuming that operational assets are up and running (in fact, it makes no sense if this is not the case).

What we want is a figure that is similar in principle but tells us something like: how many days do we have to wait while cash we invest turns back into cash we can invest again? Rather than how long it takes cash to cycle through working capital and become cash again, how long does it take to cycle through invested capital? And, as a mathematically interesting side note, can this be negative too? What would that mean?

Our starting point is to look at the components of the cash conversion cycle. To get the ‘average days of’ figure, you divide 365 by the relevant ‘turnover’ figure. Now ‘turnover’ means something quite different to a return or other growth rate. It means ‘in one year, how much of this stock is replenished?’ or ‘how much of this stock is cycled through?’ or some other variation as appropriate.

To be specific in this case, we want ‘in one year, how much of the stock of capital invested is returned as cash earnings?’ For the ‘capital invested’ there is a pleasant symmetry with working capital and the cash conversion cycle in that what we are really looking for is all assets except working capital.

As per the previous section, I argue that FFO is the most appropriate cash earnings return, as it explicitly excludes working capital movements. Working capital arises as a result of running the operating assets, but is causally completely different and the two should not be conflated. So we want long-term assets plus cash, plus any marketable securities or short-term financial assets.

The intuition here is just any productive assets the business owns, rather than being an obligation from or to customers or suppliers. i.e. things the business has spent money on itself. With the intuition out the way, however, it is a lot easier to calculate by simply subtracting all working capital assets from total assets. FFO over the average of this figure (call it ‘assets-minus-WC’) is our ‘invested capital turnover’, and 365 divided by invested capital turnover is the figure we want, which I call, days of invested capital:

The distinction being driven at throughout (and in CPRE also) is between ‘working capital’ and ‘invested capital’, which is hopefully now clear and complete. When you think about it, the ‘cash conversion cycle’ should really be called ‘days of working capital’ instead of the current very silly meaning of the latter expression. When the CFA Institute changes this in its syllabus, I will know I have finally won.

The reader may have a few niggling concerns about how we arrived here, and so we will do some housekeeping before getting back to solving the core problem. In the previous section, I made a big deal about Cash Profit, which I defined as FFO minus maintenance capex if known, or DA if not. Where is DA here? Are we dramatically overstating everything?

No, because ‘DA’ is an accruals measure, not a cash one. We include it there precisely because we want a growth metric, not a turnover metric. In fact, we have accounted for ‘DA’ here without ever making it explicit: every year we have a new assets-less-WC in the calculation, within which depreciation has been subtracted from gross PPE.

Next, I claimed the intuition was that we wanted all the assets the business ‘owns’ as opposed to obligations to or from others. Surely it owns inventory? It does, but I said productive assets it owns. Inventory is not ‘productive’: it is the result of productivity that hasn’t been sold yet.

As per the commentary above on the cash conversion cycle, it’s not really a good thing, either. You want to sell it, not have it sitting around. Because we are only interested in (potentially) productive assets, by excluding ‘inventory’ we have also avoided any double-counting with this figure as compared to ‘working capital’, which is what it really is.

Next, I also started by talking about ‘equity financing’ and then switched to ‘productive assets’ halfway through. Does this obscure an important difference that is captured, for example, by comparing ROE to ROCE? This is a good question, and the answer is quite complicated. In short, no, because we aren’t finding out what ROE should be, but rather how it will change from whatever it already is if we improve something that causes it. We could do the exact same thing with ROCE or ROA if we wanted to, by using our preferred metric as the input.

There is a slightly more complicated reason as to why it is okay to use ROE in the first place rather than adjusting for leverage. We could take assets-less-WC and divide that by equity to get a kind of ratio for WC-less leverage. While this figure might be of interest, there are two issues with taking it any further. Firstly, it might not mean anything at all if the net working capital position is highly negative: it might look like the business is substantially lacking leverage when actually a form of leverage is provided by the working capital liabilities. Or vice versa, of course.

So, in isolation, it could potentially be misleading. Secondly, as we will see shortly, the problem we are aiming to solve involves a calculation that has nothing to do with leverage in the first place. Choosing to begin with ROE, ROA, ROCE, as covered above, is the only place the consideration of leverage exists within the realm of our calculations, so introducing it here adds complexity without having any obvious utility.

Finally, just because I teased it, no, days of invested capital cannot be negative. One of assets-less-WC or FFO would need to be negative to achieve this. Assets-less-WC clearly can’t be, and while FFO could, I think the best approach is to treat this as clearly just being an error: it doesn’t mean that when you invest the equity you get the earnings back in the past — it means you don’t get them back at all.

If you want to spend 10 minutes on the philosophy of mathematics that you will never get back, you could ponder this scenario as entailing that the loss of money is a gain that happens more than infinitely far in the future and hence wraps around into the past. Then again, ‘error’ is probably the more fruitful approach at this juncture.

I suggested in the introduction that equity can continuously compound, however. What does this mean? That days of capital returns is zero? Not quite. We have one step left. As has been belabored to this point, businesses have two relevant but unrelated cash cycles. Days of invested capital and the cash conversion cycle. We need to combine the two.

Combining the Conversion Cycles

The way we combine the two is by adding them. What the sum means is something like: across the entire business, how many days do we have in which cash is tied up not yet having returned 100%. As ‘working capital’ and ‘invested capital’ partition the balance sheet, and hence add up to ‘capital’, I call this figure, days of capital returns.

To justify this by example, imagine that our cash conversion cycle is minus 10 days. This means we get paid by our customers 10 days before we pay our suppliers, and have free money to play with for that period, but which of course we must pay back. Suppose also our days of invested capital is 10 days. That means we invest capital and get 100% of our money back after 10 days.

What we do is take $10 from customers, invest it in a widget machine, wait 10 days for it to have produced the $a of widgets of which $10 is the profit, fulfil our obligations to widget-buying customers, and then pay our widget-machine-making suppliers. Clearly, we need other financing in order to do this as we still have operating costs, as it isn’t as if the other circumstances relieve us of this responsibility. But what ‘zero’ days of capital returns tells us is that there are zero days in which earnings specifically are tied up, relative to the capital and sales that produced them.

So for example, if the cash conversion cycle were negative 20 days, with days of invested capital still 10: we get $10 from customers, buy the machine for $10, wait 10 days to get $a of widgets, fulfil our obligations to customers, and then wait 10 more days before we have to pay our widget raw material suppliers. Hence our profits have 10 days of ‘freedom’, during which they could potentially earn interest or be reinvested in another widget machine.

If the days of invested capital were 20, but the cash conversion cycle negative 10: we get $10 from widget-buying customers, buy the machine for $10, but then after 10 days must pay the widget raw materials suppliers. We can do this because we have financing, but we still need to wait 10 more days to finish making the widgets and fulfil our obligations to customers. Our capital can’t ‘reboot’ to start a new period of productivity for 10 more days. We might think of this as implying our profits are ‘tied up’ for 10 further days.

What the intricacies in each example point to is that zero or negative days of capital returns in no way implies the financial equivalent of perpetual motion. We still have a base of invested capital and a margin structure in the business that dictates what kind of profits can be made. It is simply a measure of time, and what this time is telling us is how quickly we must operate to maintain that structure of earnings and returns. What altering this time would tell us is what would improve if we did things quicker.

It is possible to juice everything to infinity, but it is clearly not realistic. It is like suggesting that if we lever up to arbitrary highs, then ROE can go arbitrarily high too. In fact, it is more strictly impossible since a foolish CFO could actually lever up to some arbitrary level, but taking the cash conversion cycle to arbitrarily high (negative) values depends on conditions in the real world that are only within the company’s control within reasonable bounds. Nobody in the world gets paid 10 years before they deliver.

While it’s theoretically possible, I would find it hard to believe that any company had negative days of capital returns, or anything close to even two or three years. I gave the extreme cases here as a conceptual aid to understand the mechanics. However, below I ran the numbers on some large, well-known companies over the past several years to give an idea of a range of what is realistic:

As a brief aside, I am still waiting for an apology from Benedict Evans, whom I decided several years ago was my nemesis, on the topic of Amazon’s returns. He has obviously been in America too long and can no longer recognise good old British sarcasm.

Oh by the way, THIS IS NOT INVESTMENT ADVICE. THESE ARE NOT OPINIONS: THEY ARE PUBLICLY AVAILABLE FACTS.

Got it? Excellent. Let’s move on.

Solving the Problem

The problem was: If a company’s cash conversion cycle halved, what would that do to its ROE? We may as well ask, if days of capital returns shortened or lengthened by x days, etc., since we can now cover every possibility. If we are only interested in the cash conversion cycle, we assume the days of invested capital stays constant in our inputs.

Step one is to calculate what I call a ‘capital turnover ROE’, the answer to the question I teased earlier: given, a) a company’s annual ROE, and, b) the known days of capital returns, what is the ROE defined over this period, t? (where t is unlikely to be an exact year) To get this we take the turnover figure for days of capital returns (so 365 / DCR, call this ‘capital turnover’ or ‘CT’), and along with the actual ROE, apply this formula:

From this we can calculate the potential ROE given a potential CT. We can assume a change in cash conversion cycle or days of invested capital, use these inputs to get a potential DCR value, hence a potential CT value, and input that into the formula below:

For anybody who wants to dive into this formula, the next section explains the derivation. If not, putting it in Excel and playing around with the inputs ought to convince you it works, and you can skip straight to the conclusion.

Derivation of Capital Turnover Period Indexed ROE and its Linked Potential ROE

(apologies in advance for this section that Medium doesn’t seem to allow subscripts or superscripts — hopefully, the notation isn’t too muddled)

The continuous compounding counterpart of a given growth rate, x%, is a simple calculation: ln(1+x%). The challenge is that capital does not compound continuously. Think about what this would mean in real life: you invest capital and instantaneously receive the earnings you hoped it would ultimately provide, which you then reinvest and instantaneously receive more, etc. However, the purpose of the rest of this post to this point is to derive over precisely what time period this happens in real life: days of capital returns.

By analogy to the derivation of e, the base of the natural logarithm, as:

We instead want not the limit, but the discrete answer for a given n. Again, by analogy to this cool method of deriving e, what is happening here is we are assuming the year is chopped up into smaller and smaller increments and nonetheless compounded back to a full year. We want to take the precise increment corresponding to ‘days of capital returns’, which of course is ‘capital turnover’, or 365/DCR. So now we want to know this:

Call this number ‘c’ for clarity. We then want to use this as our logarithmic base to correspond to not quite continuous compounding:

Referring to the question above, what continuous compounding rate corresponds to the ROE of x%? This number tells us the answer to the more realistically useful question, what compounding rate over the non-continuous period at which capital compounds corresponds to the ROE of x%?

Most of us don’t have a fancy enough calculator to work this out, however, but we can use some sneaky tricks of logarithmic algebra to turn it into the following, using only the natural logarithm, which we can work with, and which I quoted in the main text above:

Remember that this still isn’t what we are after, and actually isn’t even very useful in and of itself. This is an ROE over a fairly arbitrary period — very likely not at all like one 365-day year. What we want is how ROE changes if DCR changes. We can begin to see why this is important, though, because changing DCR will change the CT period, and hence will clearly affect the ROE over this period too.

The reason we need this number is that it provides a way of indexing the annual ROE to the capital turnover period, rather than one year, so that we have a starting point to see what happens to it if we then change the capital turnover period (I’m using ‘indexing’ slightly metaphorically here). The way we do this is rather philosophical, as the derivation involves understanding the meaning of e, the base of the natural logarithm.

One meaning of e^x is the multiplicative growth factor corresponding to some continuous growth rate x. Or, perhaps more easily understood, e^x — 1 will give a percentage growth rate over one unit of time. An easy way of realising this is to invert the claim made above, that, ln(1+x%) gives us a continuously compounding rate.

By the same logic, we can reintroduce the number we called ‘c’ above, or (1+(1/CTp))^CTp and be more precise about what this means also. Firstly, by the ‘p’ we mean ‘potential’ capital turnover period rather than actual. ‘cp’ is a number increasing arbitrarily to e, as the capital turnover period gets higher and higher (recall ‘capital turnover period’ is 365/DCR, or, how many times in a year do we cycle through our capital).

The primary utility of this number is that ln(cp) will give us a number increasingly close to 1 from below the closer cp is to e. What ln(cp) means is the number we need to multiply a growth rate, g, by to turn it into the continuously compounding rate that would give the same growth over one unit of time as g does over ‘CTp’ increments of that time. In this case our growth rate is the ROE indexed to the actual capital turnover period.

Hence ln(c)*ROE(CT) is the continuous growth rate corresponding to this indexed ROE. Or, in other words, this is how we reconcile indexing the actual ROE to the actual capital turnover period with our desired potential capital turnover period. We can now calculate the continuous growth rate that doing this would correspond to, and so we need to turn that back into a normal growth rate.

This is the final interpretive step. We can now derive the desired growth rate over one unit of time — potential ROE over one year, as usual, in our case — given the corresponding continuously compounding rate — the rate described in the paragraph above. (n.b. several steps involve standard algebra I do not explain):

g is growth rate we want, x is corresponding continuously compounding growth rate:

Conclusion

Funding, operating assets, and working capital are different things. Not only are they qualitatively different, but they are causally different. A business (ideally) turns cash into more cash via investment in productive capital. In the lingo adopted here, it turns funding into operating assets and runs the operating assets to generate a return.

The fact of doing this causes a working capital position to develop, which can be thought of as either a drain on or a source of short-term cash. But beyond this effect on cash, working capital does not itself cause anything. It is a reflection of efficiency, not a contributor to output. The distinction between ‘current’ and ‘noncurrent’ assets and liabilities obfuscates all of this, as do the components of the DuPont formulation of ROE.

But as my good friend Method Man knows well, cash rules everything around us. We may have good reason to believe that changes in an industry or in the strategy or operations of a business will materially affect a company’s cash conversion cycle or days of invested capital. In such a scenario, we shouldn’t reach this point and simply say: that seems like a good thing. We should say precisely what will happen to returns.

Preferably Cash Profit Returns to Equity, but if you want to stick with ROE then that wouldn’t be so bad.

follow me on Twitter @allenf32

thanks to Sacha Meyers, Robert Natzler, and Gemma Barkhuizen for edits and contributions

DO YOU SUPPORT THE CURRENT THING?

I sincerely hope so, dear reader. I hope you at least pretend to support The Current Thing convincingly enough to keep the wokeratti off your back. Like Havel’s sign in the greengrocer’s window, you are surely basically indifferent to the semantic content of The Current Thing. You pretend because, “these things must be done if one is to get along in life.” Verbally, as Havel observes, whatever the slogan is, it might be more honestly expressed this way,

“I, the greengrocer, XY, live here and I know what I must do. I behave in the manner expected of me. I can be depended upon and am beyond reproach. I am obedient and therefore I have the right to be left in peace.”

There is a crucial difference, however; In communist Czechoslovakia, calling The Current Thing “current” would have been either a non sequitur or grimly ironic. There was only One Thing. Ever. Being an honorary Bulgarian by soon-to-be-marriage, I have a pet theory that this is why communist dissidence was capable of being so powerful and so lasting; grandparents would tell their grandchildren (in secret, of course) what the Only Thing was like back in their day. What they would have given for the excitement of The Current Thing changing every other week!

In Big Finance, however, we find another variation still. More dynamic than communism, less so than social media, The Current Thing Cycle rolls along in more like decades. The reader is probably well aware, however, that this cycle is surely nearing its peak amplitude, which has resulted in many industry participants professing their passionate love for Environmental, Social, and Governance concerns. If they are really gung-ho in their lust to Save The World, it is not unheard of for these (entirely unrelated) concepts to morph, like Power Rangers, into one MegaConcept: the dreaded “ESG”.

I have capitalized the constituent words, and will continue to do so, to emphasize that they are not so much words as slogans. When somebody uses either the words or the Megazord acronym, they are saying the Big Finance equivalent of, Workers of the World Unite! They very much are not using the actual meanings of these words, as we shall see. If you are tempted to begin your fightback by saying something like, “but these are ultimately ethical issues to which it is impossible to centrally deduce or dictate objectively correct approaches …” then I’m afraid you are very much missing the point. Nobody cares, you sweet, innocent child. It’s about power.

This power has become such an obvious problem that people whose politics are defined almost entirely in opposition to the wokeratti have themselves started to rant and rave about globalist plots to turn us all into serfs of the CCP. You know the type — people who oppose The Current Thing. Now, to be clear, opposing The Current Thing is both a useful and a hilarious heuristic. But it is a heuristic nonetheless. It is not an explanation.

One such raving rant of late was delivered by calculating psychopath, rarely if ever right about things far, far in the future, Peter Thiel, at the Bitcoin Conference in Miami.

Amongst other delightful tidbits, Thiel said that when you hear “ESG” you should think “CCP.” While I appreciate employing the shocking and unsettling to draw attention to this issue, I fear that this is unhelpful as an explanation as it conceals the real mechanics at play.

Surely nobody with any shred of self-respect and without any commercial compromise continues to deny that the CCP is evil? But is ESG evil? I wouldn’t want to flatly deny this as it seems to be a slippery slope, but I do think it is a matter of degree. As incoherent as ESG rationale can get at times, I really can’t imagine that it will ever be spun to explicitly sign off on genocide or slave labor, for example (although implicitly, for sure, as we will see below). Herein lies the key to untangling this web of lies: the evil of ESG is Arendtian in its banality. It is teleological, not normative. It is a means, not an end. It serves a seedier purpose.

But what purpose? Or, better yet, whose? Contrary to the ranting and raving in opposition to The Current Thing, I believe the explanation is rather more straightforward. I do not deny that ESG has an obvious political character that is, at the very least, deeply suspicious in its perma-alignment with The Current Thing, and which seems to be taking on a dangerous life of its own. But I believe this is an emergent property that has become attracted to the movement only after it was clear that it wasn’t going away. The purpose it serves is prior to the bizarre emergence of woke capital, and whom it serves are unimaginably more powerful than culture warriors and activists for The Current Thing.

In short, it serves Big Finance itself.

Say what? I thought it was attacking finance! I thought we were cleaning it up and making it moral and making it care? “lol,” said the Scorpion, “LMAO.” If you believe this, I have an NFT to sell you. It’s an NFT of this very Medium post, and it will serve as an excellent reminder of the moment you realized that you have no idea how power works in the real world. Pull up a chair and I’ll tell you a tale before I get canceled and you can only find me on Mastodon.

The revenues of the global asset management industry are almost entirely a function of the volume of assets a given firm manages (or “AUM” for, “assets under management” in industry jargon). Alarmingly little is a reflection of the success with which these assets are managed (or, “performance”). This creates a disastrous principal/agent problem (as if the simple fact of “managing assets” wasn’t bad enough in this respect) in that the motivation of an asset manager is first and foremost to not lose assets to a competitor.

The risk/reward trade-off compels this attitude. If a manager goes out on a limb and does something crazy (like, oh I dunno, invests in something they think is mispriced and is going to go up a lot if provided with capital) there are two possible outcomes: they are right, it goes up a lot, and they get paid a tiny bit more. Or, they are wrong, it goes down a lot, they look like an idiot, they get fired, and they get paid nothing.

This is how we end up with the travesty of passive investing, which, for the layman, basically means, investing in absolutely everything that’s already big. Passive investing is an absolute farce if the goal is, as it really should be, the effective, efficient, creative, and differentiated allocation of capital. I do not exaggerate in the slightest when I say that it is very nearly communist: on the dubious premise that we ought to cut through the noise and the waste of silly old competition, capital is allocated entirely centrally. In a sense it is even cleaner than communism because there isn’t one allocator, or a committee, or whatever; there is zero. The allocation is algorithmic. Companies get capital in proportion to how big they already are, provided they are already pretty big to begin with. Schumpeter would be so proud.

Passive investing is most often celebrated as a marvel of risk/reward packaging for the retail investor, who surely doesn’t have the time or energy to do the job of a professional capital allocator. It’s a fair assumption that they have their own job doing something productive in the real economy. Is this arrangement worth sacrificing? Would sacrificing it be ESG-friendly? Yes, absolutely it would, but we will return to this further down.

Passive investing relies on the notion of an index, or, a numerical weighting of every publicly listed company in a given geography, above a certain size, etc. which is determined by relative size and expressed as a percentage of the whole. If the value of all shares outstanding multiplied by their current market price (or, “market capitalization”) of Company A is 1% of the total of all the companies in an index, then it makes up 1% of that index, and its shares are 1% of those held by a passive investment instrument.

The existence of indices is the bane of the lived experience of investment professionals who take Schumpeter a little more seriously and do not allocate by algorithm but by analysis of business fundamentals. “Performance” is measured relative to an index, on the understandable but perverse realization that index investing, which relies only on an algorithm, is much cheaper for the client. If your non-passive (or “active”) manager returned you 50%, you might think that is fantastic, but if the index went up 60% then you paid for nothing. In fact, technically they underperformed by 10%. No performance fees — even on 50%! — and probably also fired.

This all incentivizes active managers (which, by the way, is a weird euphemism for real investors) not to do well, or even to try doing well — or even to risk doing well — but rather to do as averagely as possible! They need to mimic the tragic joke of passive investing while furiously pretending otherwise for the non-passive fees, and they need to perform as close as they can to the index or else the assets go bye-bye.

The absolute worst thing that could happen to bust this racket wide open would be a real investor, who wants to provide capital to businesses not because they are already big, but because they are small and might get bigger, coming on the scene and making the incumbents look like the parasites they were all along.

If only there were a way to dream up some bullshit compliance costs to keep out such uppity rogues, eh? And can you imagine, dear reader, if such bullshit could be marketed not only without drawing attention to the rent-seeking Cantillionaire privilege it is, but as just and fair and true and good? And can you imagine, dear reader, if this very same just and fair and blah blah blah bullshit could be repurposed to justify otherwise suspiciously high fees on the basis of it being yet more (entirely uncompetitive) “work” everybody in this racket is assigning themselves?

And even if you knew this was complete and utter bullshit, and that being an agent and not a principal ethically and legally precludes you from pretending your politics is your job, can you imagine, dearest of readers, your absolute priority at all times being to appear minimally different to all your competitors and hence to mimic whatever stupid bullshit they are spouting, regardless of whether even a single such spouter is making one iota of sense?

You’ve just imagined ESG.

ESG is a bootstrapped compliance hurdle to keep out, or at least down, anybody ruining the party of the passive cartel by actually investing, consistently outperforming the index, and raising questions about why tens of billions of dollars in fees are going to people who do absolutely fucking nothing for a living. ESG smells like money, and so it follows by syllogism that the vampire squid is relentlessly jamming in its blood funnel. If you think, for example, that Larry Fink gives a flying fuck about climate change, I have an NFT collection to sell you.

But, no, I take it back. These people don’t do nothing. They do less than nothing, because, as is far more popularly commented upon, ESG is flagrantly political, which is what caught the attention of the Oppose The Current Thing crowd in the first place. But these political activists are useful idiots. They are attracted to power, but the power had to first exist as an attraction.

The perma-alignment with The Current Thing is not random, nor should the vacuity of the necessarily capitalized not-words-but-slogans be frustrating if understood in the proper context: it is a charade on the part of Big Finance to assign itself yet more power. The only reason the object of bullshit concern is not The Proletariat is that Big Finance is not (quite) sovereign, still needs to interface with the media establishment, and still exists within a regime in which “the proletariat” is not The Current Thing.

This is how we explain that while surely no industry enjoys being muscled in on by the state and forced to implement politicized nonsense, none of this is a legal requirement and yet Big Finance absolutely friggin loves it.

Nobody cares, you sweet, innocent child. It’s about power.

The activists’ presence and their meddling is an effect, but it is not the cause. It’s just a stupid and annoying effect that requires we capitalize Environmental, Social, and Governance to distinguish the slogans from the words.

As words, these are crucial parts of serious investing. To introduce the most intimidating technical jargon of this post, they represent what financial professionals refer to as: risks. A company that pollutes a river, or oppresses a minority group, or embezzles at the board level, is almost certainly not a good investment. None of this is complicated.

But, hilariously, it puts those who take it seriously in a strange position with respect to ESG: they are increasingly required to explain their “ESG policy” to prospective clients and, in all honesty, there is no politically correct answer. The actually correct answer is, “we aren’t morons,” except they can’t say that because that implies the client is a moron. The intermediary client, that is. One of the many, many, many entirely unnecessary intermediary clients, given no real person with a real job and real savings worth caring about would ever ask such a stupid question.

And if you take a step back, a subtle inference of all of this is that your passive investing megacorp of choice also doesn’t give a flying fuck about pollution, oppression, or embezzlement, but can now explain this away. They have an ESG policy. Look, it’s right there on their website. That’s much better than doing anything.

What might be in this policy, you ask? Well, The Current Thing, naturally:

Marc Andreessen on Twitter: "The plan: ESG funds will invest in defense companies to make the weapons required to fight wars with hostile regimes we buy energy from, because ESG funds won't invest in energy companies. pic.twitter.com/Z6OlNR6yvs / Twitter"

The plan: ESG funds will invest in defense companies to make the weapons required to fight wars with hostile regimes we buy energy from, because ESG funds won't invest in energy companies. pic.twitter.com/Z6OlNR6yvs

But if you dig a little deeper, dear reader, you realize just how insidious this is — how evil, even, albeit in about the most banal manner imaginable. Because, recall, this is not their money. This is your money! This is the money of the retail investor who has a productive job in the real economy and doesn’t have time to also LARP as a Master Of The Universe. Do they support The Current Thing?

If they don’t, then I put it to the reader with deadly seriousness that this entire enterprise is criminal. It is a blatant violation of fiduciary responsibility. People should go to jail, and they should share cells with those on lifetime sentences for fraudulently repackaging MBSs and punting the exposure to pension funds with liabilities in the form of retirees of productive jobs in the real economy. How many of those are there, again?

Even if not its root cause, the political character of ESG must still be taken seriously, of course. If the cause is essentially corruption, then the effect of regulatory capture may end up proving even more dangerous still. ESG has undoubtedly become a vector of political attack on the operation of capital markets. If the US wants to retain its prime position as the venue for the leading capital markets in the world, across nearly all asset classes, it needs to surgically remove this cancer as soon as is humanly possible. It is not benign. It is metastasizing.

When SEC Commissioner Hester Peirce voiced the lone dissent against the inclusion of “climate risks” in company prospectuses recently, her argument was basically my own above: these are risks. Although the concept is incredibly technically involved, real investors know how to deal with risks and do not need to be condescended to about which deserve their attention more than others. “We are not the securities and environment commission,” Peirce warned, adding, “at least not yet.” Quite right. I would hope not ever if the rule of law is to be taken seriously, and exactly this kind of regulatory capture via backdoor-compliance enforcement of virtue signaling is to stop.

But could we probe deeper still? ESG is an attack vector, but what is the attack surface? Without intending to be flippant, I think it is centralization. Capital markets are centralized institutions and they are being attacked. So far, so bleak. Can we do anything about it? And what was that Thiel talk actually about, again?

Thiel, of course, was talking about probably the only thing we can do, at this point. He was telling us that Bitcoin fixes this.

Given my entire shtick on the interwebs is to point at random problems and say, Bitcoin Fixes This, yes, here we go. But my shtick is also to mean it! If the reader couldn’t care less, she is free to stop reading now and go back to anticipating the implosion of woke capital. But if she cares about truth, justice, and the American way; if she cares about rainbows and puppy dogs and the proper functioning of capital markets, let me wrap up this post by painting a picture of civilizational ascent. The future is bright. The future is orange.

If you are being honest with yourself, dear reader, and you are not already orange-pilled, and you have a productive job in the real economy and don’t think about all this crap for a living, it is very probably true that the only reason you “invest” in the first place is because of inflation. If money held its value, or even gained value (in line with the weighted-average reinvested return on capital employed, say), then you could decouple saving from investing and rest easy for … well, the rest of your life.

Sadly, this is not the world in which we live. Your money loses value every time Putin invades Ukraine and every time supply chains do whatever it is supply chains do.

If you didn’t realize the prior sentence was a joke, then I’m afraid you aren’t ready, either for the final few paragraphs of this post or for the category 5 shitstorm of economic reality that is gathering on the horizon. Your money loses value every second of every day because it is literally defined as the product of unbacked credit expansion. It is a fungible pan-bank liability matched to the asset of a mispriced toxic loan.

Enders Game - Unchained Capital

But if, in the highly unlikely but God-damned beautiful event that a form of money was to be invented that obviated this structurally necessary commitment to permanent inflation via neverending debt monetization, global asset management would be positively screwed. The demand for its service in the first place originates from the desperate and perpetual chase for yield that inflationary money inflicts on those further and further from the fiat spigot.

You take that away and the jig is up. Global asset management goes to 10% of its current size, with the difference made up by more local, knowledgeable, and equity-focused skin-in-the-game financing; the kind currently crowded out by the firehose of cronyism on Wall Street that sucks almost everything into its orbit and nudges the rest onto Robinhood and Coinbase.

What’s left will be … actual investing. Allocating capital to investment projects because they are small, mispriced, and stand to get bigger if appropriately financed. And who knows, in doing so they may benefit the environment and society with good or great governance. Lower case, that is, because we speak in English and not in slogans.

If I may be so bold as to quote from my newly released book, co-authored with Sacha Meyers, Bitcoin Is Venice,

Finance as it exists today is a chokepoint for extra-legal and supra-democratic political attack, in the sense of activists pushing high-modernist agendas via the absolute practical necessity for corporations to have at least a commercial bank, if not access to capital markets. The looming threat of regulators, goliath capital “allocators,” or even individual banks cutting off corporations from the ability to finance themselves — with artificially cheap, politically preferential capital or otherwise — is why multinational corporations virtue signal for LGBTQ+ rights in the United Kingdom but dare not do so in Saudi Arabia, and for Black Lives Matter in the United States but conveniently ignore slave labor and genocide in China.

The customer base of Nike, McDonald’s, or whoever, and the beneficiaries of assets managed by BlackRock, or whoever else, may or may not care about these causes. But this doesn’t matter: This is not a clumsy attempt at marketing. Or rather, it is, but the customer is the tax-collecting state, the operationally necessary rent-seeking banking cartel, and the social caste of narcissists that populate both ranks, rotating amongst roles, and from which the decision makers wish not to be excommunicated. It is very much not individual consumers or savers.

This is perhaps the cleanest way of describing how the merchant strikes back. Much of her financial necessities and actions will be entirely within her own control. She will return to a state of having only one customer: the customer.

Bitcoin Is Venice: Essays on the Past and Future of Capitalism

Do you support The Current Thing? Yes? No? Whatever your answer, great, but go support it on your own. Inflict it on your own customers and see how they like it. Leave the rest of us alone.

Or … get #rekt. The storm is coming, and your slogans won’t save you.

follow me on Twitter @allenf32

Thanks to Sven Schnieders and Nic Carter for edits and contributions.

The Bitcoin Times Ed 4 is now available for download, free. We will be publishing each edition, in high quality hard cover this year.

Keep an eye out for announcements and remember to follow and support each of the authors. Share their work far & wide.

“I don’t believe we shall ever have a good money again before we take the thing out of the hands of government, that is, we can’t take them violently out of the hands of government, all we can do is by some sly roundabout way introduce something they can’t stop.”

Friedrich Hayek

The political economy of fiat is one of toxic bigness.

Given fiat money exists only as the liabilities of state-licensed banks with politically preferential access to artificial credit, bigness in banking is rewarded by default, and bigness in business is rewarded by proximity to bigness in banking. The losses of both are socialized under the pretence of preventing financial catastrophe, but of course the real catastrophe is the thumb on the scale against the small and the politically unconnected. Capital markets abjectly fail in their titular goal of creating a market for capital. They become, instead, political tools, whose politics are anything but “local”.

This is clear enough from the fallout of Operation Choke Point (aptly named given the core premise of political capture) but the reasoning bleeds also into analyzing the architecture of the internet. Given the lack of native digital value prior to Bitcoin, online monetization has primarily been architected around the assumption of advertising, which of course means surveillance as well. Every action one takes in consuming online content is relentlessly spied upon as potentially valuable, while capturing and processing this value has enormous returns to scale given single such data points tell you nothing, but trillions can be mined for patterns that no human could identify. You cannot run an online business without appeasing those who have mastered this game and who, surprise, surprise, have also been politically captured. Their bigness makes them targets for political capture, and their political capture keeps them big and makes them bigger.

It is becoming more widely understood how bitcoin fixes this, and, in general, encourages economic thinking along more local lines and heuristically warns against the excessively interdependent and fragile. Energy markets are perhaps the most obvious example: “toxically big” is perhaps an odd criticism of the grid, given it is more of an economic miracle creating a clearing price for power — which, unlike inflation, is a necessarily transient economic phenomenon. And yet, Bitcoin allows detachment from this vast, costly, and systemically fragile infrastructure by allowing for the creation of a clearing price bought and sold only over the internet.

On a long enough time horizon, we can reasonably hope that Bitcoin will remove the thumb from the economic scales. The small and the local will no longer be politically disadvantaged in economic terms, and the big will have to compete on even ground.

But what of politics itself? Might we worry that a return to localism in capital formation and consumer behaviour will not amount to much in the face of an overbearing state and a class of noneconomic institutions and their parasitic constituents with the lingering fiat taste for the transnational?

I think not. It is all well and good championing localism as obviously good, transnationalism as obviously bad, Bitcoin as obviously good and contrary to transnationalism, and hence Bitcoin as a natural complement to localism. But correlation is not causation. My argument is stronger even than this: Bitcoin will cause localism, politically as well as economically. There will be no other choice. Toxic bigness in government will become every bit as unsustainable as in business.

That is not to say that Bitcoin will lead us to a pacifist utopia in which any attempt at violence suffers metaphysical intervention by the spirit of Satoshi. That money can grant power is clear enough as there will always be a clearing price for violent thuggery. But what will distinguish a Bitcoin standard is that power will not grant money.

There are two reasons to believe this. The first is that bitcoin simply cannot be seized by any force less severe than torture, and even then, it is possible — and will surely become widespread for any value worth protecting — to render even torture obsolete. If you want bitcoin, you will have to provide something deemed more valuable to its holder.

The second is subtler, and I believe is not widely understood, except perhaps by the subset of Bitcoiners intimately interested in political history. A distinguishing feature of Bitcoin is that it is the first ever truly stateless money. Contrary to some naïve Bitcoiner and even gold-bug talking points, gold has constituted the base for specie throughout history, but has never acted fully and wholly as money. This historical observation provides an amusing afterthought to what I have previously described as The Semantic Theory of Money:[1] that money can be, and is, defined entirely by an academic checklist and not at all by reference to reality. Something is money if and only if it fulfils “the three roles of money”; that is, store of value, medium of exchange, and unit of account. To economists enamored with this taxonomic vacuity, it doesn’t matter in the slightest how something is being used in the real world. “Money” is a semantic category, not an explanatory one.

Curious, then, that in medieval and renaissance Venice or Florence these alleged “three roles of money” were each fulfilled by different objects or concepts: elemental gold was the store of value (sometimes silver or billon), bank transfer via attested ledger alteration (tellingly called ghost money in Florence[2]) was by far the most common medium of exchange, and the polity-prescribed (that is, government) denominations of coinage via the mint were the units of account.

The reader might object that this itself is irrelevant semantics that allows us to escape the primacy and importance of gold and the gold standard. Quite the contrary. Elemental gold has a cost — indeed, a very high cost. Nearly all human civilization across the world and throughout history independently arrived at the utility of elemental gold as a store of value because, of the options, it has the highest cost and greatest scarcity, hence the weakest market response of increased supply to its premium as a store of value, hence the lowest inflation, and, finally, the greatest monetary utility.

Elemental gold approximates what Nick Szabo called unforgeable costliness. Brilliantly anticipating contemporary pushback against “wasteful” Bitcoin mining, in Shelling Out, Szabo explains that,

“At first, the production of a commodity simply because it is costly seems quite wasteful. However, the unforgeably costly commodity repeatedly adds value by enabling beneficial wealth transfers. More of the cost is recouped every time a transaction is made possible or made less expensive. The cost, initially a complete waste, is amortized over many transactions. The monetary value of precious metals is based on this principle.”

Even though the typical government monopoly on violence has, across the years, included a monopoly on the right to mint coins (or, at the most removed, a government-granted private right, liable to be revoked at a moment’s notice) it has never extended to a right to escape economic reality. Debased coins would be valued abroad precisely in line with their debasement: that is to say, not by their government-insisted fake unit of account, but the true store of value of whatever unforgeably costly precious metals they contained. Foreign exchange markets kept government mints (relatively) honest given economic feedback from seigniorage allowed only the smallest windows of temporary benefit prior to longer-term and more extreme damage.[3]

Even when backed with such military might as were the Roman, Spanish, or British empires, for example, that we might think could overrule economic feedback essentially emanating from decentralized trade webs that could simply be co-opted, the essential cost of elemental gold still forced itself to be felt. Organized violence at such a scale has a cost. The greater the scale, the greater the cost, and in fact, the greater the incentive to maintain a gold standard effectively than to attempt to subvert it. While not a singularly causal factor, it is certainly not a coincidence that the three great empires just cited all collapsed more or less in line with the rate of debasement of their currencies in pursuit of economically destructive militaristic ends.

But the fiat era created a dramatic historical anomaly. For the first time in recorded history, the cost of creating new money literally was zero. This has had profound effects on political economy. While money can always buy power, power could now buy money, and without economic calculation. There is no cost too great to seizing power, and next to no incentive not to give it a shot, because any costs can later be paid back, and then some. This, we believe, is the root cause of the cult of toxic bigness now endemic across the developed world,

Rather than a naturally homeostatic process of increased size tending to lead to inefficiency, in the fiat era, the bigger you are — either as a business or a government — the more powerful you become, hence, entirely perversely, the more efficient you become. Of course, the less efficient everybody else becomes because they are transparently being stolen from. The more communal capital is consumed, the more energy the capital consumer can direct towards seizing power and paying back himself, but likely nobody else.

Bitcoin fixes this. And in a remarkably simple way; it undoes everything just described. It returns a cost to money — a higher one even than gold — and makes toxic bigness unsustainable. Hence, Bitcoin isn’t so much explicitly a pro-localist tool. If anything, the reality is even more profound: localism itself is natural, healthy, sustainable, and right. Bitcoin destroys the historically anomalous countervailing force and, in doing so, will let localism happen without having a particular bias of its own beyond the far more abstract concerns for sustainability, efficiency, accountability, humility, and truth — all natural bedfellows to localism.

And if localism stems from humility, then transnationalism is surely intertwined with narcissism. One way to conceive of the tragedy of modernity, and its impact on the strip mining of economic, social, and cultural capital is perhaps that narcissism is artificially subsidized. Through subsidy it is normalized, and through normality it becomes a part of the culture itself, and encourages its own championing and reproduction. From an artificial inception, it takes root and sustains itself as it drags the culture down. In The Culture of Narcissism, Lasch points a way out the nightmarish labyrinth:

“In a dying culture, narcissism appears to embody — in the guise of personal “growth” and “awareness” — the highest attainment of spiritual enlightenment. The custodians of culture hope, at bottom, merely to survive its collapse. The will to build a better society, however, survives, along with traditions of localism, self-help, and community action that only need the vision of a new society, a decent society, to give them vigor. The moral discipline formerly associated with the work ethic still retains a value independent of the role it once played in the defence of property rights. That discipline — indispensable to the task of building a new order — endures most of all in those who knew the old order only as a broken promise, yet who took the promise more seriously than those who merely took it for granted.”

Insufficient but necessary, Bitcoin provides such a vision. Let’s buidl.

Allen Farrington
November, 2021

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OMG GUYS WE RECORDED OUR CLUBHOUSE FOR ONCE!

What a glorious moment for culture and humanity. Thanks to the good folks at Swan Bitcoin, Aleks Svetski and I spoke to Izabella Kaminska for some ridiculous amount of time until we all fell asleep at 2.15 am or so. Once we level up our competence yet again and turn it into a podcast, you will able to able to verify the following for yourselves, but for the time being you will have to trust me: Izzy said there could be inflation in a hyperbitcoinized world.

And she’s right.

Calm down, maxis, calm down. Explaining why this is true sheds light on yet another of Bitcoin’s quasi-magical properties and paints our hyperbitcoinized future an even rosier shade of orange. This is good for Bitcoin.

I kinda thought I’d explained this well enough in The Capital Strip Mine, but then again, it’s like, suuuuuuper long and people are busy, so I’ll try to keep this under a 10-minute read.

Narrator: he failed.

The Capital Strip Mine

Inflation — by virtue of being an economic phenomenon — has two different kinds of explanation: methodologically individualist ones and wrong ones.

The wrong one is the degenerate fiat economics trope we are witnessing in real-time as lumber go up yet number stay down. I’m not going to waste any of your time explaining the machinations in which central bank economists are willing to engage to keep the number down because I also don’t even really care. It’s Brandolini’s Law, once again, and I happen to simply not have orders of magnitude more energy than they do.

The methodologically individualist explanation requires an important distinction between price inflation and supply inflation. Central bankers are aware of this too, clearly — the entire point of their machinations is to try to convince you the two have nothing to do with one another and everything is under control, because they think you are stupid.

But you aren’t stupid, are you? You know that inflation of the money supply happens in fiat terms whenever a bank creates a loan ex-nihilo without ever writing off a previous credit asset (on a net basis) or when the central bank creates new reserves ex nihilo. You also know that this happens in Bitcoin never.

So what is Izzy talking about? Is she a useful idiot of the chattering classes, as I confessed in Clubhouse to once having called her?

No, Izzy is based AF. And she’s not stupid either. She knows she is talking about price inflation: how much stuff costs. Can the price of stuff ever go up in a hyperbitcoinized world? Yes. Here’s how.

To capture Izzy’s idea in degenerate fiatspeak we would say “an increase in velocity,” and it’s worth explaining exactly why this is so silly before describing the same thing in plain English. As Mises knew well, “velocity” is pretty stupid, and as Saylor has said of such other pretty stupid aggregates as “GDP growth” and “CPI,” it is a metaphysical abstraction. It comes from Fischer’s Equation of Exchange from the Quantity Theory of Money, usually written simply as MV=PT.

Quantity theory of money - Wikipedia

This has the curious characteristic of not really being an equation but rather a tautology, a definition, and a destroyer of useful information. It’s really quite bizarre. What it actually says is that “velocity” is defined as PQ/M, or everything bought in a year, times its price, divided by the money supply.

But were we minded to behave more like physicists (i.e. real scientists) than economists (i.e. not real scientists) we could do some cheeky dimensional analysis on this equation, and start off by leaving out V entirely. Let’s just call it “?” because it could be anything! Who knows? We might make a discovery!

so ?=PQ/M

now the dimension of “P” is $ (the average price of all the stuff), and “M” is also $ (the total amount of money), so they can cancel, but we will wait a moment before doing that.

“Q” is a super weird variable. It allegedly means “quantity” — as in, how many of the things were sold at the average price P that year? Why does that matter? It seems dimensionless so it really doesn’t (the Wikipedia page above is unintentionally hilarious on trying to explain this away, by the way) but actually what it is really there for is “that year,” meaning it gives us the dimensions of 1/time, as in, how many per year? So P*Q becomes: how much $ was spent on stuff in a year?

Dividing by M leaves us just with 1/time for “?” or “how many [of something] per year?” — how many of what?

Believe it or not there isn’t really an answer that refers to the real world, despite all the inputs being (apparently) real. The problem is we have multiplied up an average, apparently solely for the sake of dimensional consistency, then divided it by something of the same units but to which it bears no real-world relation. What is left over for “?” to “explain” is “how many times did the average dollar get spent?” Let’s call that “velocity” because why not. It sounds like it’s about speed. It’s not a vector but we are well past any of this making sense, so who cares.

“Velocity” has been tautologically defined (yippee!) but it tells us absolutely nothing because there is no “average price” and hence there is no “average dollar.” The average dollar is a metaphyiscal abstraction, or, to quote Mises, “lol, what? velocity? you serious, brah?”

All this averaging and abstracting obscures that all of this happens across time. What is being captured here is dynamic, but the equation of exchange implies, without ever being too explicit, that these quantities just exist as features of the universe. The degenerate fiat economist would say “velocity went up” when what he really meant was, “persons x, y, and z made decisions to spend more for reasons a, b, and c.”

Or, crucially, if asked to explain “inflation” any attempt will be next to incomprehensible. Let’s evaluate the options:

Velocity went up: meaningless.

Quantity went down: huh? No seriously, what does this mean? Here we finally pay for the mistake of including a variable that does nothing beyond throw “1/time” into the mix to balance the dimensions but otherwise has no clear way to be understood in real terms.

Money supply went up: sounds appealing at first glance, but, for example, does this mean state money increased or bank money? Credit or equity? If unbacked credit has been created ex nihilo, as fiat bankers are wont to do, how do we distinguish this from velocity? Is it even possible to hold velocity constant and point purely to the money supply? Doesn’t that require some even more confusing offset somewhere else? The mind, it boggles …

Price level went up: wait, what? Isn’t that exactly what we are asking? Yes, but it gets even more confusing because “P” is “the average price,” which tells us absolutely nothing if we want to know about a specific price.

Let’s scrap this nonsense and go with the Farrington Theory of Price instead, which I just made up right this moment:

Price = Money spent on stuff / Stuff available to be bought

This is consciously descriptive of the aggregate level of “stuff,” such that ∂-price might give some useful measure of “inflation,” but, unlike the Fischer waddayacallit above, we can easily translate this to the price of an individual good or service:

Price of good = Money spent on that good / Amount of that good available to be bought

This has the benefit of being both simpler and more accurate in terms of what it captures. It’s a gloriously elegant model. It’s basically science. It may even be The Science™.

This now ties back very nicely to my (much longer) explanation in The Capital Stripe Mine. Given (price) inflation is not a metaphysical abstraction but comes from individuals making decisions and acting, it is now pretty clear what decisions and actions lead to inflation: when the money being spent on a good goes up or when the amount of that good available goes down.

Notice this is saying very little more than: either demand went up or supply went down. This is a very good sign given that’s literally all of economics in one sentence. The tiny bit more it is saying helpfully hints at why either or both of these has happened.

The merchant will have a window of time in which she expects to sell the amount in her inventory before then expecting to restock. If she gets through her stock faster than this, and still has more inquiries she cannot meet — or if she has the same number of inquiries but gets through her stock quicker because there was less to begin with, then she will decide — she will act — to increase prices to boost her margins, boost her returns, and better clear the market. And there you have it, price inflation. Customers decided, for reasons, to buy more stuff, and the merchant decided, for reasons, to raise prices. Methodological individualism 1, metaphysical abstractions 0.

I mentioned above that the Fischer waddayacallit gets very confused about the different kinds of money supply growth. We can now be a little more specific because the Farrington Theory of Price doesn’t address this either. Is this a flaw in my Nobel-(memorial)-worthy theory?

Lol. Of course not. The difference is the Fischer equation pretends to capture this, and then when you try to work through the implications of varieties of monetary inflation, you just end up confused. Mine doesn’t even try because … drumroll … to the individual, it doesn’t matter!

The merchant does not say to herself: “Gee whizz, I sure would like to raise prices, boost margins, and increase returns, but I can’t for the life of me tell if the money being spent on stuff faster than before has come from unbacked credit creation by banks, from central bank reserve creation, from customers dipping into their savings, from my competitors going out of business, or some combination of all four or possibly more! What a pickle!”

She just sees the change and reacts. This is a perfect example, incidentally, of the one sensible way in which markets can be considered “efficient”: with respect to information. She doesn’t need to know the answer because she has been given the pure, condensed signal of customer behavior, into which all the relevant information has been compressed. She knows how to act in response without needing to know why.

The Fischer equation has special difficulty with the final two options considered— dipping into savings and the competitive landscape shifting — because these are distinctly local events that cannot be explained within an aggregate or an average.

This all gets nicely to Izzy’s point. You absolutely can have inflation in a hyperbitcoinized world, and the Farrington Theory of Price makes it totally obvious why. There are two possible reasons:

Stuff bought goes down: not that interesting as likely indicative of a natural disaster, but for the sake of argument, let’s suppose we are in the wake of a credit crunch in which previously misallocated capital is being liquidated and less is being produced in the interim. This also won’t happen in a hyperbitcoinized world, but just humor me, will ya?

Money spent goes up: this is the trap.

The terribly, terribly silly Bitcoiner answer here is to scream “21 MILLION!” until somebody calls the police for breaching the peace.

The sophisticated Bitcoiner will realize there are all sorts of reasons money spent could go up that, given they do not result from an expansion of the base money supply BECAUSE 21 MILLION YOU IDIOT, are worth thinking about more carefully to see what, if anything, they reveal.

Izzy’s idea was straightforward enough and I alluded to it above: people start to dip into their savings to spend. For any confused not-quite-bitcoiner readers, “savings” is an antiquated concept whereby you earn money and then don’t spend it. No seriously, you just don’t — you leave it alone and then you have the option to spend it in the future. No seriously, because in a hyperbitcoinized world there won’t be a bottomless pit of consumer credit so if you want the option to spend in the future you will have to “save.” It basically means “not-spend-right-now,” but it has fewer letters and syllables.

But actually, patterns of investment could affect this dynamic in a more complicated way. Bitcoin TINA and I (and implicitly Saifedean Ammous too but we’ve never all talked about it together) have a fascinating disagreement about to what extent, if any, credit will exist on a Bitcoin standard. TINA thinks none, I think some, but neither of us can prove it, obviously, so we just have to yell at each other in Clubhouse while we wait and see. We did so in Izzy’s episode. It was 🔥.

In any case, credit would be the easiest-to-understand version of my following point but is by no means the only one that works. Imagine literally any temporally discordant boost in capital investment. Perhaps this could also just be a more roundabout version of “dipping into savings.” People snap out of their scroogey miserdom and realize that if we just rely on deflationary money to provide for us we will literally all starve and die within a week or two, and they shift their liquid capital into illiquid capital accumulation.

You don’t even really need to think about this too hard. That investment could go towards all kinds of things: likely mostly novel capital goods, but also real estate, wages, financing services (bankers need a cut too, obvs), which will quickly filter to regular people looking to consume (or “save” [spits on ground]). By any number of channels which, as good methodological individualists we don’t need to pretend to understand, money spent will go up. Merchants will react in order to maximize their returns. Inflation. Boo! hiss! Bitcoin is deflationary! 21 million! 21 MILLLLIIIIIIIIOOOOOOOON!!! 😡

Just wait! What happens next is key — and unfortunately spoils what I thought was the most interesting bit of the entire podcast, besides Izzy’s musings on the future of biowarfare. Don’t quit before you get to that part, fo sho.

What happens next invites — arguably demands — clarity on the typical capital structure post-hyperbitcoinization. And this is where TINA’s and my disagreement really becomes clear as rather more aesthetic than practically consequential.

If there is debt in such a world, there is a very, very small amount, at least relative to now. So with either zero debt or very little debt, entrepreneurs will be in a position to react to these price signals with maximal flexibility. Contrast this to degenerate fiat finance in which the answer to every question is, more unbacked credit.

Stock market volatility? More unbacked credit. Repo market liquidity crunch? More unbacked credit. Too much unbacked credit? More unbacked credit. Tea or coffee? More unbacked credit.

Enders Game - Unchained Capital

But in a hyperbitcoinized world, the answer will be … well … I frankly have no idea because it will emerge from methodologically individualist entrepreneurs acting from flexible balance sheets and no-longer-politically-misaligned incentives.

But one thing I can say relatively confidently is that any “inflation” will be short-lived. It will only serve to reflect some unexpected change in economic reality that it requires a reallocation of capital to satisfy. But unlike in degenerate fiat finance, it will not either be the product of, or itself be, permanentized inflation from unbacked credit that will never be redeemed. It will actually be healthy inflation 😱 because the underlying money/stuff situation will be real and will demand it.

In the moment, that is. In anything longer than the very, very short (basically instantaneous) run, entrepreneurs will deflate it away again with effective capital allocation that identifies, responds to, and improves upon this new reality.

This all provides yet another, far more roundabout and conceptual route to explain the idiocy of “velocity.” To the extent the variable means anything at all, it is entirely endogenous and has no causal import. So, it emerges from a range of other behavior, and doesn’t then affect any behavior. To take it seriously is to be deeply confused.

But what else is new? The end. Listen to the podcast when it comes out. Peace and Love.

follow me on Twitter @allenf32

So that was pretty wild, huh?

Did you guys sleep? I didn’t sleep much. To my eternal shame, at one point of my jet-lagged, emotionally-and-physically-drained-lying-in-bed-not-sleeping at five in the God-damned morning, we decided to have a little impromptu international diplomatic summit with the President of El Salvador. I was awake for that and I didn’t go because why would I check Twitter at five in the morning when I’m in my sixth straight hour of failing to go to sleep? To whit: what even is life? Is any of this really happening?

Speaking of which, I think we should declare June 8th, El Día Del Salvador. That’s how it works now, right? Bitcoiners declare things and the whole world listens? This literally translates as, The Day of The Saviour, but would likely be stylized in English as, Saviour Day. And if the prophetic overtones here aren’t really your thing, don’t worry, Bitcoin is nothing if not inclusive! Know instead that Dzambhala, God of Wealth in Mahāyāna Buddhism, smiles upon the good people of El Salvador this day.

It’s all Jack Mallers’ fault really. What an asshole. I was doing just fine taking years off my life expectancy by strip-mining my metabolic capital with caffeine, alcohol, adrenaline, heat acclimation, and sleep deprivation, until he had to go and throw in dragging the developing world out of poverty.

AND THEN! get this, right: then he goes and has a beautiful family who hug him and they all cry and like, I’m trying not to cry but I’m crying and I can’t cry because I have to go sing a sea shanty! It was totes emosh, I tell you.

₿rooke on Twitter: "#Bitcoin pic.twitter.com/7HxB5ZWQ3v / Twitter"

Bitcoin pic.twitter.com/7HxB5ZWQ3v

And are they even going to make any money from doing that? I don’t know how Strike works if I’m completely honest, but surely their voracious venture backers are demanding they scalp the El Salvadoreans, right? Not as much as Western Union but … like … surely a little? Like half as much? maybe undercut by 15 bps and corner the market? I dunno, somebody DM me if they actually understand this. Payments isn’t really my thing.

So anyway, I sadly failed my covid test and I had to go home, and even though I missed Nicolás “El Jefe” Cartero’s inaugural roundtable for the Bitcoin Monetary Fund, I did eventually get back to normal day-to-day life. One might say I grew my metabolic capital above its rate of depletion and hence am verifiably “sustainable” and ESG-friendly.

I then noticed two things. The first is boring and probably happened to everybody: mainstream coverage of the conference was vapid, vacuous, and tactlessly antagonistic. But — and I’ve really thought a lot about how best to articulate this — meh. C’est la vie. Reject nocoiner orthodoxy. blah blah blah.

The second is dope as shit: I had a backlog of content kindly provided by truly amazing and inspiring people I met for the first time in Miami and who were usually shocked to learn that I am neither 50 years old, 13 years old, nor a squirrel. There’s too much to shill here lest this drift away from a confessional and into mere anthology, but I will highlight the following as perfectly making the point that follows:

This is legitimately the single best podcast episode I’ve ever heard, on any show, about anything. I’ve listened to it twice already and I plan to listen for a third time just to take some final notes to follow up on. Not only is Joel clearly brilliant, but Marty catches himself a few times nearly inadvertently insulting Joel by saying it’s weird that Joel is a farmer, and yet he may be the most insightful guest Marty has had on.

(you’re brilliant too, Marty, it’s just I’ve listened to you a lot so I sort of get you now, whereas I just met Joel and it was AWESOME. And I’ll come on TFTC soon, I promise, just as soon as my friend’s submarine resurfaces …)

What I knew he really meant, and he knew he really meant, and — I think most importantly — what Joel knew Marty really meant, is not that it’s weird that Joel is a farmer. It’s weird that Marty had that reaction to Joel being a farmer. And let’s be honest, so did we all. Not because of Joel — who is scarily smart and couldn’t possibly give that impression on his own — but because everything sucks. Or rather, I can’t remember who said this but, Bitcoin Is For Foxes, Joel is an überfox, and late fiat society has taught us all to instinctively worship hedgehogs for absolutely no good reason.

Bitcoin Is For Foxes

The real reason is that the hedgehogs are in charge and they make the rules. Which is actually kinda messed up wh-LOOK BUNNIES CUDDLING SO CUTE!

One might be tempted to say that the difference between the mainstream coverage and Marty’s podcast is that Marty is right and they are wrong. Or that Marty is smart and they are dumb. Or that Marty is good and they are bad.

But I think the main difference — the most important difference — is that Marty cares and they do not. It may sound trite but I wouldn’t underestimate this. Aside from anything else, it’s poor tactics: the nocoiners, and even the precoiners, are not themselves stupid. Some of them are frighteningly smart, and almost all of them are still fundamentally good people (I think? like I really do think that but I am prone to naïve optimism so discount appropriately).

The people who run Western Union are almost certainly very smart, very accomplished, and — I have no reason to disbelieve — perfectly good people. They are just working with old (fiat) tech that compromises their ability to do as much good as they might and gives them shitty incentives so it likely doesn’t even occur to them to try to figure out how to do better.

But there is no chance in hell they care as much as Jack, or Marty and Joel, or — to really make the point — Ross:

I had the honor of shaking Lyn Ulbricht’s hand when I was introduced to her as the keynote speaker soon to present. She introduced herself as if I didn’t know who she was, and the very first thing she said to me was to apologize for not knowing who I was.

I mean, come on, like that matters? Really?!? Surely it shouldn’t matter in the slightest to Lyn Ulbricht who some random kid is? Some happy, healthy, and free kid …

Except that it does matter — not because of me — not in the slightest — but because it proves that this amazing, inspiring woman cares.

Joel argued convincingly in the TFTC episode that there are seemingly uncountably many paths to Bitcoin. It doesn't take any specific academic background or professional experience to come to appreciate what is essentially just sound, programmable money and open source freedom. You don’t need to have gone to a conference and you don’t need to have run Silk Road — much as these might accelerate your journey. You need none of this because the material is frankly not that hard.

Joel’s route in was farming; mine was capital markets; we had a delightful conversation about the conceptual links between farming and capital markets. So delightful, in fact, that I later bought a book called “Dirt”. I’m not sure I knew why at the time. I think he incepted me:

Whatever your academic background or profession, it has likely been messed up in some or other way by the total perversion of incentives brought about by Federally-and-hence-globally mandated ultra-high time preference. If you don’t care then you don’t care. I don’t know what else to tell you. If you care, you look into it, and if you poke around for long enough or piss people off with awkward enough questions, there is a reasonable likelihood that you will eventually find your way to Bitcoin.

Joel did. I did. You probably did too. Unless you are a complete noob, in which case this is a bad place to start, FYI. Take Marty’s advice and, “turn off Wet Ass P***y and turn on a Bitcoin podcast.” Listening to the one linked to above would be a wonderful first tumble down the rabbit hole.

I sometimes wonder if my Grandpa would have taken such a tumble and become a Bitcoiner. We have a family story about how he threatened to quit his job as chief counsel and vice president of a bank because he disapproved of a new mortgage lending practice he believed to be unethical. The details are somewhat lost to legend now, unfortunately, given he passed away many years ago. But we know he got his way. They didn’t do it, and he didn’t quit.

This would have been in the early 70s, so very possibly a textbook case of wtf happened in 1971?. His employer was probably starting to feel the pressure of high-time-preference finance but he, as nothing more than a good, strong man, would not stand for it. He cared about his short-term payday a little, sure — nobody’s time preference is zero, after all. But he cared about his ethics and the effects of his actions on his community far more.

I take it back — I don’t wonder if he would have been a Bitcoiner; I know he would have. I just hope he would have been proud of me.

I recently snarkily tweeted — as I am wont to do — something to the effect that: I used to wonder why Bitcoiners knew so much, but then I realized, people who know things become Bitcoiners. But it’s more than that. It’s not just that Bitcoiners care. It’s that people who care become Bitcoiners. I really don’t believe it is all that helpful to say that Bitcoiners care. It’s probably largely true, but it gets the causation backward.

And isn’t this really just a way of making time preference less formalistic and mechanical and instead tangible and emotional? If you have a high time preference you almost by definition don’t really care about the things that really matter. If you have a low time preference you almost by definition do.

As I was mulling all of this over, Elizabeth Stark messaged me out the blue and then gave me a call. This is just the kind of thing that happens to me these days, and, given I missed El Jefe’s summit, I kinda felt like I deserved this one.

But seriously (no, actually seriously, I swear!), Elizabeth has been my personal hero for the better part of three years. This was totally surreal.

She is clearly a genius, and as cool as that is, that’s not why she’s my hero. She’s my hero because she could have spun her intellect into making a bajillion more dollars than she has by selling out to Wall Street or Silicon Valley at pretty much any point in the last seven years. But she never did, and I believe she never will, because there is no doubt in my mind that she cares.

Not to say she’s a big ol’ victimess or anything: she founded and runs an awesome sauce company that has been backed by Jack Dorsey, amongst others. She’s hardly poor or unaccomplished. But my point is that she chose the hard path, the better path, and the truer path. She has enough skin in the game to lead a perfectly comfortable life, but she also has something invaluable that nocoiners never will: soul in the game.

And this is why we are going to win.

That’s what we talked about (well, we talked a bit about DeFi too but you’ll all have to wait for the product of that to drop. I’d say maybe 1–2 months but don’t hold your breath).

We talked about what motivates us. We talked about the times we thought about giving up. We talked about the things we want to build, that we hope we can build, and that we are enormously grateful for having the opportunity to build. We talked about number of people go up. We talked about how it turns out she decided to commit her life to Lightning in Edinburgh, and that I am therefore duty-bound to go to the place in question and talk them into putting up a plaque.

And the single best thing about this piece of history is that there is a feature of this “place” that is just God-damned perfect in terms of tying in with Bitcoin memes, lore, culture, etc. — but I can’t identify the feature without doxxing the place, which I would prefer not to do. I therefore resort to the following next-generation Zero-Knowledge Proof to convince the reader beyond a shadow of a doubt (and remember, I math real good so this is powerful stuff):

Elizabeth will make an obvious confirmatory gesture in a public appearance in the near future. Keep an eye out. It’ll be totes emosh.

But more importantly than any or all of these details, we just talked.

Like, wtf?!?

If you’d told me this a year ago, I wouldn’t have believed you. If you’d told El Jefe a year ago he’d be granted this noblest of ranks by a sitting head of state, he wouldn’t have believed you. If you’d told Gladstein a year ago he’d meme volcano mining into reality, he wouldn’t have believed you.

If you’d told any of us that Bitcoin would be legal tender a year ago …

… I dunno, actually, we might have believed you. Maybe not intellectually. Maybe we wouldn’t have bet on it (“proper structuring” notwithstanding). We may not have been rationally optimistic enough to put skin in that particular game, but I’m pretty sure our souls have been in it all along.

To whit: what even is life? Is any of this really happening?

Yes. It is. Number of people go up 🧡

Totalmente emocional, chicos, totalmente emocional 😊

*

follow me on Twitter @allenf32🇸🇻⚡️

As Fragile Nassim’s public psychological breakdown continues apace, I recently took 15 hours out of my schedule to reread my magnum opus, A Tale Of Two Talebs.

A Tale Of Two Talebs

In the end, I was interrupted by a person from Porlock, who insisted on talking to me about Samuel Taylor Coleridge and eating up the rest of my allocated time. We’ll see if anything comes of that, but in the meantime, it led to some reflection on where I managed to get to before interruption.

I got to roughly here:

This is particularly amusing because, while various concepts such as antifragility, black swans, skin in the game, and more, are very useful as explanatory tools (Gigi’s wonderful Bitcoin resources library has a section devoted to The Incerto) the idea of consensus development has no parallels in Fragile Nassim’s oeuvre. Why try to understand something new when you can throw a bunch of made-up words at it and see what sticks? Bitcoin is for foxes. Fragile Nassim’s arrogant hedgehog is devoured by the honeybadger. It gets worse …

Narrator: “it did, indeed, get worse.”

This was funny because recent developments have made me think that, even while desperately trying to turn “bullying, cowardly, bullshitting charlatan” into a meme, I may still have given Fragile Nassim too much credit. He might be uniquely awful, but he is not unique. He’s an entirely typical arrogant hedgehog, just atypically annoying and rotund.

Here’s a fun riddle: is Fragile Nassim a yuppie elite?

I can see the arguments both ways, but actually, I don’t really care because my asking is purely stage theatrics to set up shilling this phenomenal piece by Croesus. I suspect most Bitcoiners are entirely familiar — I do not claim to be doing him any favors here — but it is certainly worth a read if not, and a reread if so:

Why The Yuppie Elite Dismiss Bitcoin - Citadel21

It is a wonderfully short piece, from which I have been trying to learn lessons of late, so I will barely bother summarising it beyond reiterating the title: the yuppie elite dismiss Bitcoin. They tend to have what might be called a social disinclination to Bitcoin. Their professional and social existence relies on heuristics that Bitcoin egregiously violates — and of course, this is a good thing, properly understood.

Bitcoin is new in just about every conceivable way, while their heuristics are highly conservative, in the regular sense rather than the political. They ensure certain power structures are conserved. Bitcoin is targeting exactly this power for controlled demolition, so it makes a kind of perversely rational sense for them to dismiss it even without understanding it.

The only glitch being that this heuristic provides evolutionary support to the power structure, not to the individual. Individual yuppie elites who snap out of it, like Croesus (and like me!!!), start to see the matrix for the code it really is. woo hoo.

But I think there is a tiny slice of argument missing from Croesus’s piece, and entirely to his credit, when I discussed this with him, encouraging him to write a follow-up, he encouraged me to write this instead! Aren’t Bitcoiners just the nicest? 😃

I think that as well as a social disinclination, yuppie elites have a potentially more serious intellectual disinclination — specifically yuppie elites who work in finance. And of course, one of the social catastrophes of late-stage fiat is that when everything is financialized, everybody works in finance whether they like it or not. So not “specifically” after all. Just yuppie elites.

The disinclination is that they don’t like things it takes extra effort to understand. Which is not at all to say they are stupid or ignorant. Quite the contrary. To succeed as a yuppie elite you need to be rather smart and rather knowledgeable (there is, however, no ethics component). But there is a set syllabus, and once you have mastered it, there is a strong disinclination towards having to learn more.

The intellectual appeal of finance in the first place is that it provides a totalizing vision and toolkit. Once you master the basics you can explain absolutely everything from chemical manufacturers to logistics to software-as-a-service to real estate to government debt to money. The same language, mental models, patterns of thought, and so on, can be gleefully recycled time after time in remaking the world as you see fit.

At some or other level of suitable abstraction, everything becomes understandable as a special case of long or short exposure, volatility, diversification, leverage, cash flows, securitization, whatever …

Or, equivalently, at some point, we all become Fragile Nassim. Which is my roundabout way of explaining that he isn’t even that interesting as a specimen. He’s in the unhealthily fat tail of the distribution, sure, but the distribution itself is perfectly common and well understood.

But the fact that Bitcoin doesn't fit this and is clearly about finance triggers a similar response to Croesus’s “scam red flags”, except that I would suggest is as much an emotional crisis as a genuinely helpful social heuristic. It comes out as something like:

“If this is about finance then I should be able to understand it immediately. But I can’t, therefore something must be wrong. I now EXTRA dislike it, mwahahaha!”

Although I discussed the raw materials of this argument with Croesus a while back, it all finally came together for me after reading this blistering tour de force …

Bitcoin Mining and the Case for More Energy

… and listening to Hass McCook in the latest episode of On The Brink, back to back, no less.

Hass McCook on Bitcoin's energy use in context

Again, I won’t summarise (although I will absolutely endorse — go read and listen right now, they are both excellent), but I will happily relate precisely the realization that struck me while reading and listening:

the FUDsters are hedgehogs.

They know one big thing. You know who else knows one big thing? Yuppie Elites. Which is, of course, to say that they don’t really know anything. They have no domain-specific knowledge because their domain is everything. It’s exposure and volatility and diversification and blah blah blah. And this doesn’t fly in Bitcoin:

alnfrngtn on Twitter: "you can be as smart or as stupid as you like but this pressure forces you to admit you are only an expert in whatever tiny area you are actually an expert, if you are one at all.and even then, you will get relentless shit so everybody is extra sure.5/n / Twitter"

you can be as smart or as stupid as you like but this pressure forces you to admit you are only an expert in whatever tiny area you are actually an expert, if you are one at all.and even then, you will get relentless shit so everybody is extra sure.5/n

And, to extend the above tweet a little, if we aren’t already an expert, but the cause needs one, we will embrace our inner fox and go learn the shit out of it to aggressively explain it back properly at the hedgehogs, like Nic has already done with energy, what with his seventeen or so “final words”, and I did recently with algebraic geometry:

Gauge Theory Does Not Fix This

So when some über-financialized yuppie elite learns about Bitcoin and tells us all she is here to fix it ***cough cough TechnoClown cough cough*** somebody like Hass McCook, Pierre Rochard, or me invariably pops up to mercilessly demolish her pitiful ignorance with cold, hard, local, domain-specific knowledge.

Super cute mining council, guys, but get back to us when the virtue-signaling funds run dry and you need to learn how global energy markets actually work.

Forget sound money, sustainable capital, and world peace — this is what I am most excited about under a Bitcoin standard: fuhNANCE being put in its place as back-office administrators of whatever capital flows still require administration, not Masters Of The Universe; localism, not just in economic and social practice, but far more importantly, in spirit.

If you are a bright young kid, you won’t need to move to New York or San Francisco and work 22 hours a day with an eye on a Davos invite ten or twenty years down the line. It will be perfectly honorable to stay in your hometown, start a business, be a good role model, and live a good life.

That’s what I’m looking forward to. A world full of foxes with nary a hedgehog in sight.

In the meantime, it was recently brought to my attention that far too few people know about the Talebenning, important people in particular:

So if you want the future just described to arrive sooner rather than later, stay humble, stack sats … and get pumping.

follow me on Twitter @allenf32