Why You Can Be Bullish Crypto, Even If The Price Goes Down

One of the things you hear about crypto is that it is a fraud.  There is no doubt that some crypto will be a fraud.  They created an idea and some rudimentary tech and took the money and ran.  There is no doubt there will be future frauds in crypto.

Where there is money to be had, there is always fraud.  There is a Bernie Madoff just around the corner somewhere.  Remember, he was “respectable”.

A lot of people think that speculators entering the market is a sign of a more tangible fraud.  That’s not the case either.  Traders making wild predictions on price don’t help though.  The answer is “nobody knows”.

Nope, the true promise of cryptocurrency lies in something even deeper.  It’s ingrained into the human soul. Humans are hard wired to seek out gains from trade.  Division of labor is a part of that.  Allocation of resources is a very large part of that.  We intuitively allocate resources using a heuristic cost/opportunity cost analysis to put them to work where we think the time, effort and resource will give us the best return.

Sometimes that is not in terms of hard numbers like we find in finance, but in relationships and time spent doing things as well.

If we take that basic economic concept and apply it to crypto, the world blows wide open.  Crypto and its structure lubricates a lot of friction that currently exists in many transactions between people and firms.  One of the concepts Ronald Coase put forth in his paper, The Economics of the Firm, talks about how firms make a calculation on whether to internalize or externalize certain processes.  It makes no difference if they are internal or external.  What makes the big difference is how efficient the means of production are so they can deliver a good or service to the market at a competitive price.  Coase also shows how firms eschew price theory to allocate resources inside the firm.  Cryptocurrency might be able to change that and allocate resources inside companies by some internal price system that is more efficient than cost accounting.  That in turn will drive efficiency that the world has never seen before.

Yesterday, CME announced it would trade an index on Ethereum futures.  This is good for ethereum because the entire ecosystem will have less volatility now that it can be hedged.

As we see the entire trading world gear up to trade crypto, it’s not a sign that it is something or is a fraud. We should be happy that speculators are entering the crypto marketplace. Their risk capital will make the entire market more efficient.  Capital, both human and physical, will be able to flow to the outlet that will give it the best return.  Operations should become more efficient and supply chains should become more efficient as more reliable price mechanisms become transparent.

If you want to learn more about Coase, listen to this podcast.  It talks about his legacy.