Markets: Stop Being Blinded By “Innovation"
Financial principles do not change.
By Willie J. Costa & Vinh Q. Vuong
The ongoing crypto winter has spawned memes, flights to liquidity, liquidations, eradications, and a serious reexamination of precisely where the line is drawn between investing and speculating. It has shown that the anarcho-capitalists and “sovereign libertarians” are like housecats: they enjoy their independence so long as someone feeds them, otherwise they starve. When one of crypto’s most ardent supporters states that he’s pouring hundreds of millions of dollars into crypto exchanges that he openly admits are likely “secretly insolvent,” the comparisons between crypto and tulip fever seem tautological.
Throwing good money after bad is not only insufferable – and likely criminally negligent in the cases of beleaguered crypto exchanges – it also reveals fundamental shortcomings in the speculative mindset that only cause suffering to those who refuse to rectify their outlooks. For years, the innovations touted by the cryptosphere have brilliantly highlighted solutions in search of problems, and millions around the world put on their casino hats and poured in billions of dollars seemingly without ever considering the mechanics of reality. To paraphrase Jimmy McMillan, the APRs are too damn high.
The world has been given a respite from the insanity of technology without use cases, and we should take a moment to reacquaint ourselves with the immutable fundamentals instead of grasping at vapors that promise the benefits of web16 are just around the corner.
There are three ways to build wealth: interest, dividends, or capital appreciation. Everything else is a ponzi.
Real investments grow wealth through one (or more) of these three methods. Such was the case in the mists of prehistory when Mog and Grog exchanged shells for cattle, and such is the case now. Real investments are easy to spot because they grow slowly over time, due to the indisputable fact that risk and reward are directly correlated: stratospheric returns – if ever realized – are the compensation for stratospheric risks. “Liquidity staking” and its foul ilk have repeatedly failed to answer the fundamental question of why anyone would want to use a token to begin with. Earning 5,000% on fake money (usually paid out in more increments of fake money) seems like a fantastic way to turn $100 into a Lamborghini until you realize that the fake money only has value as more people “invest” in it: returns are influenced by the whims of the market and the mass actions of actors, but continued increases in value are only sustained by additional buy-in from those who came after you, making one wonder why there isn’t a term for this scheme that seems to be structured like a pyramid.
When too many innovations focus on cartoon monkeys and video games that pretend to be a substitute for work, the proponents of a given technology have long since passed the point of madness. The potential to use blockchain, NFTs, etc. to contribute meaningfully to the development of society has instead been squandered on JPEGs that can be screenshotted, platforms forked from each other hawking innumerable tokens that do nothing, and a cottage industry to support the delusions of both. So intent has everyone been on figuring out whether they could that no one seems to have bothered asking whether they should.
No amount of technological wizardry will ever change the fact that an investment structure that does not generate meaningful goods or services for society will eventually collapse. It will fall to zero because it must fall to zero, because zero is its intrinsic value. The world has spent more than a decade waiting for the “killer app” that would justify the existence of crypto and have been rewarded with harrowing losses and violent price fluctuations. If there were a viable use case, someone in today’s world of venture-funded, hyper-intelligent, technologically-savvy visionaries would have made it work by now. Protocols have attempted to address Ethereum’s gas fees and Bitcoin’s horrific transaction throughput, but have failed to even acknowledge that the world has no use for these overgrown science projects to begin with.
Investors should apply Occam’s Razor and eschew a fanciful future that will never come in order to fall in love with cold, harsh reality: which is more likely – that the future of finance is being unfairly stunted by the inertia of the legacy world (itself rabidly obsessed with trying to improve efficiency, accessibility, and throughput), or that said future was never built on anything meaningful in the first place?
The most difficult aspect of investing is having the discipline to do nothing. The panic-selling and implosion of crypto illustrates that few ever believed in it as anything but an easy way to make a fast buck, and like all rats they fled the ship when the first leak appeared. For a cult that screams about its “antifragility,” it couldn’t even survive a market downturn or a run of inflation, the latter being the very thing that crypto was praised for hedging against. Rather than a stable future, the crypto cultists have managed to create a high-beta bubble with more volatility than a tech company but without even the decency of offering free two-day shipping. Perhaps the complete destruction of crypto will be what pauses the defenestration of logic and reason, and forces investors to think more and speculate less, but history has shown that human stupidity is as predictable as the tides.
Willie J. Costa is the Vice Chairman and COO of Garrison Fathom, a diversified holding company with a focus on long-term holdings and shareholder activism. Vinh Q. Vuong is the Chairman and CEO of Garrison Fathom.
The ongoing crypto winter has spawned memes, flights to liquidity, liquidations, eradications, and a serious reexamination of precisely where the line is drawn between investing and speculating. It has shown that the anarcho-capitalists and “sovereign libertarians” are like housecats: they enjoy their independence so long as someone feeds them, otherwise they starve. When one of crypto’s most ardent supporters states that he’s pouring hundreds of millions of dollars into crypto exchanges that he openly admits are likely “secretly insolvent,” the comparisons between crypto and tulip fever seem tautological.
Throwing good money after bad is not only insufferable – and likely criminally negligent in the cases of beleaguered crypto exchanges – it also reveals fundamental shortcomings in the speculative mindset that only cause suffering to those who refuse to rectify their outlooks. For years, the innovations touted by the cryptosphere have brilliantly highlighted solutions in search of problems, and millions around the world put on their casino hats and poured in billions of dollars seemingly without ever considering the mechanics of reality. To paraphrase Jimmy McMillan, the APRs are too damn high.
The world has been given a respite from the insanity of technology without use cases, and we should take a moment to reacquaint ourselves with the immutable fundamentals instead of grasping at vapors that promise the benefits of web16 are just around the corner.
There are three ways to build wealth: interest, dividends, or capital appreciation. Everything else is a ponzi.
Real investments grow wealth through one (or more) of these three methods. Such was the case in the mists of prehistory when Mog and Grog exchanged shells for cattle, and such is the case now. Real investments are easy to spot because they grow slowly over time, due to the indisputable fact that risk and reward are directly correlated: stratospheric returns – if ever realized – are the compensation for stratospheric risks. “Liquidity staking” and its foul ilk have repeatedly failed to answer the fundamental question of why anyone would want to use a token to begin with. Earning 5,000% on fake money (usually paid out in more increments of fake money) seems like a fantastic way to turn $100 into a Lamborghini until you realize that the fake money only has value as more people “invest” in it: returns are influenced by the whims of the market and the mass actions of actors, but continued increases in value are only sustained by additional buy-in from those who came after you, making one wonder why there isn’t a term for this scheme that seems to be structured like a pyramid.
When too many innovations focus on cartoon monkeys and video games that pretend to be a substitute for work, the proponents of a given technology have long since passed the point of madness. The potential to use blockchain, NFTs, etc. to contribute meaningfully to the development of society has instead been squandered on JPEGs that can be screenshotted, platforms forked from each other hawking innumerable tokens that do nothing, and a cottage industry to support the delusions of both. So intent has everyone been on figuring out whether they could that no one seems to have bothered asking whether they should.
No amount of technological wizardry will ever change the fact that an investment structure that does not generate meaningful goods or services for society will eventually collapse. It will fall to zero because it must fall to zero, because zero is its intrinsic value. The world has spent more than a decade waiting for the “killer app” that would justify the existence of crypto and have been rewarded with harrowing losses and violent price fluctuations. If there were a viable use case, someone in today’s world of venture-funded, hyper-intelligent, technologically-savvy visionaries would have made it work by now. Protocols have attempted to address Ethereum’s gas fees and Bitcoin’s horrific transaction throughput, but have failed to even acknowledge that the world has no use for these overgrown science projects to begin with.
Investors should apply Occam’s Razor and eschew a fanciful future that will never come in order to fall in love with cold, harsh reality: which is more likely – that the future of finance is being unfairly stunted by the inertia of the legacy world (itself rabidly obsessed with trying to improve efficiency, accessibility, and throughput), or that said future was never built on anything meaningful in the first place?
The most difficult aspect of investing is having the discipline to do nothing. The panic-selling and implosion of crypto illustrates that few ever believed in it as anything but an easy way to make a fast buck, and like all rats they fled the ship when the first leak appeared. For a cult that screams about its “antifragility,” it couldn’t even survive a market downturn or a run of inflation, the latter being the very thing that crypto was praised for hedging against. Rather than a stable future, the crypto cultists have managed to create a high-beta bubble with more volatility than a tech company but without even the decency of offering free two-day shipping. Perhaps the complete destruction of crypto will be what pauses the defenestration of logic and reason, and forces investors to think more and speculate less, but history has shown that human stupidity is as predictable as the tides.
Willie J. Costa is the Vice Chairman and COO of Garrison Fathom, a diversified holding company with a focus on long-term holdings and shareholder activism. Vinh Q. Vuong is the Chairman and CEO of Garrison Fathom.