150 lines
12 KiB
Markdown
150 lines
12 KiB
Markdown
# Market Fundamentalism
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<iframe width="560" height="315" src="https://www.youtube.com/embed/K5JtPTyc0y0" title="YouTube video player" frameborder="0" allow="accelerometer; autoplay; clipboard-write; encrypted-media; gyroscope; picture-in-picture" allowfullscreen></iframe>
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In Episode 2 of the series, Rufus Pollock and Stephen Diehl discuss the market fundamentalism perspective on crypto assets and the perspective on crypto assets from the perspective of day traders to quantitative hedge funds.
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[https://youtu.be/K5JtPTyc0y0](https://youtu.be/K5JtPTyc0y0)
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## Topic
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[market-fundamentalism](../concepts/ideologies/market-fundamentalism.md)
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## Summary
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**Who holds this position?**
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- Day-trader in the pub, WallStreetBets demographic.
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- [https://www.ft.com/content/162839aa-0437-478b-a4d4-4a8d7ab71458](https://www.ft.com/content/162839aa-0437-478b-a4d4-4a8d7ab71458)
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- “I’ll either be rich, or wrong.” This is how Sam, a 29-year-old cryptocurrency enthusiast I interviewed on this week’s Money Clinic podcast, summarized his strategy for investing the last £2,000 of his savings in a hugely volatile and unregulated asset class. Claiming that he’s not a natural risk taker, Sam has never set foot inside a casino or put money on a horse. “To me, that seems stupid, like you’re throwing money away.” He has never considered investing in stocks and shares. Being self-employed, he’s never paid into a pension or thought about setting up a self-invested personal pension (Sipp). “No one’s ever given me that kind of information,” he says. So why is he prepared to risk his spare cash betting on crypto? Sam found out his younger brother had turned a £3,000 investment into £30,000 within four years — money he now intends to use as a property deposit. “I was very surprised and it made me feel a bit stupid . . . why aren’t I doing this?”
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- Low bets, with tiny but possible asymmetric returns. A regressive tax or distributed lottery.
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- Quants and Hedge funds
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- Jane Street / DE Shaw
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- Alameda Research / Jump Crypto / DRW Cumberland
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- Goldman Sachs / Credit Suisse
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- Mann Group - [https://www.ft.com/content/9275baf4-0422-43a1-b8c9-9317882ca874](https://www.ft.com/content/9275baf4-0422-43a1-b8c9-9317882ca874)
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- “If you look at cryptocurrencies as a whole, it is a pure trading instrument. There is no inherent worth in it whatsoever. It is a tulip bulb,” Ellis said, referring to the flower that became the focus of a 17th-century Dutch financial mania.
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- Minnows and the sharks …
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- The sharks *love* the minnows
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**Context: why is this an interesting group and position to examine?**
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- Likely represents a majority of interest and activity in crypto (and even DAOs)
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- We hear from the day-trader in the pub up the wall street trader
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- Generally not brought up explicitly so much in the crypto / web3 discussion (for obvious reasons: it is not as substantive or attractive position to espouse publicly)
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- The political imaginaries aren’t there - “I just want to make money”, “Greed is good”
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- Consequences and externalities be damned
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- Hyper-capitalist
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- “Life is nothing but a competition to be the criminal rather than the victim.”
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- However, may actually account for a good portion of the interest and even political/social support for this area
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- Legitimizing segment esp for regulators (hey even goldman sachs or JP Morgan are involved, this must be a legitimate area / industry)
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**Essense of the position**
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- Friedman Doctrine [https://en.wikipedia.org/wiki/Friedman_doctrine](https://en.wikipedia.org/wiki/Friedman_doctrine) applied to unregulated markets. Optimize for shareholder value.
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- Now we get to redefine shareholder to mean token holder, without any regulatory baggage from traditional markets.
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- Line must go up at any cost.
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- Markets have no moral quality.
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- They are a mechanism of like evolution that selects for fitness and success
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- If I’m allowed to trade products that are massively asymmetric and disadvantage retail traders then I can and I will => it will eliminate those inefficient players (it punishes unfitness and rewards fitness)
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- I’m just participating in price discovery of a new asset class.
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- Even if “I know it’s a greater fool asset [let's clarify this is proper econ terminology], if I have access to non-public information and more capital I can (and should) use it and exit before the other fools.”
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- Some people legitimately did make money trading on South Sea Bubble, Dotcom Bubble, Tulip Mania
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- These booms and busts are a natural part of market cycles
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- Crypto products are risk assets that have no fundamentals, but that’s not necessarily a problem because you can make money on trading them.
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- There other financial products (ETNs - exchange traded notes, volatility swaps) many of which are intrinsically negative-sum and high-risk as well, these are allowed in markets … so why shouldn’t crypto be.
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- [Credit Suisse defends controversial financial product at the center of the market turmoil](https://www.cnbc.com/2018/02/07/credit-suisse-defends-controversial-xiv-etn-amid-market-turmoil.html)
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- If the market allows manipulation (pump and dumps, insider trading, wash trading) this is public knowledge and it is reflected in the price formation of the assets. There is no non-public disclosure about the risks of these assets, everyone is going in with their eyes open that this is the wild west.
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- Investment Hypothesis 1: Tokens are an investment product that exists to secure compute cycles for people to run computation on a globally distributed state machine using the market to create game theoretic incentive to run other’s computations as a “public good”. That state machine has an operating cost and that creates synthetic demand for people who need to buy it, at any cost, to run computation on the chain.
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- Investment Hypothesis 2: We can treat crypto tokens as a synthetic hedge against the entire class of assets with fundamentals. They're a place to park money in times of loose monetary policy to chase yield when there's nothing else left to buy, because other funds circularly trade this thesis.
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- Institutional investors should be able to leverage their AUM to take high-risk positions just like they are in other private markets. If retail wants to participate with the “sharks” then it’s on them to understand the risks not on the people they’re trading against. The fiduciary mandate of hedge funds is to take positions on behalf of their LPs in beta uncorrelated positions.
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**Critique**
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- Everything that has been illegal for 80y is suddenly allowed. Exchanges are basically like bucket shops from the 1920s. Everything is allowed.
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- Wash-trading
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- Front-running
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- Painting the tape
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- Insider trading
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- Arbitrarily halting trading
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- Price manipulation and order book tampering
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- Pump and dumps
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- Canceling orders arbitrarily
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- Refusing cash withdrawals
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- Offering 125x leverage on options
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- Clearing house and in-house prop trading are in the same room
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- Exchanges have their own proprietary trading arm
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- Trading against their own clients
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- Equity markets (after many years) separate brokers, clearing house and market makers for very good reasons. Markets work best when we have abundant public information and minimize fraud and collusion in price formation.
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- We have no idea how much leverage is baked into the entire market, induced by products like unbaked stablecoins which can seemingly produce limitless amounts of unsecured debt products on demand.
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- [Tether minted most USDT to just 2 firms — Alameda and Cumberland](https://protos.com/tether-minted-usdt-stablecoin-crypto-two-alameda-cumberland/)
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- What does that lead to?
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- Inequality (money flows to the sharks)
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- Distrust and cynicism (and i’m on my own)
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- Both wider in society: i’m out for myself, other people are just out for themselves. Dishonesty and exploitation are a normal part of (capitalist) society
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- Subversive opportunism
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- Just because you can trade something doesn't mean it’s good for the world (opium trade, slave trade, asbestos)
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- Moral hazard - public is incentivized to take on disproportionate risk expecting a bailout
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- When it goes wrong the state and its institutions and leaders are blamed further corroding trust in our collective capabilities when we most need them (climate change etc)
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- In markets - assuming that markets esp financial markets have some value then undermining faith in them is problematic. Cf the 1920s/1930s which led to much of the market regulations we have today
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- You may think this is a good if you are anarchist-nihilist
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- A deformation of character: we become enslaved to the idea of getting rich quick (cf Salgado). Capitalist alienation
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- Terribly pathological form of capitalism that doesn't result in price formation on collective enterprise, goods or services. Funds are betting on financial fantasy castles in the sky detached from any day to day reality of human life.
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- What is the purpose of public markets then?
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- What type of asset is a crypto token? How do we value it? Is there a comparable asset?
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- Zero-coupon perpetual bond?
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- Currency you wouldn’t want to spend?
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- Equity with no cash flows or dividends?
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- [https://en.wikipedia.org/wiki/Blue_sky_law](https://en.wikipedia.org/wiki/Blue_sky_law)
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- Commodity with no use value?
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- Exchange traded pyramid schemes?
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- Derivative contract with no underlying?
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- Libertarian performance art split into 21 million pieces?
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- [https://en.wikipedia.org/wiki/Monte_Carlo_Bonds](https://en.wikipedia.org/wiki/Monte_Carlo_Bonds)
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- If we value it as a “block box” financial product (ala Nassim Taleb) we find it’s present value can only be zero.
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- [https://www.fooledbyrandomness.com/BTC-QF.pdf](https://www.fooledbyrandomness.com/BTC-QF.pdf)
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- A captive market for “fictitious commodities” (Marxist term) that is controlled by opaque unregulated market making and an economic cartel.
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- This is great if you’re inside the cartel. Not so great if you aren’t.
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- Wealth transfer from public to insiders is all nearly guaranteed by the information asymmetry.
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## Concepts Covered
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* [artificial-scarcity](../concepts/artificial-scarcity.md)
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* [assets](../concepts/assets.md)
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* [asymmetric-information](../concepts/asymmetric-information.md)
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* [bitcoin](../concepts/bitcoin.md)
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* [bond](../concepts/bond.md)
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* [bubble](../concepts/bubble.md)
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* [cartel](../concepts/cartel.md)
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* [commodity](../concepts/commodity.md)
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* [crypto-exchange](../concepts/crypto-exchange.md)
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* [deflationary](../concepts/deflationary.md)
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* [dogecoin](../concepts/dogecoin.md)
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* [expected-return](../concepts/expected-return.md)
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* [fundamental-value](../concepts/fundamental-value.md)
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* [gambling](../concepts/gambling.md)
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* [greater-fool-theory](../concepts/greater-fool-theory.md)
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* [income-cashflows](../concepts/income-cashflows.md)
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* [leverage](../concepts/leverage.md)
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* [market](../concepts/market.md)
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* [market-maker](../concepts/market-maker.md)
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* [market-manipulation](../concepts/market-manipulation.md)
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* [market-value](../concepts/market-value.md)
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* [moral-hazard](../concepts/moral-hazard.md)
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* [narrative-economics](../claims/narrative-economics.md)
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* [order-book](../concepts/order-book.md)
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* [present-value](../concepts/present-value.md)
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* [pump-and-dump](../concepts/pump-and-dump.md)
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* [regulatory-arbitrage](../concepts/regulatory-arbitrage.md)
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* [speculation](../concepts/speculation.md)
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* [stock](../concepts/stock.md)
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* [valuation-model](../claims/valuation-model.md)
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* [wash-trading](../concepts/wash-trading.md)
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* [zero-sum-game](../concepts/zero-sum-game.md)
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## References
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1. [@akerlof_market_1978]
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2. [@krugman_technobabble_2021]
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3. [@krugman_transaction_2018]
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4. [@griffin_is_2020] |