Formerly a developer and director of computer software engineering, Andrew Rodwin is a crypto assets and blockchain trainer in the Boston region.
Add Jim Chanos to the list of venerable professionals who think about cryptocurrencies to be a scam.
In a recent interview, Chanos says, among other issues, “Cryptocurrency is a security speculation game masquerading as a technological breakthrough.”
Jim Chanos is an professional on monetary fraud. He even teaches a course on it at Yale. But he is not an expert on cryptos.  Neither is Buffett. Their cluelessness about the subject shows. In positing an argument, they subscribe to Huey Long’s rhetoric dictum “weak point: holler louder.”
At a high level, the flaw in their positions is: “I know finance, crypto is finance, so I know crypto.” Finance is 1 of many elements of crypto. Treating crypto as “just another economic instrument” is naive. It’s not an equity. It’s not a commodity. Although Chanos is not the only a single guilty of misusing the term “cryptocurrency,” it really is still seriously misleading.
Not every single crypto is a currency. Ethereum arguably isn’t. Cardano is not. Hundreds far more are not. If he took the time to understand far more about crypto ahead of issuing sweeping statements, Chanos would use the generic term “crypto asset.”
Throughout the interview, Chanos makes a series of vague, misleading, unsupported contentions.
Chanos opens with a higher-level description of financial fraud patterns. As he is an professional on that, and I am not, I assume that what he writes on this topic is airtight. When he veers into crypto, I no longer give him the benefit of the doubt.
Right after covering fraud patterns, Chanos makes the following logical jump:
“So nowadays we’ve got bitcoin and ICOs [initial coin offerings], which went ballistic in 2017. I suspect going forward we’re going to see a lot more and more proof of questionable firms as this bull industry keeps advancing and aging. We’re now nine years into this bull market, identical as the ’90s, so I suspect that now factors are beginning to percolate. I think bitcoin and the ICOs are just a single manifestation of that.”
Chanos is saying that 1) bitcoin and 2) ICOs fit the pattern of questionable investments typified by the tail finish of a bull market place. He doesn’t provide any detail of why they match the pattern. They just do.
By the exact same logic, the world was flat due to the fact folks declared it was flat. And by this argument, any new venture in the tail finish of a bull market can be lumped into this category, shy of any analysis of why or why not it might match the pattern. It’s a round hole, so it should be a round peg. In reality, it’s a square peg, but no matter. Hammer it into place!
Furthermore, lumping in bitcoin with ICOs is sloppy at best. Bitcoin has been about because 2008. ICOs had been not. And 2008 was … not a bull industry, to say the least. The phrase “bitcoin and the ICOs” is an apple-and-orange fruit salad of meaninglessness.
And “the ICOs” is a hugely diverse set of projects. Chanos is right that some, perhaps most, are questionable, as a recent Wall Street Journal post demonstrated. That does not mean they all are.
When the net took off, “the dotcoms” incorporated Pets.com and Amazon.com. Lots of losers and some actually massive winners. If you wrote off the whole class, you failed to recognize what was happening. Distinctions matter. Precision matters.
Separating wheat and chaff is a organic development in a paradigm shift. As Chris Burniske and Jack Tatar observed in their book “Cryptoassets: The Innovative Investor’s Guide to Bitcoin and Beyond“:
“[C]ryptoassets are not going by means of bizarre growing pains special to them. As an alternative, they are experiencing the exact same evolutionary procedure that new asset classes over hundreds of years have had to go by way of as they matured.”
In writing about the interplay in between economic and capital markets, Venezuelan economist Carlota Perez posited a related dynamic.
Chanos then says, “At one particular blockchain gathering there were a set of rented Lamborghinis parked outside to entice the traders and day traders and retail investors: this, also, can be yours if you hop aboard the blockchain and bitcoin bonanza!”
Ah, the Lambo argument! (Thank you, Consensus 2018.) Yes. The rented Lambos were an epic fail. When a handful of spoiled traders choose to embarrass themselves flaunting symbols of conspicuous consumption, they are very easily lampooned. But it’s not relevant to whether cryptos are revolutionary or fraudulent, any much more than Nikola Tesla dying a pauper reflects on the value of his inventions.
The idiots with the Lambos are not bitcoin. They’re just idiots with Lambos.
Right after a short exposition on the partnership between government and fiat currency (which struck me as right on target), Chanos adds: “In the new bitcoin and crypto-craze, the whole notion is that we need to have to get away from fiat currencies by creating our own fiat currency for which there is no lender of last resort, no third party adjudicator.”
Effectively yes. And no. The entire notion with bitcoin (but not all cryptos) is to develop a currency which governments and banks can’t screw up. As in Weimar Germany. As in 2018 Venezuela.
As far as third-celebration adjudication goes, that can be utilized for great or ill. China, for instance, uses financial handle to punish dissidents. And appear at Venezuela. And Argentina. Chanos only cites the excellent, not the ill. That really weakens his point.
But here is exactly where Chanos really goes off the rails:
“For those who believe it’s a shop of value in the coming apocalypse, the concept is that you’re going to have to safeguard your crucial below a mountain with fingerprint and eye scan security whilst the hordes are outdoors your bunker attempting to get in to use it &ndash for what, I have no concept. Due to the fact for those who think that you require to own digital currency as a shop of worth in the worst-case situation, that’s specifically the case in which a digital currency will function the least. Food would work the best! …  And if you say, properly, fiat currency is going to bring the world down, which could, of course, happen, then I say the final factor I’d want to personal is bitcoin if the grid goes down.”
I’ve spent about two,000 hours reading up on cryptos and never ever once saw that apocalyptic use case. Chanos apparently has crypto asset enthusiasts conflated with survivalists.
He also singles out one of the three aspects of funds for which cryptocurrencies (a subset of crypto assets) are used: a store of value. They are also a signifies of exchange. For rhetorical purposes, the finish-occasions retailer-of-worth rant is catchier, but it is not grounded in reality. Gold is widely accepted as a shop of worth that is outdoors government handle, but its use is not de-legitimized if a tiny fringe hoards it in anticipation of Armageddon.
The other distinction Chanos conveniently ignores is that although an apocalypse may be a binary event, financial misery developed by failed governments is not. Witness, Venezuela. The folks of Venezuela are not sitting in bunkers hoarding private keys, but they are utilizing crypto assets to operate around real, in-your-face, financial woes brought on by an inept government that badly mismanaged its economy and its fiat currency. Cryptos make their lives far better, due to the fact the government cannot screw them up, other than by making a bogus national crypto that no a single wants.
In this environment, yes, cryptos are beneficial as each a retailer of value and a means of exchange. Even Jamie Dimon, not specifically a crypto fanboy, saw the worth of bitcoin in a disaster like Venezuela. Just due to the fact we in the United States have not skilled this sort of catastrophe does not make it significantly less real.
Subsequent, Chanos tends to make the common error of confusing pseudonymous with anonymous: “Bitcoin is still the location for people who are attempting to steer clear of taxation or other examinations of their transactions. That’s one factor where I think it possibly nonetheless has utility, but the governments have figured that out.”
Yes, the governments have figured it out, employing tools like Chainalysis, and no, it is not the ideal location for individuals who are trying to keep away from taxation. There are anonymous, not pseudonymous, cryptos for that, and the privacy they provide is not merely to keep away from taxation: there are a host of reasons why people would want to keep their transactions private.
Cynics assume the only attainable motivations for wanting transactional privacy are to steer clear of taxes, purchase drugs, or launder cash. Those are motives. They are not the only causes. Any individual who knows anything about bitcoin is not going to use it (in the U.S. anyway) to dodge taxes.
Next, Chanos regales us with a story about the hassle an investor went through when attempting to money out his bitcoin. This is yet another blunder by Chanos, of the crypto-ecosystem-is-not-crypto selection. The aforementioned hassle, no doubt, had to do with exchanges attempting to comply with government know-your-buyer and anti-money-laundering laws.
Utilizing that story to indict bitcoin is a enormous attain, and reflects a fundamental misunderstanding of the boundaries of cryptos relative to their surrounding ecosystems. If your Facebook iOS app repeatedly crashes, you do not replace your iPhone.
Right on the heels of that story, as if it justifies his conclusion, Chanos closes his crypto rant with “So this is simply a safety speculation game masquerading as a technological breakthrough in monetary policy.”
There is no detail or evaluation in the interview that justifies the conclusion Chanos reaches. And crypto assets are not a technological breakthrough in monetary policy. They are a technological breakthrough in developing safe and private markets, relying on mathematics rather than counterparty trust, with transparent, immutable records not subject to a single point of failure.
But to Chanos, an expert on economic fraud, simply because some investors treat bitcoin like a speculative asset, and we are late in a bull market, and some morons pick to flaunt their Lambos, then bitcoin need to be a fraud. That is not rigorous logic.
And this is the issue with the rants by these professionals.
Buffett, Chanos, Shiller … all brilliant folks, professionals in their domain. But crypto is not their domain. They have not taken the time to recognize it, but they weigh in as if they do.
Warren Buffett named bitcoin “rat poison squared.” Even though late to the celebration, Berkshire Hathaway is now a massive Apple investor. If an individual stood up at a Berkshire Hathaway meeting and complained that Apple stock was rat poison squared, how seriously would Buffett take that position?
No one knows how all of this will turn out, of course. It’s totally attainable that Chanos and Buffett, et. al. are appropriate about cryptos. They could turn out to be an utter failure.
But if so, Chanos got fortunate. He could have reached the identical conclusion by flipping a coin.
Chanos was lazy. He did no rigorous logical analysis, which requires an understanding of what you are analyzing, simply because while he understands fraud, he knows virtually absolutely nothing about cryptos.
He’s renowned, he has been right about numerous items, and he teaches at Yale, so in the eyes of journalists, he’s an professional. Possibly so on financial fraud.
But when it comes to cryptos, regardless of attempting to sound sensible, he’s willfully ignorant and lacking in humility.
Miniature man and bitcoin image by way of Shutterstock.
The leader in blockchain news, CoinDesk is a media outlet that strives for the highest journalistic standards and abides by a strict set of editorial policies. CoinDesk is an independent operating subsidiary of Digital Currency Group, which invests in cryptocurrencies and blockchain startups.
Published at Thu, 14 Jun 2018 09:00:31 +0000