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Roula Khalaf, Editor of the FT, selects her favourite stories in this weekly newsletter.
The writer is an FT contributing editor
I’m a financial historian, and one of the hazards of my profession is that sometimes people ask me what I do. I tell them and watch them back away slowly, hoping to bump into someone, anyone else. I have noticed a charming exception, however: crypto dads. They have tasteful haircuts and good manners. They read history and think about money and want to talk to me.
I am genuinely happy to talk to crypto dads. I have dad energy myself. I think financial history is fascinating and they do, too. I keep hitting a wall in these conversations, though, and it comes down to epistemology — how we know what we know, and how we know that it’s true.
To them, an idea can be tested with a bet. If it pays off, they were right. I don’t think that way and I don’t make bets. This means we always end up with an exchange where I say something like, “over the long run you can’t force people to use a deflationary currency; they either come up with a local workaround or they revolt”.
Then they will say something like, “but bitcoin keeps climbing in value over the long run, so you’re missing something markets see, because it’s working”. Under their epistemology, this is correct. So that’s where we wrap it up, two well-meaning dads talking past each other.
I suspect they’re working from an idea by the financier and philosopher Nassim Nicholas Taleb, who has argued that opinions without financial risk are meaningless — you can’t truly believe something unless you have skin in the game. I do not wish to do battle with Taleb in any arena and am frankly terrified to have invoked his name here.
Skin in the game is a useful construct. I often wish, for example, that the people who design car seats for children were forced to install and uninstall their own car seats every day, in the rain, while sleep deprived, forever. But I have found it difficult to apply skin in the game to crypto.
First, it’s possible that something can be a very good trade but very bad for a lot of people. Second, risk aversion is hard to structure as a winning trade. Third, I am metaphorically short crypto but I am not literally short crypto, because you can wait a long time and lose your house before a short pays off.
There are lots of different kinds of crypto — bitcoin is not a stablecoin and neither of them is a memecoin. The crypto sector is so broad that I have come to think of all of it together as “finance as if the past never happened”.
Bitcoin, for example, rests on the assumption that the best monetary standards have been hard and limited, and that a slow, constant deflation is ideal. This has been true, historically, for two groups of people: merchants who trade in low-trust environments across oceans, and creditors who benefit when old loans pay off in more valuable amounts. For everyone else, hard deflationary standards have been a grinding punishment.
Administrators in the early modern Italian city states understood the challenge of deflation. They kept hard gold florins and ducats for long-distance trade but managed their own lightly inflationary silver standards for petty trade at home. American colonists in the 18th century developed their own paper bills of credit — some a little inflationary, some a lot — as a compromise between the hard sterling standard in trade with London and the need to handle small purchases at home. Barry Eichengreen, the best-known historian of the modern gold standard, has argued that it was democracy that ended the regime. In other words: most people hated the gold standard.
Today, bitcoin does seem to work as a currency for some international transactions, particularly in developing countries. That could be good, but it’s hard to tell which transactions are wealth preservation, which ones are tax evasion and which ones are capital flight. If I were a betting man I’d buy bitcoin, and you’re welcome to it. But I’m not a betting man, I’m an American academic who worries about deflation, and all I want is for bitcoin to stay the hell away from the dollar. That’s an argument, but I don’t think it’s a trade.
Similarly, I think the new US stablecoin law returns us to a 19th-century regulatory regime for dollars, where there’s no national deposit insurance and states race to the bottom with their regulations to attract business. How do I trade on my sense of doom? I can tell you about 1837, when paper bank notes failed, or 1932, when bank deposits failed. But I can’t tell you what year it is now. Is it 1825, in an expanding economy with room to run, or is it 1836?
Early in my career I worked for Swiss Re, a reinsurer full of smart people who structured trades under the assumption that disasters happened but it was impossible to know when. I have always liked that approach, but the recent history of reinsurance has been of chancers from Wall Street, stepping in for premiums without an appreciation for disaster.
I don’t have the capital to wait out a long-term bet like a reinsurer and then laugh at the chancers. I’m just a dad, worried, standing in front of another dad, who is not.