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Bitcoin and the Incredible Power of Fiction

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This post originally appeared in Money Stuff.

Here’s Paul Singer’s Elliott Management with the bull case for bitcoin:

“FOMO (fear of missing out) has solidly trumped WTHIT (what the hell is this??),” Elliott told clients in a January 26 letter seen by Business Insider. “When the history is written, cryptocurrencies will likely be described as one of the most brilliant scams in history.”

The fund dedicated three pages to covering what it sees as issues with cryptocurrencies. The letter said:

“We all laugh at primitive tribes which used large stones (or pigs) as currency. Well, laugh as you will, but a stone or a healthy pig is something. Cryptocurrencies are nothing except the marketing power of inventors, financiers and others who love the idea of buying a black box (which is obviously empty) for the price of a Kia and dreaming that it will turn into a Mercedes. There have been times recently when this dream has materialized within hours. This is not just a bubble. It is not just a fraud. It is perhaps the outer limit, the ultimate expression, of the ability of humans to seize upon ether and hope to ride it to the stars.”

I mean look. If I told you “X is a scam,” you probably wouldn’t buy X, because you are a savvy Money Stuff reader and you don’t buy into scams. But maybe you should! What if I told you “X is a really good scam, and it’s just getting started”? The stereotypical pump-and-dump scheme starts with some fraudster hyping a stock, and ends with a bunch of retail investors holding the bag when that stock crashes. But in between there are usually savvy people who buy the stock on the hype, knowing that it’s a scam, but believing correctly that they’ll be able to sell it to someone else on the way up and get out before the crash. Sometimes the right trade is to short a scam, but often it’s to go along with the scam for a while.

But cryptocurrencies, in Elliott’s telling, are not just a scam, or a good scam. They are “one of the most brilliant scams in history.” (And they’re only like 10 years old! Get in early!) What else is on that list? I like Yuval Noah Harari’s argument, in “Sapiens,” that Homo sapiens’s major advantage as a species is our ability to generate collective fictions:

As far as we know, only Sapiens can talk about entire kinds of entities that they have never seen, touched, or smelled. Legends, myths, gods, and religions appeared for the first time with the Cognitive Revolution. Many animals and human species could previously say ‘Careful! A lion! Thanks to the Cognitive Revolution, Homo sapiens acquired the ability to say, ‘The lion is the guardian spirit of our tribe.’ This ability to speak about fictions is the most unique feature of Sapiens language. … You could never convince a monkey to give you a banana by promising him limitless bananas after death in monkey heaven.

Harari argues that fiction “has enabled us not merely to imagine things, but to do so collectively,” and thus given us “the unprecedented ability to cooperate flexibly in large numbers.” Harari’s list of powerful fictions includes religion, nation-states, human rights, money and the limited liability corporation. Laugh as you will, but the limited liability corporation is not a stone, or a healthy pig. It is just an example of the ability of humans to generate abstract concepts and use them to coordinate action, “to seize upon ether and hope to ride it to the stars.” Viewed in a certain light the corporation, or money, or nation-states, or religion, are some “of the most brilliant scams in history.” Being on that list augurs well for a scam’s longevity, and for its real value. If Bitcoin lasts for 10,000 years and facilitates a freer and more productive economy, then it really will be one of the most brilliant scams in history. And you’ll be glad you bought Bitcoins.

That doesn’t mean that Elliott is right! What do I know? Maybe cryptocurrency is not one of the most brilliant scams in history, but just a regular scam. This is not investing advice. My point is only that it is not a good objection, to an innovation in human culture, to say that it has no basis in physical reality. That’s the whole point of culture, the defining feature of humanity.

Meanwhile, the absolute gibberish that is Venezuela’s cryptocurrency, the petro, which will somehow be a commodity currency and a fiat currency and a cryptocurrency, is launching today. And: “Bitcoin is becoming a ‘nightmare’ for divorce lawyers,” not just for the obvious reason (it’s a way to hide assets) but also because its value is so volatile that it’s hard to fairly divide up assets. And: “Despite the growth in both retail and institutional interest in the cryptocurrencies, the number of firms producing institutional quality research of this new asset class has clearly lagged.” And “SEC Suspends Trading in Three Issuers Claiming Involvement in Cryptocurrency and Blockchain Technology.” And: “South Korean Cryptocurrency Regulator Found Dead at Home.” And: “The currency they were after was virtual, but the guns they carried were anything but.”

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This column does not necessarily reflect the opinion of the editorial board or Bloomberg LP and its owners.

To contact the author of this story:
Matt Levine at mlevine51@bloomberg.net

To contact the editor responsible for this story:
James Greiff at jgreiff@bloomberg.net

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