I'm Pretty Confident That Bitcoin is Both a Pyramid Scheme and a Bubble

Let's talk about Bitcoin. The last few weeks have been abuzz with Bitcoin, as Bitcoin value has lept beyond $10,000 to about $17,000 as of today. I've come across myriad articles on the internet and heard conversations amongst folks asking questions about Bitcoin's machinations: What the hell is it? Is the Bitcoin market a bubble? Will it crash? Where did Bitcoin come from? Why does Bitcoin even exist?

That last question really intrigues me, and I think it has the most interesting answer that offers a view into the answers to the other questions above. Let's get the spoiler out of the way: I'm really damn out on Bitcoin. As a financial instrument and artifact, Bitcoin is a sign of some fucked up times. I  argue that Bitcoin is a pyramid scheme and bubble in one


To set up that argument, I'd like to take you on a crash course in economic history of the last 100 years in order to understand the rise of the global & American economic conditions that make Bitcoin possible.  In particular, I'm talking about:  the decline of American manufacturing, the rise of VC-backed internet startups and the development of tech infrastructure in the '90s, governments responding to economic crises with historically low interest rates, and the spike in post-2008 worker precarity and inequality.

I draw on the economic history that Nick Srnicek outlines in his excellent Platform Capitalism, which uses this timeline to explain the rise of platform-based tech juggernauts like Facebook, Google, Apple, and Amazon. I believe that this economic history is also applicable to the everyday consumer to explain the rise of Bitcoin as a bubble & pyramid scheme today. I recommend reading the book for yourself, as I'm going to gloss over some detail. Well, a lot of detail.

Disclaimer: I'm not a conspiracy theorist claiming that anyone's intentionally running a Bitcoin pyramid scheme. Rather, I'm suggesting that the growth of Bitcoin, whether it's intentional or not, is the product and reinforcer of pyramid scheme conditions. Bitcoin is unique in that it's also a bubble. And I'm not suggesting that this is am imminent implosion. I wouldn't be surprised by multiple boom/bust cycles of increasing severity over a period of years.

Anyways, let's get a move on.

The Decline of American Manufacturing

Fordism saw the rise of industry and manufacturing jobs, and the post-WW II economic boom ushered in the explosive growth of American production (putting our boys back to work, and whatnot). The economy was humming. Eventually, competition from Asian and European manufacturing cramped American manufacturing's style, which couldn't compete with Japanese and German firms' efficiency and prices: enter global economic crisis of the 1970s, stage left.

Manufacturing profitability was in the tanks, and investment money funneled elsewhere. This set the stage for the dot-com boom and bust of the 1990s, which led fairly directly to today's juggernaut companies and the rise of Bitcoin. The explosion of internet companies in the 1990s was fueled by venture capital, insane stock valuations, and an equity market in love with internet shit, as folks with money hunted for high return investment opportunities.Those opportunities sure as hell weren't in American manufacturing and blue chip stocks.

The Development of Tech Infrastructure in the '90s

Capital flooded in, and companies dumped billions of dollars into telecommunication infrastructure. We're talking about investments in fiber optic cable, software and network design, and database and server architecture to facilitate the rapid growth of internet-based companies whose lifeblood was the exchange of data. This was all well and dandy, until Asian economies endured the dot-com bust of the late '90s.

Low Interest Rates in Response to Economic Crises

Economic shit hit the economic fan.  The U.S. Federal Reserve moved swiftly to stave off the worst of this downturn's effects by enacting some ultra easy monetary policy to keep the economy growing, in spite of the still stagnant manufacturing sector. Manufacturing was left behind; all hail internet companies!

Things kept cruising until the crash hit in 2001, but whatever; interest rates remained low to keep money flowing and the economy growing despite a dearth of deficit spending. This is important: low interest rates meant low returns on financial investments, which rationally spurred investors to hunt for higher return investment opportunities. Enter a rough 'why' behind the subprime mortgage crisis.

So 2008 popped off and the mortgage crisis fucked everything up. The Federal Reserve reacted with a massive bailout plan: $700 billion was injected into banks that would otherwise fail, and central banks around the world dropped interest rates to nearly 0% (and some went to zero). The global economy prevented collapse, but national governments found themselves with hefty public debt bills. The U.S. maintained its rock bottom interest rates and enacted the policy of "quantitative easing," which is a fancy way of saying it created a ton of money that it used to purchase assets  (particularly bonds and mortgages) from banks.

This is important because the intent of quantitative easing is to lower the interest rates of bonds. The idea is to reduce short term interest rates, ease credit, increase the money supply, and raise the prices of stocks & spur spending. It worked: stock markets surged, and corporate yields rose. Cool, but let's keep our eye on the interest rate prize: continued low interest rates reduced the rate of return across a variety of financial assets.

This is juicy stuff: investors have had to hunt for increasingly risky investments in order to find higher yields. So we've got loose monetary policy and low ass interest rates. VC money has (naturally, I guess) poured into tech companies, as investors look for unicorns amongst a sea of high risk, unproven, and generally unprofitable tech companies. All made possible by that '90s telecom infrastructural bonanza, which came into existence as investable dollars looked for opportunities outside of manufacturing. Today's cloud based infrastructure wouldn't exist without it.

The Spike in Post-2008 Worker Precarity and Inequality

Governments went into austerity mode after the Great Recession. The U.S. was less hard hit by budget cuts than European nations, but political divisiveness prevented any chance of a stimulus package (much beyond what was used to bail out the banks)

Additionally, tech giants deliberately stashed billions of dollars in cash on hand in offshare tax havens: to the tune of about $460 billion last year. You've got a lack of stimulus, you've got tax evasion, and you've got ongoing bailing-water-over-the-side-of-the-ship economic policies fueling dark lived conditions for workers as a result of the 2008 crisis. On the whole, global and American workers alike have had a pretty shitty go of it since then. The rise of the "sharing economy" and "gig economy" is no fluke; an increasing number of American workers have had to turn to precarious and gray area work to source or supplement their incomes and make ends meet. Long-term unemployment is still higher than at any point pre-crisis, defaults on student loans have doubled even in the last four years, and the bottom 50% of Americans households account for just 1% of the nation's wealth in 2016. 

Not great, Bob!

Not great, Bob!

There's also that little ongoing Millennial student debt thing, and avocado toast. Americans are sneaky broke. Or not sneaky, if you're a Marxist.

And That Gets Us to Today.

Why does all of that matter? I'll tell you why. The conditions that Srnicek laid out above converge today in 2017, amidst the rabid interest we see in Bitcoin among a public who doesn't really know what the hell Bitcoin and cryptocurrencies even are. The economic and physical infrastructural groundwork was laid in the '90s for Bitcoin mining to exist, and today's worker precarity means that there's a wide swathe of individuals who appear ready and willing to say Fuck it

I think that this is the most important part - you have consumers taking part in high yield, high risk ventures like Bitcoin just like Venture Capitalists. But where VC invests because they have too much money, with consumers today you have people who don't have enough. Or perhaps just a bit too much.

I Think That Bitcoin is a Pyramid Scheme and a Bubble

I suppose that this could go a few ways, depending on what the data bears out regarding the demographic composition of Bitcoin owners. Are Bitcoin owners underpaid, overextended, and stretched too thin? Are they risking the extremely limited capital they have (or overextending themselves on credit) by buying into Bitcoin as a Hail Mary pass for economic gain?

Or is this a trickle down effect in behavior from VC to the petit bourgeoisie, benefiting  individuals who have enough capital to risk it on this high risk, high yield venture? The top 20% of the population did possess 87% of American wealth in 2016. 

[Sidebar: That'd be an interesting dataset to get your mitts on: the demographic composition of American consumer Bitcoin owners. Probably placed at a cap under $10,000 at initial investment, and then onioned off into layers down to $250-500 in Bitcoin, but that's just spitballing at this point. What do these consumer-level Bitcoin owners look like? If you're in at these seemingly low dollar amounts - $1,000, $500, $250, even $100 - is it more the last of your paycheck, or some extra cream off the top? That's a good signal of economic conditions and consumer exposure to Bitcoin that somebody should be measuring over time]

The two scenarios outlined above sound similar, but they're a matter of very different relative risk/reward ratios. Here's what I think: I think that Bitcoin is a pyramid scheme and bubble. It grows in monetary value because more people buy it, and buy into the social belief that it is valuable. It benefits by more people buying slices of Bitcoin (it grows in social value and influence - i.e., the belief that it exists legitimately and has monetary value). Investors are then compelled to tell others about their investment and the profits they've made, as a matter of altruism more than anything else - they don't want others to miss out on the economic gains; everyone could use some money!

That sounds a lot like the pyramid schemes popular today amongst the Facebook crowd. Health and fitness product lines, Herbalife, Amway, LuLaRoe, and other multi-level marketing corporations rely on you to recruit more people into the marketing scheme and sell shit to each other in order to exist. Bitcoin seems to be very similar, if not the same, but you're selling buy-in and belief in Bitcoin's value instead of Avon products.

I mean, when all existing investment knowledge tells you not to invest in something when the crowd moves towards it, Bitcoin grows in value because more people invest and put faith in its legitimacy. That is both a bubble and a pyramid scheme - it's doubly bundled, where Bitcoin's monetary value inflates in step with its social value; they prop each other up and are based on each other. It has monetary value because it matters, and it matters because it has monetary value.  Here are the Winklevoss twins claiming that Bitcon's value could increase 20 fold. This is true if more people buy Bitcoin and drive up Bitcon's value. It's a self-fulfilling prophecy, and it's what they have to say to get more people to buy and believe in Bitcoin (again, I'm not a conspiracy theorist thinking that they are knowingly in on a pyramid scheme). If that statement came from the CEO of a tech company hyping its IPO, it'd be seen as either reckless or foolish. Bitcoin is not a tech company, but it's a pseudocurrency that requires people believing that it has value and invest in it to continue to increase that value. 

Okay, you say, Well, those multi-level marketing companies like Herbalife haven't collapsed. True, but let's take a step back and look at the current state of affairs, the contemporary convergence of events and conditions (in the spirit of economic histories being useful to explain economic realities today). Bitcoin is the topic of the day, the seemingly too-good-to-be-true, unpredictable, in-uncharted-waters shiny economic toy amidst a period  defined by the rise of Donald Tump and the alt-right, "fake news", Flat Earthers, anti-vaxers, Nazis, mass shootings, Pizzagate, Clinton murder conspiracies, and those rampant multi-level marketing schemes. Does that not raise a contextual red flag for you? There are a lot of bewildered and/or poor people seeking explanations, answers, and solutions for better lived conditions. Perhaps cryptocurrency is one piece of a larger constellation of seemingly bizarre shit at this particular point in time and social life.

There's also a lot of IT, finance, and hardware services exposed to Bitcoin. Computer hardware manufacturers can hardly keep up with demand for graphic cards and chips used in mining, and they're orienting product development specifically to improve performance in bitcoin mining. Here's Walmart selling a mining-specific (in product name, at least) processing rig, oddly categorized under 'Wall Decor.' How very post-modern steampunk of them. 

I'd be curious to know about bank exposure to Bitcoin. Overstock.com is heavily invested in Bitcoin companies, and Morgan Stanley owns 11.4% of Overstock.com, to the tune of 2.87 million shares. When news of this broke on Monday, 12/11/2017, Overstock's share value surged by 23% in that day alone. Again, is this not eyebrow raising?

Maybe it's all just conjecture, and perhaps I'm organizing puzzle pieces in a way that simply fits a particular narrative. I guess we'll find out, even if it may take a long time to truly pan out. I don't know the answer to my question from earlier (do the people in Bitcoin come from high or low economic standing?), but I'm not sure that it matters. I fear that it's both, and may only get worse. Speculation here: I can see Bitcoin rising much more precipitously in value, with investors (who are increasingly late to the game, and are increasingly overstretching their economic means) flooding into adjacent cryptocurrencies and driving their values astronomically high as well. I have a feeling that banks and consumers alike will be very overexposed to cryptocurrencies by then, and a lot of people will get hurt. It'd be a real damn shame if top tech companies were overexposed too.

That's why I'm out on Bitcoin. and why I think it's a sign of awful times.

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