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- Herausgeber: John Wiley & Sons
- Kategorie: Fachliteratur
- Sprache: Englisch
Competition, the drive for efficiency, and continuous improvement ultimately push businesses toward automation and later towards autonomy. If a business can operate without human intervention, it will minimize its operational cost. If Uber can remove the expense of a driver with an autonomous vehicle, it will provide its service cheaper than a competitor who can't. If an artificially intelligent trading company can search, find, and take advantage of some arbitrage opportunity, then it can profit where its competitors cannot. A business that can analyze and execute in real-time without needing to wait for a human to act, is a business that will be able to take advantage of brief inefficiencies from other markets or businesses. This trend following a thesis that is based on 100 years of proven economic theory. Short-wave economic cycles, those 5- to 10-year cycles, are driven by credit but the long-wave economic cycles, those 50- to 60-year cycles, are driven by technological revolution. We've had 5 cycles over the past 200 years with the last wave, the Age of Information & Telecommunications. We've seen evidence that a new cycle has begun. Technological revolutions come by way of a cluster of new innovations. About a decade ago, you started to see AI, robotics and IoT (sensors) delivering on automation. That's been powerful, but not transformational. It does not force businesses to fundamentally change how they do business. The last piece of the puzzle was cryptocurrency because it allows us to process and transfer economic value without human intervention. Soon, there will be a global race to build autonomous operations. Businesses and organizations without autonomous operations simply will not be able to compete with those that do because ... autonomy is the ultimate competitive advantage. Crypto is the mechanism that will accrue value from being the infrastructure for the next digital financial revolution. Crypto Asset Investing lays out a case that we've begun a new technological revolution similar to the Internet Age of the 1990's. Artificial intelligence, the Internet of Things, robotics and cryptocurrency are converging to deliver on a new age, what I call the Age of Autonomy. Understanding the transformation that's taken place before anyone else can yield enormous investment opportunity. In this book, you'll learn how and why to invest in crypto assets.
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Table of Contents
Cover
Title Page
Copyright
Acknowledgments
Author's Note
Introduction – Why This Book and Why Now
We Are Marching Toward Two Worlds
Where We Are in the Current Economic Cycle
Investing in the New Technological Revolution
The Push Toward Autonomy
Innovations That Make the Age of Autonomy Possible
The Age of Autonomy – Welcome to the Future
The Ideal Investment Profile
Investing in Crypto Assets in the Age of Autonomy
Putting It All Together
Notes
PART I: THE HISTORY OF ECONOMIC CYCLES AND MONETARY POLICY
1
The Fed and You: A Brief History
How It Was versus How It Is
Monetary Policy – The History of the Federal Reserve
The US Dollar as the Global Reserve Currency
Sovereign Currencies Are Now All Fiat Currency
Notes
2
Understanding Economic Cycles
Terms and Definitions
The Economic Cycle
Deleveraging – Understanding a Debt Crisis
Where Are We in the Long-term Debt Cycle?
What's Outside the Economic Cycle Definition
Current Cycle Comparison to Past Cycles
Note
3
The Long-wave Economic Cycle
The Kondratieff Cycle
Spring – The Start of Inflation
Summer – Runaway Inflation
Autumn – Disinflation
Winter – Deflation
Technological Revolutions – Building on the Long-wave Cycle
The Past Longwave Cycle – The Age of the Internet
Moving in Cycles
Notes
4
Safe Is the New Risky
The Problem – Historical Truth, Contemporary Fallacy
US Treasuries Are a “Risk-free” Asset
Owning a Stock Was Always Owning an Asset
There Is No Counterparty Risk to Owning Gold
Savings Accounts Are Safe
The News Is News
Okay, Boomer
Conclusion
Notes
5
Credit and Commodity Currencies
The Purpose of Money
Commodity Money (Sound Money)
Periods of Sound Money Policy
Bi-metal Periods
Credit Money (Unsound Money)
Problems with Credit Money
Periods of Unsound Money Policy
Notes
6
The Fall of Credit Money and the Rise of Multicurrencies
The Fall of Credit-based Currencies
The Ever-Increasing Size of Bubbles
The Federal Reserve's Modern Policies and Positions
Unintended Consequences
Modern Global Monetary Policy – Money Printer Goes Brrrrr
The Decline of the US Dollar as the World's Reserve Currency
The End of a Sovereign Debt Cycle
A Checklist for the End of a Sovereign Debt Cycle
The Future – A Multicurrency World
Notes
PART II: THE RISE OF BLOCKCHAIN AND THE AGE OF AUTONOMY
7
A Digital Commodity: Bitcoin as Digital Gold
A Primer on Bitcoin
Primitives of Bitcoin
What's Unique About Bitcoin
Triple-Entry Accounting
Bitcoin as a Hedge Against Global Monetary Policy
Bitcoin as Sound Money
The Bitcoin Halvening Event
Scarcity Value and the Stock-to-Flow Model
Other Ways to Value Bitcoin
Notes
8
Blockchains
Blockchains: The Basics
Blockchain Properties
Primitives of Blockchains
Vulnerabilities
Use Cases
Conclusion
Notes
9
The Age of Autonomy
Long-wave Economic Cycles – 100 Years of Economic Theory
Blockchain – The Last Piece of the Puzzle
A Brief History
The Age of Autonomy: What's Possible
An Example of the Future Decentralized Autonomous Corporation
The Knowledge Doubling Curve
The Case Against a Continuation of the Old Technological Revolution
Conclusion
Notes
10
Clusters of Innovation in the Age of Autonomy
Parallels to the Internet Technological Revolution
Blockchain Infrastructure for the Age of Autonomy
The State of Artificial Intelligence
The Intersection of Blockchain and AI
The Intersection of Robotics, AI, and IoT/Sensor Data Technologies
Ephemeralization
Notes
11
The Case for Investing in Crypto Assets
Old Fiat Money Regimes Are Dying
Possession Is 9/10ths of the Law
Old Investment Strategies Are Becoming Antiquated
Risk Management Favors Antifragility and Ephemeralization
Seizure-Resistant Assets Have a Premium
Blockchain Immutability Solves Information Integrity
The Gold versus Bitcoin Argument
A Set of New Innovations Is Affecting Everyone
Revolution in the Means of Production
Public Financial Infrastructure
Invest in Scarcity
Innovation Creates Asymmetry
Crypto Assets: A New Asset Class
Notes
PART III: CRYPTO INVESTMENT STRATEGIES
12
A Primer on Crypto Asset Investing
What Are Crypto Assets?
Crypto Classification: Security versus Commodity
Passive Investing and the Crypto Index Fallacy
Investing from First Principles
Investment Vehicle Options for Crypto Investing
Notes
13
Quantitative Analysis Frameworks
Fundamental Valuation Using On-chain Metrics
Global Macro Risk Management Models
A Model for Fundamental Analysis
Interpretations of the Model
Summary of Other Valuation Models
Token Models and Tokenomics
Token Mechanics
Conclusion on Models and Frameworks
Notes
14
Understanding Crypto Asset Classes
Reserve Crypto Assets
Cryptocurrencies
Platform Crypto Assets
Utility Tokens
Governance Tokens
Security Tokens
Asset-Backed Tokens
Crypto Commodities
DApps (Decentralized Apps)
Nonfungible Tokens (NFTs)
Stablecoins
Other Approaches
Conclusion
Note
15
Investment Themes
Sound Self-Sovereign Money
Decentralized/Open Finance
Decentralized Governance
The Age of Autonomy
Web 3.0 – Own Your Own Data
P2P Commerce – Disrupting the Disruptors
Digital Collectibles (Nonfungible Tokens)
Passive Income
Notes
16
Building an Investment System
Portfolio Construction
Advanced Risk Management Concepts
Asset Selection
Using Technical Analysis
Event-Driven Portfolio Management
Investment System Summary
Thresholds
Asset Allocation Thresholds and Event-Driven Management
Putting It All Together
Risks and Disclosures
Conclusion
Further Reading and Resources
Books
News Sites
Articles and Blogs
Services
Crypto Funds Blogs and Newsletters
Appendix
Index
End User License Agreement
List of Illustrations
Chapter 1
Figure 1.1 Productivity versus Compensation
Figure 1.2 Gold Certificate
Figure 1.3 Federal Reserve Note
Chapter 2
Figure 2.1 US Short-term Interest Rates
Figure 2.2 Total US Credit Market Debt to GDP
Chapter 3
Figure 3.1 The Kondratieff Cycle
Figure 3.2 FANG Stocks versus the S&P 500
Chapter 5
Figure 5.1 The Hanke-Krus Hyperinflation Table
Chapter 6
Figure 6.1 Fed Balance Sheet and the Fed Funds Rate
Figure 6.2 Public Trust in Governments
Figure 6.3 US versus China GDP
Chapter 7
Figure 7.1 Bitcoin Monetary Inflation
Figure 7.2 PlanB's Stock-to-Flow Model for Bitcoin, with Price
Chapter 9
Figure 9.1 Recurring phases of each great surge in the core countries
Figure 9.2 A Chart of the Kondratiev Cycle Showing Cycles over the Past 200 ...
Figure 9.3 Five Successive Technological Revolutions, 1770s to 2000s
Figure 9.4 Knowledge Doubling Curve
Chapter 12
Figure 12.1 SIFR data provided in 2019 on its website in 2019, https://sifr....
Figure 12.2 CoinMarketCap of Top Crypto Assets
Chapter 13
Figure 13.1 Dashboard Showing Metrics as of July 28, 2019
Figure 13.2 Dashboard Showing Metrics as of February 10, 2019
Figure 13.3 Dashboard Showing Metrics as of March 11, 2019
Figure 13.4 Dashboard with Metrics Showing June 26, 2019
Figure 13.5 Bitcoin Price Chart for 2020
Figure 13.6 Binance Burn Chart for 2020
Chapter 16
Figure 16.1 Graph Shows Correlation Between Cryptocurrency Assets Using the ...
Figure 16.2 Asset Allocation Management Template
Figure 16.3 Bitcoin's 200-Week Moving Average Using TradingView
Figure 16.4 Dashboard with Metrics
Guide
Cover Page
Table of Contents
Begin Reading
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CRYPTO ASSET INVESTING IN THE AGE OF AUTONOMY
JAKE RYAN
Copyright © 2021 by Jake Ryan. All rights reserved.
Published by John Wiley & Sons, Inc., Hoboken, New Jersey.
Published simultaneously in Canada.
No part of this publication may be reproduced, stored in a retrieval system, or transmitted in any form or by any means, electronic, mechanical, photocopying, recording, scanning, or otherwise, except as permitted under Section 107 or 108 of the 1976 United States Copyright Act, without either the prior written permission of the Publisher, or authorization through payment of the appropriate per-copy fee to the Copyright Clearance Center, Inc., 222 Rosewood Drive, Danvers, MA 01923, (978) 750-8400, fax (978) 646-8600, or on the Web at www.copyright.com. Requests to the Publisher for permission should be addressed to the Permissions Department, John Wiley & Sons, Inc., 111 River Street, Hoboken, NJ 07030, (201) 748-6011, fax (201) 748-6008, or online at www.wiley.com/go/permissions.
Limit of Liability/Disclaimer of Warranty: While the publisher and author have used their best efforts in preparing this book, they make no representations or warranties with respect to the accuracy or completeness of the contents of this book and specifically disclaim any implied warranties of merchantability or fitness for a particular purpose. No warranty may be created or extended by sales representatives or written sales materials. The advice and strategies contained herein may not be suitable for your situation. You should consult with a professional where appropriate. Neither the publisher nor author shall be liable for any loss of profit or any other commercial damages, including but not limited to special, incidental, consequential, or other damages.
For general information on our other products and services or for technical support, please contact our Customer Care Department within the United States at (800) 762-2974, outside the United States at (317) 572-3993, or fax (317) 572-4002.
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ISBN 9781119705376 (ePub)
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Acknowledgments
There are many people without whose involvement this book would not have been possible. I'd like to thank and acknowledge them all for their contribution. First, I'd like to acknowledge and thank my mom, Pam Skersick. Not in just the “mom” sense, though I thank her for that, too. My mom was instrumental in encouraging me to stay on track and write a third book proposal after my first two attempts at getting a book deal failed. She was a tireless supporter of my writing. She was also my proofreader through the entire writing process of the manuscript. Words cannot express how thankful I am for her support.
I would also like to thank my business partner, James Diorio. Thank you for helping and supporting the project from day one and for helping to write most of Chapter 8 to meet the deadline. Thanks for believing in the Age of Autonomy investment thesis and especially for believing in me. I'd also like to thank RT Moreno. It's been a journey to get this book published. I want to acknowledge you for your commitment to “transform the money, transform the world.”
I would also like to thank my wife, Onkar, for supporting my writing efforts. It's been a sacrifice and I appreciate all you do for me and for our family.
I would also like to thank my dad, John Ryan, for always having conviction in my investment pursuits. He's always been an early investor.
I would like to thank Nels Paine and Rob Cone for being advisors to my crypto fund and providing me direction about the world of institutional investment.
I would also like to thank my literary agent and initial editor, Herb Schaffner. Without your help, direction, and expertise, there is no way this book would have been published. It was a pleasure to work through the initial drafts with you and I'm so glad I found you to help edit, create, and network this book into existence. I hope we work together again soon.
I would also like to thank my editor, Bill Falloon, and the entire team at Wiley, including Purvi Patel for editing and Samantha Enders for cover art. Thank you for your contribution to this book. A special thanks as well to Kinga Toth for helping proofread and edit the early manuscript.
I have a special thanks to Joshua Hong for being an instrumental believer and supporter of the Age of Autonomy™ thesis. He led and financially supported the Autonomy2040 conference in Tulum, Mexico, getting some of the top minds in blockchain, robotics, IoT, and AI together at one conference. It's that inclusion of several revolutionary technologies under one roof that's going to make the difference.
Finally, I'd like to extend a special thanks to so many out there in the VC, tech, financial, and crypto investment community. You provided me with ideas, guidance, and advice, and I appreciate you – Gordon Mattey, Joshua Hong, Ric Edelman, Anuraag Shah, Travis Kling, Brock Pierce, Coburn Hawk, Otto Penzato, Tom Shaughnessy, Kevin Kelly, Tyrone Ross, Chris Paine, Tiffany Asakawa, Plan B, and many others. You've helped me directly or indirectly with this book and inspired me along the way.
Author's Note
I started writing the manuscript for this book in late 2019. A lot has changed in the world from the time I started to the time I finished. A global pandemic has come and upended the world. An economy already in trouble has been thrown into further turmoil. Central banks around the globe are expanding monetary policy and using exotic instruments to try and stabilize their economies. In 2020, in the United States alone, public debt ballooned an estimated 80% in one year. Chaos abounds.
Through it all, the crypto markets have survived and thrived. If ever there was a macroeconomic case for Bitcoin, the time is now. Investors all over the world are concerned about inflation. In fact, the #1 debate in finance is whether inflation or deflation is coming. The debate is happening all over the world. It's this analysis from which all investment strategies are born.
I have been an investor for a long time. I bought my first mutual fund when I was 15 years old. I bought my first stock when I was 18 years old. I learned how to trade options when I was 22 years old. While finance has never been my profession, investing has always been my passion. My profession for the first half of my career was in software technology. I graduated from the University of Texas at Austin with a degree in computer science. I had a specialization in the field of artificial intelligence. My first job out of school was as a VisualBasic developer for a Fortune 100 company, having never seen or programmed in VisualBasic. Eventually, I started my own software consulting firm, the Venice Consulting Group, and served clients like SAG-AFTRA, FOX Sports, and Lexus. In 2014, I started angel investing in early stage equity of AI and fin-tech start-ups. In 2015, I invested in seed stage equity of my first blockchain company. In 2016, I started investing in bitcoin – I think my first price paid was around $450. I love the crypto space because it sits at the intersection of technology, economics, and finance.
While I've read a lot of books on economics, I am not a formally trained economist. There may be debates going on in economics that are beyond the scope of this book. Too, there are times that I make analogies and don't represent all of the technical detail due to my commitment to the audience for book readability. There are cases where I make more generalizations that don't go into the full detail of specifics and that may not fully represent the technology that's going on in the background. I've found in writing a book that covers this much in scope that I have to set priorities and boundaries in certain places to make the crux of the book the focal point.
As a community, I think we've done an okay job conveying the monetary value of bitcoin. We've conveyed the concepts of digital gold, digital scarcity, a hedge against central bank monetary manipulation, and a new digital reserve asset. However, I don't think we've done a good job as a crypto-community conveying the transformative nature of smart contracts and the utility value created with them. With this book, I aim to fix that. If you're going to create a new digital capital system, money is the first building block. It's required, but not sufficient. This book illustrates what comes after money in a new digital capital system.
I wrote the precursor to this book back in 2018. It was an article on Hacker Noon titled “Crypto's Role in the Age of Autonomy.” It was my first attempt to provide an economic thesis about what is happening with crypto and the world around us. It outlined the basic premise of this book.
I am committed to being an educator and expanding the field of study around crypto asset investing. I am committed to making a difference. I think I can do that by getting more people involved in the next great technological revolution of our time. Transform the money: transform the world. With all that said, I do hope you enjoy the book.
Introduction – Why This Book and Why Now
In the middle of difficulty, lies opportunity.
— Albert Einstein
Speech, content, math, code, and money are converging. They are mental constructs humans symbolize as characters on a page or a screen. We take this symbolic transmutation of cognitive concepts into value for granted, but in fact each of these is the same thing at one level – abstractions of human design. Before, we saw code, math, and speech converging in software applications, cryptography, and web design. Now, money is fully converging with this construct. As a result, many of us are rethinking how we view the digital life of money.
I view the two most important factors of successful investing to be great timing and strong, educated conviction. Sometimes the timing aspect of investing is lucky. No one wants to rely on luck when managing their money. If you want to incorporate timing into a systematic investment thesis, create great timing through smart, impactful research. Watch for what's going to be successful in the future instead of trying to invest in what's worked in the current past. Markets change over time. As conditions evolve, successful strategies lose their advantages. If you are analyzing current returns and are following a strategy that is producing outsized returns, then I think most of the time you are too late. I see so many investors in the equities markets searching for mutual funds with a strong 12-month performance in beating the market benchmark. But if you're a new investor getting in at that point, it's already too late. Outsized returns have been made. This is why I never want to analyze past returns as a part of my decision-making process for a future investment strategy. Instead, I want to understand market cycles to figure out where we are and then where we're going. This book will show you how finding and following market cycles is key to producing outsized returns.
The second important aspect to exceptional investing is to have conviction in what you're investing. Especially when it comes to understanding new innovation or technology, you gain conviction by learning, researching, and digging deeper into a particular domain to gain expertise. In this book, you will learn why cryptoasset investing is so transformational and how to invest using systems and processes that remove emotion from the equation. I will explain the world of crypto markets and lay out easy-to-understand strategies and tactics for investing in crypto assets while showing you, the investor, what risks to manage and how to manage them.
We Are Marching Toward Two Worlds
Right now, the majority of the world is walking into a trap. They're walking into a world where every single action they do, online or offline, is being monitored, tracked, and surveilled. The tools are becoming better and better and the amount of data tracking the population is staggering. If you have Google's Gmail, they are reading your emails and the emails you send to others in an effort to better target advertising. They use Google Maps for location data. Your phone is spewing out geolocation data to more third parties than most even realize. And there are data aggregators that are collecting all this information to sell to anyone for a price. Your privacy is going the way of the dinosaur.
It's worse in some other countries. In China, they have a social scoring system that tracks all aspects of your behavior and your financial life. If you are using your mobile phone for payments through Alipay and other services, every single financial transaction is being tracked by the government. They know where you are. They know what you purchase. They know vast amounts of medical information about you. In China, this can affect whether you can buy a train ticket or upgrade to first class or not. There are over 50,000 cases of Chinese citizens who couldn't book travel because they had outstanding debts. Depending on where you live, a comfortable, lazy approach will land you living in a world of surveillance capitalism or a world of a surveillance state.
There are Chinese citizens who are having the sum of all their public actions reduced to a social score. There are American citizens who have their email surveilled to improve e-commerce opportunities for companies willing to pay. Google partnered with Mastercard, so now Google can view all your financial transaction data. It's the aggregation of all your health, online, and financial data that's bringing about a future I suspect none of us truly want. What I am describing is only the beginning. You have a choice.
Do you want to own your own data or are you going to let it own you? Blockchain and crypto assets allow for us to create a different future. One where you own and control your own data. One where you cannot be tracked, at least not as easily. One where you could get paid for allowing access to your data. These technologies provide tools for anyone to reclaim their privacy. In this book we offer a reason and a way for taking back control of your financial life such that your life is farther away from a surveillance state and closer to financial autonomy.
Where We Are in the Current Economic Cycle
The globe is currently in a tricky spot in the current economic cycle. In 2020, we're in a transition period. Countries are laden with debt. The United States has $28 trillion in public debt with $123 trillion in unfunded liabilities that include Social Security and Medicare.1 We are currently in a period of slowing growth coupled with the potential of inflation – and this is driving global central banks to take a dovish stance as they are worried about deflation. We are transitioning into slower growth as the potential of inflation starts to accelerate and so this changes the market dynamic. Global central banks will start to take a more neutral monetary stance as they worry about stagflation. This all drives toward the next aspect of the cycle that I think we're all most worried about, which is the next major recession or downturn in the market. When the next major downturn comes, the Federal Reserve and all global central banks will not have any ability to increase stimulus in the system. No traditional monetary solutions will be available to governments because they've been used up and not replenished. Quantitative easing (QE) has been used for too long. Interest rates are already low or zero, depending on the country. Many developed nations have negative-yielding sovereign debt, so what are they going to do? Push rates even lower? This means that our governments' only option will be fiscal reform, but that takes time, especially in the polarized political world we live in today. The easiest option will be to print more money and give it directly to the people. At the end of all this, we're going to see a public debt crisis – this is an opportunity for those who are informed about alternatives.
Investing in the New Technological Revolution
My investment thesis is based on 100 years of proven economic theory. As we've learned, short-wave economic cycles, those 5- to 10-year cycles, are driven by credit, but the long-wave economic cycles, those 50- to 60-year cycles, are driven by technological revolution. We've had five cycles over the past 200 years – the Industrial Revolution, steam/railways, electricity/city electrification, oil/autos, and the last wave, which was the Age of Information with the Internet.2 These long-wave economic cycles drive market forces and investment over decades. Being able to spot them early is advantageous.
Artificial intelligence (AI), the Internet of Things (IoT), robotics, and cryptocurrency are converging to deliver a new technological revolution. We've already seen evidence of this. For the past 10 years AI, IoT, and robotics have been delivering new solutions that drive automation. That has been valuable, but it has not been transformational. There has been no driving force requiring a paradigm shift in how businesses operate.
Cryptocurrency was the last piece of the puzzle. It allows for generating, processing, and transferring economic value without the need for human intervention. As these technologies converge, they are bringing about a new age, what I call the Age of Autonomy™. Once this technological innovation reaches a tipping point, businesses around the world will push to reconstitute themselves, once again, just like they did during the last technological revolution in the Age of Information (aka the Internet Age). It's that competition that's a key driver to technology adoption and the force that drives global adoption. In the future, businesses and organizations that do not have autonomous operations simply will not be able to compete with those that do because autonomy is the ultimate competitive advantage. In this book I will show you why cryptocurrency is the mechanism that will unleash the wealth-building value of these technologies in our digital age and how you as a crypto investor can prosper.
The Push Toward Autonomy
With the advent of blockchain technology, we've begun a new long-wave economic cycle driven by a new technological revolution. Individuals, corporations, and organizations are pushing for greater autonomy, agency, and sovereignty. Management analysts, political gurus, and trend watchers all agree that AI is the tech frenzy of our time. Companies are feverishly developing AI for improvement in all sorts of systems, from e-commerce to customer support to robotics. We see AI helping improve our lives, from suggesting a new book to read based on past history to helping our search on Google. There is an underlying trend developing everywhere to help people improve their knowledge and therefore decision making, from GPS data helping with optimal routes home to removing one extra step in choosing a movie theater based on current location. The trend is to provide more agency and sovereignty to people by removing rote tasks and it's happening by giving more autonomy to software and robots to operate on our behalf.
Investment is pouring into start-ups and initiatives that use robotics to minimize human intervention in rote physical tasks. Investment in AI systems will top $98 billion by 2023, says a new IDC report.3 According to Gartner, global business value derived from AI will reach a staggering $3.9 trillion by 20224.
I expect this revolution to reach the automobile by way of autonomous driving, which would revolutionize one of the biggest industrial sectors in the economy, starting in 2022 with long-haul trucking. We are looking at the greatest macro shift of our time and blockchain technology is going to take it one final transformational step further.
Even money itself is looking to become self-sovereign. Every time a government-backed currency has come off a commodity or gold standard, it fails. One of the first examples is Rome in the third century AD, where the amount of silver in coinage went from 100% silver per coin a hundred years earlier to 0.02% at the end of the Roman Empire. Another example is John Law and France's failure of its state finance in the early eighteenth century, through a series of missteps, creating crippling inflation of 13,000%. Another example in modern history is the hyperinflationary period of the Weimar Republic in the 1920s, which killed the German mark. Historically, fiat currencies fail as a store of value, always. Money gains its value by declaration and agreement, not by any intrinsic value. Money that can be enforced without the need of human intervention could be the most valuable money created to date.
Bitcoin was the first killer app of blockchain technology. Bitcoin brought forth something innovative by creating a global system to digitally transfer and store value. It does this through its design by using decentralization, immutability, and incentivization in novel ways that allow commerce transactions without the need of a trusted third party (i.e. like a bank). Moreover, the next generation of cryptocurrencies brings forth the capability of smart contracts (i.e. programmable money). These capabilities are new, and they will spark an entire wave of technological improvement centered around how we globally generate, store, and transfer value.
Innovations That Make the Age of Autonomy Possible
There are many innovations under the crypto umbrella. Crypto is not just one invention, but a set of ideas and innovations that have settled into a paradigm shift in what's possible with money and finance. Today – and it's completely unbelievable that it's true – the fastest way to get a transfer of money is still to fly it physically to its destination and settle the transaction in physical cash. You might say, “That's not true, I can just wire the money and it's there in a few hours.” That's actually not the case. Currently the entire financial system is built on trust and it's the trust between those banks that allows it to look like the transaction is settled in a few hours. Behind the scenes, ACH, SWIFT and IBAN, and BIS all work to settle transactions in a network of banks, intermediaries, and legacy-based software to clear and settle transactions in what takes days, not hours. This is because all that legacy technology is built on 50-year-old paper-based processes. There is only a digital veneer. However, many innovations have occurred over the past decade to make true digital finance a reality.
Many innovations now exist from several inventions that have come from Bitcoin and blockchain technology. These inventions, when combined together, provide for capabilities previously not possible. Collectively, they are revolutionary.
Blockchain and the Proof-of-Work Consensus Mechanism
Blockchain technology is a system of creating and maintaining a decentralized network of servers that maintain a decentralized, distributed public ledger (i.e. a blockchain). At its core, a blockchain is just a decentralized public ledger. Blockchain is the underlying technology that allows cryptocurrency to function. A blockchain allows digital information to be recorded and distributed but not edited. It does this through a consensus mechanism called “proof of work,” which is a fundamental invention in a blockchain. This innovation solves the Byzantine Generals Problem, which allows systems to gain consensus among two or more nodes without requiring a trusted third party.
In the past paradigm, the financial system required trust to securely operate. The system required a trusted third party to settle accounts, form capital, issue credit, and conduct almost any commercial transactions. Bitcoin safely eliminated that requirement, reducing time and friction of all commerce transactions and creating permissionless, trust-minimized financial transactions. This is transformational.
For the first time in history, peer-to-peer consensus allows us to transact globally without the need of a trusted third party. With Bitcoin, it's the blockchain that provides certainty that one coin cannot be double-spent. To prove that no attempts to double-spend have occurred, the blockchain uses a proof-of-work consensus mechanism to agree upon and distribute every transaction, which we'll discuss in detail later in the book. With Bitcoin, all transactions are publicly communicated to all nodes in the network. With this architecture, opacity is removed from the financial system and users can trust the accuracy of the ledger.
Decentralization
Decentralization is a design principle by which the activities of an organization, particularly those regarding planning and decision making, are distributed or delegated away from a central location, group, or authority.5 The value of a decentralized architecture, especially for public infrastructure and open protocols, is that it's not centrally owned or controlled. The benefit of decentralization is that there is no single point of failure in either the administration or execution of the system. This concept is outlined eloquently in the book Antifragile by N. N. Taleb,6 which we discuss later in this book. This principle is at the heart of designing the next digital financial system of the future. A decentralized system cannot be co-opted or manipulated by a single participant. This becomes critically important when you look at money and the history of money.
Permissionless Access
One of the biggest breakthroughs with blockchain technology is that one does not need an account or permission from anyone to access it. Users do not have to have an account or request permission to use this public infrastructure. Permissionless access to public blockchains fundamentally transforms the architecture of how we design financial transactions and financial system infrastructure.
Bitcoin software runs as a virtual machine on thousands of servers across the world called miners. They get paid in the form of a chance to win mining rewards of bitcoin, to run the Bitcoin software and maintain the Bitcoin blockchain. Anyone who knows how to correctly access the Bitcoin blockchain can buy or sell or complete a variety of transactions without permission and that's transformational. Talk about egalitarian; this alone could change the world.
Immutable Records
Blockchains work in such a way that present work is built on top of past work. Therefore, there is no way to edit or alter past transactions. Public blockchains record immutable transactions in their blockchains, which means that once a transaction is recorded, it can never be changed or undone. This is securely enforced by the blockchain system itself, which is why we no longer require trust to conduct financial transactions. With a database, there's always a capability of deleting a record or transaction, which is why trust is so important in how legacy financial systems operate. With blockchains, being able to store a record that you know can never be changed is transformational and it brings forth new capabilities. Immutability is a cornerstone for how blockchains can be maintained without a trusted third party; we'll see later why that's important. Being able to record a transaction forever, that anyone can read and verify, lends itself well to areas like money and stores of value.
Trust-minimized Transactions
Our financial system is based on trust. If you want to go to the store to buy some organic, gluten-free bread, first you need to trust that the store deals with distributors to supply it. Then, you need to trust the label on the bread that it's organic. Then, you need to trust the store that they've competitively priced it. Then, you need to trust your credit card to debit the right amount. Then, you need to trust your bank to cover the charge. Then, you need to trust that your bank will hold your money and not steal it. And on and on and on. Right now, financial transactions require a whole lot of trust and trusted third parties to conduct financial transactions, but that's about to change.
With cryptocurrency, through the use of blockchain technology, a trusted third party is no longer required to complete a financial transaction. Transactions now can be trust-minimized. This changes the nature of how many people can now participate in financial transactions – think of the four billion people who don't have a bank account. It also reduces the cost within financial transactions. With crypto, vastly more people will be able to make financial transactions, and what they can transact and how much is a paradigm shift from the past.
Autonomous Execution
Another innovation in cryptocurrency is smart contracts or autonomous contracts. Smart contracts are chunks of code that live and run on permissionless global servers. Each blockchain has its own ecosystem of servers and miners that get paid to manage, maintain, and secure the blockchain. Smart contracts live on a set of global servers and they can always be accessed and executed – and they're permanent.
A smart contract is a self-executing contract, with the terms of the agreement written into programmable lines of code. The code and the agreements exist across a decentralized blockchain network. Smart contracts can have conditions before a transaction occurs. It can send a partial transaction if and only if a certain event occurs, like an escrow service. All business contracts, like buying a house or transferring a title or creating a trust upon death or any standard business contract, can now be expressed in a smart contract. Smart contracts move all the logic from a business contract out of paper into the digital world. In this book, I will show how the idea of programmable money will alter what's possible in the future.
Autonomous contracts are a type of smart contract. They are smart contracts that are designed to be event-driven and do not require human intervention. They are to legal agreements what digital currency is to paper money. Smart contracts allow agreements between two parties, whether that's an organization, a person, a contract, or a wallet address, to be executed without permission and without needing human intervention. The legal system exists to govern conflict. As these crypto smart contract platforms evolve, they will bring more transparency, consistency, uniformity, and autonomy to maintaining, executing, and processing legal contracts while also reducing friction, cost, and time.
Autonomous contracts open a new world of what's possible. Now, a decentralized autonomous organization (DAO), which is a collection of members who agreed to be represented by rules encoded as a computer program that is transparent, controlled by owners, and not influenced by a central authority, can be set up with cryptocurrencies as resources. They can provide goals, constraints, and actions that the DAO can deliver on without the need for human intervention. What makes this possible is the set of autonomous contracts and the infrastructure, a blockchain, to run them. Resources can be purchased and transferred based on a set of rules and logic. No humans required. This digital market infrastructure makes it possible to deliver unprecedented agency, sovereignty, and autonomy.
The Age of Autonomy – Welcome to the Future
This new age will alter every aspect of how a business or organization will go about producing goods and services. Throughout the globe, each industry, community, and government will begin building autonomous agents to produce work and generate value, then transfer and store value. These actions will be created and enforced by software – agents and bots implementing smart contracts through cryptocurrency platform networks. Robotics will achieve any movement in the physical world. The IoT will provide the sensors and networks to measure and communicate data. Artificial intelligence will provide the judgment, expertise, and evaluation within a closed system. And decentralized cryptocurrency platforms will provide movement across organizations via the smart contracts to govern and enforce the transfer and storage of value from the work produced.
This will also restore balance between the individual and the group. Autonomous agents working in a decentralized world will allow people to invest and work on projects they're interested in and be paid or rewarded for their contribution. Earning tokens through work or investing in crypto assets you believe in allow the benefit to be restored back to the individual. No longer will there be a rent-seeking intermediary like Facebook, Uber, Google, or any other to extract value from the whole. Central organizations will no longer accumulate all the benefit. The power is restored to the individual because they will be able to vote within the “on-chain” governance systems without politics and without an intermediary circumventing the will of the collective individuals.
The Ideal Investment Profile
If I were to build a profile of one of the best types of investments, it would have the following characteristics. First, the investment would have a big defensible moat; that is, it must be hard to compete against and hard to replicate. You can think of the social network Facebook as having a defensible moat. If you remember Google+, which in many ways was far superior in technology and feature set, it could not break into the social network space. People had already uploaded their photos and built their friends networks on Facebook, which made it very hard for any competitor to come and disrupt Facebook. Second, the investment should generate asymmetric returns; that is, it should be able to perform nonlinearly and produce outsized returns relative to the risk taken. Third, it should be as close to a monopoly as legally possible. Fourth, it would be antifragile, that is, it would improve in complex, chaotic circumstances. And finally, the timing should be such that the investor is early, before a huge wave of adoption is about to transpire. Crypto assets, the right ones, provide all these characteristics.
Investing in Crypto Assets in the Age of Autonomy
What if you could have invested in the Internet protocols in the 1990s? I'm talking about the Internet protocols like HTTP, SMTP, FTP, TCP/IP, SSL, and so on. Every time a web page was requested via HTTP, your fractional ownership of the protocol would generate a small return in some form. Imagine how valuable those investments might be. That wasn't possible then, but it is possible in this next digital financial revolution. Certain crypto assets represent and approximate to fractional ownership of these public blockchains. Public blockchains are permissionless, as described earlier; you need no one's permission to access or use them. If one (or many) of these blockchains really takes off and becomes widely adopted, how valuable would that fractional ownership be? That's what we're talking about in this book – an innovative investor's ability to obtain fractional ownership of public financial infrastructure that will power the next long-wave economic cycle and an investment that has all the ideal characteristics we've described.
Putting It All Together
The Autonomous Revolution has begun. Artificial intelligence, the IoT, robotics, and cryptocurrency are converging to deliver a new long-wave economic cycle. Soon, there will be a global race to build autonomous operations. Businesses and organizations will be in ever-more cutthroat competition to build autonomous operations that allow them to take advantage of more real-time opportunity and build systems for continuous real-time improvement.
Understanding the long-wave economic cycle and what the key technological innovation is will make you a better investor. If you could have been early in the Age of Information investing in Internet infrastructure, you would have delivered superior returns as an investor. Understanding the technological revolution and where we're at in the cycle would have kept your investment “true north.” Likewise, this new long-wave cycle will be about autonomous operations. Autonomy is the ultimate competitive advantage by reducing operational cost and increasing potential leverageable opportunities. Investors and entrepreneurs who focus their strategy on building autonomous infrastructure will reap the rewards. Those that don't will be left behind.
Notes
1
.
https://usdebtclock.org
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2
. Perez, Carlota.
Technological Revolutions and Financial Capital: The Dynamics of Bubbles and Golden Ages
. Northampton, MA: Edward Elgar Publishing, 2002.
3
. “Worldwide Spending on Artificial Intelligence Systems Will Be Nearly $98 Billion in 2023, According to New IDC Spending Guide.” IDC, Framingham, MA, September 4, 2019.
https://www.idc.com/getdoc.jsp?containerId=prUS45481219
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4
.
https://em360tech.com/tech-news/tech-features/global-ai-business-value-reach3-9-trillion-2022-gartner
.
5
. Wikipedia. “Decentralization.” 2020.
https://en.wikipedia.org/wiki/Decentralization
.
6
. Taleb, Nassim Nicholas.
Antifragile: Things That Gain from Disorder
. New York: Random House, 2012.
PART ITHE HISTORY OF ECONOMIC CYCLES AND MONETARY POLICY
History doesn't repeat itself, but it often rhymes.
— Mark Twain
It's important to remember that the global financial market has been here before in some form. I would say almost everything in nature moves in cycles. There, too, are economic cycles. Global central banks over the past two decades have been trying to stop the economic cycle from progressing. The powers that be don't want a recession. They don't want deflation. They are doing everything in their power to change the shape of an economic cycle from a circle to a diagonal line that just continues to go straight up. But no matter what they do, they are fighting the natural order of things and they will not succeed. History has shown this time and time again. When the state tries to intervene in the economic cycle, it has always ended badly.
Understanding where you are in the economic cycle, as well as other cycles, along with understanding what monetary policy regime you're under will go a long way to improving your returns as an investor. One of the most important factors in developing an investment strategy, when in a credit-backed currency regime, is to figure out whether the economy is about to go through inflation or deflation. Part I of this book helps set the context for you the investor to be able to answer these questions for yourself. I intend to show you that the current system is fraught with risk and what you didn't see before now becomes apparent for all who pay attention.
1The Fed and You: A Brief History
I was reading in the paper today that Congress wants to replace the dollar bill with a coin. They've already done it. It's called a nickel.
— Jay Leno
It may feel like you have no relationship with any federal entity. But, if you're using money to transact business or if you're investing in the stock market for your retirement, you have a deep relationship with at least one – the Federal Reserve. It's ironic, too, because the Federal Reserve (the Fed) isn't a public body nor is it an official part of the government. The Fed is a private bank with the superpower of managing the country's money. The Fed has a dual mandate – to maintain full employment and to keep prices stable. However, it's this one power of managing the money supply through the setting of interest rates and the printing of money that allows it to have massive influence the world over.
How It Was versus How It Is
During the post–World War II period job security, pension security, and health security were relatively more stable than has been the trend since the 1990s. You could save money in an account that generated a decent return and you were able to maintain purchasing power in part because you had US currency that was also money. It was a store of value because it was backed by gold. If you wanted to get a higher return, you could buy government or municipal or corporate bonds and, for risk-adjusted returns, you were doing quite well. There wasn't any need to take big risks in the stock market or to start your own business if you wanted to lead a middle-class life.
Figure 1.1 Productivity versus Compensation
Source: Economic Policy Institute.
Until the early 1980s, the gap in income between blue-collar and white-collar workers was relatively stable. Moreover, the average multiple between the highest paid person at a company (like the CEO) and an average worker was between 10 and 20 times difference. There was more equality within the income system, which favored being an employee in the risk/reward calculus as productivity was shared across the organization. In 2016, the US CEO-to-worker pay ratio was 276 to 1. We see productivity continuing to increase (see Figure 1.1) while pay has remained stagnant. Therein lies the opportunity. Start a business and take advantage of productivity to increase your personal income return.
The tax structure was also completely different. Back in the 1950s and 1960s the highest tax bracket for earned income was 90%! Can you imagine that? This influenced lots of decisions. One was the risk-versus-reward ratio of trying to start a business. If you could only keep 10% of your earnings after taxes, would it be worth it to take outsized risk? Probably not.
In the twenty-first century, many companies don't expect to keep their employees for 10 or 20 years. Employers let workers go through reduction in forces (RIFs), layoffs, or a variety of other means. Due to the Employee Retirement Income Security Act (ERISA), a law enacted in the 1970s, the government made a huge change to retirement and how we go about saving and investing for retirement. Like so many laws, the law enacted did the exact opposite of what its named implied. It did not secure employee retirement income. It converted risk from the employer to the employee by moving from a defined-benefit plan to a defined-contribution plan. This was an enormous change.
Now we have defined-contribution plans like a 401(k) or a 403(b) where the risk and onus of a person's retirement lie squarely with the employee. That was not the case under a defined-benefit plan. Today's savings accounts do not produce any real return. You're lucky if you can get 0.1% interest rate per year. The US dollar is not maintaining its purchasing power like it did in the olden days. This happened in 1971 when Nixon took us off the gold standard. He turned our US dollar from a commodity currency to a credit currency. The US dollar is now good for being a medium of exchange but not good as money that is a store of value. Inflation eats away at purchasing power over time. While we're conditioned to think 2% inflation is healthy, inflation is actually a stealth tax that hits every American. It is disproportionately worse for the poor because they pay the same tax of inflation as the rich at the same rate. Moreover, they are more likely to use savings accounts versus investing if they have any wealth at all to save.
So how is it that our pillars of middle-class security were shaken by these megatrends in monetary policy, demographics, technology, and the global economy?
Monetary Policy – The History of the Federal Reserve
In search of an answer to this question, I start with a week-long discussion with my friend Dax about the Federal Reserve (the Fed). It was a few years ago when we both read an article about the Federal Reserve and it sparked a discussion about whether the Fed is harmful or helpful. Our conversation focused on an article written by a former Fed advisor, Danielle DiMartino Booth, “How the Fed Went from Lender of Last Resort to Destroyer of American Wealth.”1 Dax was skeptical of the article and wanted to discuss its positions. Dax (DH) started the conversation with this question:
DH:
One of the recurring complaints I hear from some fiscal conservatives is about the Federal Reserve and how evil it is. I'm trying to understand why and have been doing a little research. I have read a lot of people complain about the era of “cheap money” and how it is having a terrible effect on the real US economy despite all the traditional markers like the unemployment rate and the Dow looking really good. Is it justified?
JR: Consider this. If I offered you a $100 bill or $100 in gold, which would you take? What if I made the same offer to you in 1913 when the Federal Reserve (the Fed) was established? Which option would provide you with more purchasing power today? The answer is $100 worth of gold in today's currency. The US dollar has lost over 95% of its purchasing power in 100 years. One hundred dollars' worth of gold in 1913 would now be worth over $2,000 in today's currency.
The Fed decided to situate the entire economy on top of an abstraction of the monetary system. The abstraction, decoupling the money system from real assets, allows them immense and unchecked power. Most people are not aware of it. The Fed does not answer to Congress. They are not audited by our government. The Federal Reserve is a private corporation. By targeting 2% inflation, you're targeting a 2% “tax” on the entire economic system and it's a regressive tax. With that target, we are all agreeing to reduce our purchasing power by 2% per year. Every percentage point of inflation erodes everyone's purchasing power by design. And, this “tax” affects the poor most.
The Fed has helped the US dominate the world economy by using many levers and tools. We can import or export inflation as needed by many Fed maneuvers. It has been great for US citizens, but the rest of the world has caught on and they are tired of it. They are tired of the US dollar reigning supreme as the world reserve currency because it allows us to force our country's debt on the whole world. If they hold US dollars as reserve assets and the purchasing power of the US dollar diminishes by 2% per year, they are losing value. This does not include the other Fed tools used to create negative real return for bondholders. We can monetize our debt, a phrase that was typically reserved for developing nations.
We've been able to do this because of the Bretton Woods agreement after World War II. It tied the US dollar to gold and then all other major currencies, like the yen and the British pound, to the US dollar. This probably would have been fine if Nixon hadn't pulled us off the gold standard in 1971. It is this move that changed everything. Nixon was forced to do this, however, because the US government was spending way more than it had and there was a currency war going on with France. Charles de Gaulle et al. knew the US couldn't back every one of its dollars with gold, so he kept exchanging dollars for gold until Nixon was forced to act.
An economy is ultimately based on trust and we are at the end of that ride. The beginning of the end becomes a game of musical chairs in the form of a currency war. In fact, it's already begun. We are in the beginning of a currency war with China. You will see a lot more in the coming years. There are going to be winners and losers.
You will see more gold repatriation in the coming years, as Germany and other countries have already initiated. You've seen the list start to grow. Now countries that have begun repatriating their gold include Venezuela, the Netherlands, Belgium, Switzerland, Austria, India, Mexico, Bangladesh, Romania, and Hungary. The list is only increasing as trust continues to slowly erode.
You will see continued quantitative easing by the Fed because it cannot allow interest rates to spike as it becomes difficult to find buyers for US Treasury bonds. The US Treasury is buying more and more bonds. It's like the serpent who eats its tail. One of the main reasons these developments have not accelerated is that other major developed economies are still manipulating their own currency through quantitative easing (QE) and zero/negative interest rate policies (ZIRP/NIRP).
To answer your question, “cheap money” has us focused on financial leverage (in the form of borrowing) instead of productivity. Now, cheap money adds volatility and risk into the economic system and that's why you see greater and greater booms and busts. These are getting bigger and more severe. If our money was backed by something, like gold, there would be constraints within the system. We would not be able to print currency out of thin air. That would force the government to make better choices along the way. Capital would have to be more efficient because it would be competing against all the other ways it could be deployed more productively.
