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Global Cryptopolitics: What You Need to Know Before You Buy More Bitcoin

Published 2018-01-20 by StartUp Daemon
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“Grown-ups never understand anything by themselves and it’s tiresome for children always and forever to be explaining things to them.” – The Little Prince

Update: I originally published this piece in December 2017. At the time, I had slept about five hours over three days of hectic work on a number of projects. I wanted to publish and move on to the next thing, but my instincts told me to pull back out of concern that I could have missed something important. Experience has taught me to make sure I have done a satisfactory job of challenging my intuitions. Coming back to it some weeks later, I have changed little other than adding a brief section on Turkey.

Why Care about Cryptopolitcs?

One reason I ignored cryptocoins for a long time is their exposure to cyber threats. They are much easier to trace and disrupt than what the packaging says, and subject to security vulnerabilities just as your email or bank account. For the benefit of the most delirious Coin Fiends out there, I take this opportunity to congratulate the Bulgarian government on seizing $3bn in bitcoin and other cryptocoins, equivalent to about a quarter of the country’s national debt.

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Please understand this, and understand it well. Cybercriminals aren’t anywhere near as dangerous to cryptocoins as governments are. A multipronged government crackdown has a much greater chance of disrupting cryptocoins than someone hacking an exchange from one's grandma's basement. A cyberattack can defile your hard drive; the government can defile your body too. That’s why the smart kids at school care about cryptopolitics at least as much as they do about cybersecurity.

Monetary systems are the main instrument of domestic control for political and economic establishments in the industrialized world. The global monetary system centered on the IMF and the petrodollar is the most important geopolitical battlefront. A child could tell you that no-one would cede one’s position at the top of the social pyramid without a fight.

Governments can disrupt crypto in two big ways:
1) Cyber ops (covertly).
2) Netblocking and legal bans (overtly and legally).

The recognized leaders in cyberwarfare are the US, Russia, China, Iran, Turkey and North Korea. With Japan having legalized cryptocoins, only China, the US and the EU could possibly have enough critical mass to affect cryptocoin transactions in a big way by banning or otherwise regulating them out of existence.

There seems to be a lot of uncertainty about government intervention. But that’s a muddled view of the situation. An international Iron Coalition has already cast its dark shadow over the future of bitcoin and distributed payments. I will explain the incentives and capabilities of each of the global players, so you can easily see what’s happening for yourself. The Iron Coalition is already at war.

EU: No Game

I put the EU first because it’s the most irrelevant of the top players. While it will remain the largest economy in the world even after Brexit, its member-states have their hands full with domestic issues. The migration crisis, decaying political establishments, Brexit, the continuing economic stagnation and the EU’s general disunity render it impotent despite its economic and technological advantages. Great is Europe’s moral decline.

The only EU power center which could mount meaningful resistance to crypto disruption is the Commission with its bureaucracy in Brussels. The Commission has broad regulatory powers not just within the Eurozone. However, the Eurocrats are already bogged down in a confrontation with Poland, Czechia, Slovakia and Hungary (the “Visegrad Four”) over immigration. The Four have the tacit support of the other eastern member-states.

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If Brussels tries something radical against cryptos, the Four would have an opportunity to undermine and embarrass the Commission publicly. They would also have the firm support of Bulgaria and Romania, whose vibrant tech sectors stand to benefit greatly from the growth of distributed computing. That’s more than enough to put the fear in the Eurocrats. For these reasons, government response in the EU will likely remain anemic and mostly contained to the national level. If anything, regulatory action will make crypto trading more transparent, secure and mainstream, fueling demand.

US: Big Game

The US, where many high-profile Coin Fiends reside, is the most likely to try and restrict cryptocoins. Domestically, crypto is a serious threat to the banking cartel that controls USD issuance and extracts rents from the largest financial markets in the world. The US financial industry accounts for 7-9% of GDP, depending on how you cut it. And its political power is disproportionately greater than any other lobbying group, comfortably surpassing that of the MIC.

Conversations from the last few days [early December 2017] suggest that the higher echelons on Wall Street don’t quite realize how suddenly things are going to happen, but many know that cryptocoins are just the opening salvo of total financial disintermediation and the dismantling of their business model. The reaction so far has been of “deer in the headlights”, but panic is setting in and a crackdown by the “regulators” requires no special authorization from Congress. Existing law gives the SEC, the banking cartel and the surveillance agencies broad powers to monitor, restrict and conduct “enforcement activities” on financial transactions. IRS subpoenas and intimidation are a mosquito bite in comparison. And do we have any takers for civil forfeiture?

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However, there is a powerful counterbalance that strongly favors the Coin Fiends. First, the financial industry has been reeling in the double deadlock of pseudo-compliance and collapsing spreads. The monetary tsunami loosed upon the markets has wrecked the hedge-fund industry and active management more generally. Even the money-center banks are looking for an out from the hell they created, as their margins are squeezed ever tighter.

Meanwhile, the financial sector is technologically backward relative to both the SV set and the type of people who frequent reddit, GitHub and hacking forums. Of course, there also are plenty of capable finance types and innovators who would welcome the opportunity to compete in the crypto world (and get rid of their incompetent bosses). All this makes it very difficult for Wall Street no-coiners to present a united front against the Coin Fiends. An important component here is Wall Street greed, which is headed for a blow-off top, unbridled by fear (because the banks own the pols). Many are already breaking off the herd to start selling crypto products: futures, ETFs, hedge funds etc.

Second, social media have pushed aside the corporate mainstream serving the financial sector. We will never know whether Twitter elected Trump president or Trump got the presidency by winning Twitter. In either case, everyone with a brain realizes that the balance of power has shifted away from traditional media outlets. And Coin Fiends on social media will fight tooth-and-nail to counter a swamp-creature attack on their bitcoin. History shows that the blue checkmarks stand no chance. And many of them will be joining the Coin Fiends for any such fight.

Third, D. J. Trump is president of the United States. He probably wants to be seen as unpredictable, but we have a lot to work with on the crypto issue. The president almost certainly has no hard view on bitcoin and no specific reason to try and disrupt it. (I wouldn’t be surprised one bit if the Trumps own coin.) He has also shown that he can take feedback on non-security issues, and adjust course. And did you hear that the Pentagon is being audited for the first time in history?

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The real wildcard is national security. American power and the entire framework of US national security is built around the petrodollar. If you are wondering why the US have had military bases in the Middle East for decades (since long before Islamic terrorism became a thing), stop wondering. Petroleum is still the most valuable commodity on the planet, and it happens to be concentrated in a particular area. The US protect many regimes there and the regimes maintain the dollar monopoly. Most oil contracts are settled in USD, which effectively requires everyone to hold large amounts of dollar-denominated assets.

The petrodollar is the single most important reason why the US government has been able to rack up mountains of debt without losing its superpower status. All USD holders pay an annual currency-debasement tax (often called inflation). The growth of distributed payment systems is a major threat to the existing monetary order, so swamp creatures and the surveillance agencies may fight to defend it. On the other hand, cryptocoins offer new avenues for mass surveillance of financial transactions.

China's Long Game

Cryptopolitics is critically affected by the US-China rivalry. The PRC's key battleground with the US is not the Western Pacific, let alone Korea. China wants to dominate the South China Sea not just out of national pride and for a few cubic kilometers of natural gas buried at the bottom. The South China Sea is the route to the Persian Gulf and China’s main oil supplier – Saudi Arabia. Hegemony in the area is essential to China’s national security and ability to compete with the US in the Middle East. The Central Committee understands the importance of the petrodollar for America’s ability to project power around the world.

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The Chinese – the world’s top oil importer – are launching a yuan-denominated delivery contract, which Russia and Iran can use to avoid sanctions imposed by the US. China has already made a deal with Russia to make the petroyuan convertible into gold, making it attractive for gold-hogging Putin, alongside more pipelines and deliveries from Russia. The growth of cryptocoins only adds fuel to the fire of petrodollars, with the added benefit of not antagonizing the US. Crypto is a backdoor for China to euthanize the petrodollar without a direct confrontation with the US on the monetary front. Anything that undermines USD dominance in international settlements is good for China.

But you have heard about the massive Chinese crackdown on cryptocurrencies, haven’t you? China struck bitcoin so hard that the epicenter of the crypto bubble shifted from the mainland to Japan. Well, that crackdown never really happened. The Chinese blocked the frothing wave of fraudulent domestic ICOs, which was threatening to engulf mom-and-pop speculators’ savings and cause social unrest. You can still purchase bitcoin in China and use it to skirt the country’s capital controls. If anything, the “crackdown” has made transactions safer and more reliable, although pricier. Eliminating competition from alt-coins only puts more upside optionality on bitcoin’s price.

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Russia's Game

If Russia launched a gold-backed ruble tomorrow, do you think most Russians would prefer to keep their savings in some digital hocus-pocus?

President Putin has probably quadrupled Russia’s gold reserves in the past decade and shows no sign of stopping that effort. While he has jawboned cryptocoin exchanges and urged the central bank to clamp down, the Russian Ministry of Finance designated bitcoin miners in the country as the Russian equivalent of sole proprietors and they remain unregulated until a cryptocoin bill is passed in July 2018. The bill takes a "soft touch" approach to crypto regulation: digital assets will be classified as "other property", ICOs are designated as crowdfunding, and their size and participation by unqualified investors limited. The Russian government itself has been planning to issue its own cryptoruble since 2015, which is now slated to launch in 2019. Putin would surely like to see the petrodollar dethroned and replaced by a rebalanced SDR or another global payments system. Overall, Russia's approach has been the friendliest of all the major players, with a clear legal framework set to come into force, and its own national cryptocurrency.

Russia’s agenda is very different from China’s though. Putin seems inclined to work with the US in fixing the mess they created in the Middle East, containing China and defeating Islamic jihadists. These are common problems and common interests. Closer relations with Washington would solve a lot of (potential) problems for Putin and act as a buffer against US attempts to topple him. He is likely desperate for a partner who does not act like a petulant child or threaten to take over Russia economically and politically.

Ironically, one big way to speed up a rapprochement is to undermine US power indirectly. Undercutting the petrodollar works for Russia even better than it does for China. The greater the flight from dollar-denominated assets to cryptocoins, the weaker the global monetary system which has enabled bungling US interventionism to continue way past its expiration date. Both China and Russia have a lot more to gain from undermining this system than they have to lose from viable crypto.

Iran's Troll Game

After the most jihadist enclaves in Syria were defeated, the US shifted attention back to their rivalry with Iran. Its hands freed from the fighting in Syria, Iran and its special forces can focus on dealing with the American threat. The Iranians issued an ultimatum for American forces to withdraw from Syria and will be more than content to join the currency war against the petrodollar. This effort is already at the point of trolling the Americans with an extended promo for bitcoin on Iranian state TV. Since cryptocoins are a great way to evade US sanctions, it is highly unlikely that Iran's hacker corps launch attacks against cryptocoin platforms.

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North Korea's Game

North Korea’s cost-benefit analysis is even easier than that of the Iranians. Because of Pyongyang’s total control over telecommunications, Little Rocket Man has nothing to lose from the growth of crypto. And he would surely support anything that could undermine US influence in East Asia and globally. It's highly unlikely that DPRK cybercorps will attack crypto channels, except to steal coin for the regime, which some have speculated has already happened in large-scale heists from exchanges. The DPRK might even try to use crypto to skirt sanctions. So Dotcom is not the only Kim on side with cryptocoins.

The Turkey Problem

Among the major cyberops players, Turkey is the only one which could attempt to restrict cryptocoins more severely, but global government-sanctioned attacks seem unlikely given legalization and regulation in Japan, Russia and the US. However, the country itself may impose more draconian restrictions internally. The religious authority in Turkey came out with a cryptocoin fatwa in December 2017, but bitcoin exchanges in the country continue to work and some businesses even accept $BTC as payment. The ruling Islamist party may be inclined to restrict cryptocoins in order to prevent their use for funding its domestic opponents such as secularists and Kurdish insurgents, but a ban on cryptocoins appears far-fetched. The working group assembled by the authorities probably will recommend something akin to the framework implemented in Russia.

Summary

The Iron Coalition of China, Russia, Iran and North Korea against the petrodollar is a fact. While the coalition members have conflicting interests on other geopolitical matters, they align together perfectly on cryptocoins. Even better, they have to do exactly nothing to get the geopolitical benefits of bitcoin and its ilk. With Russia and Iran having effectively endorsed cryptocoins, North Korea with no incentive to do otherwise, and China allowing free exchange of cryptocoins on its OTC markets, to say that global cryptopolitics is bullish for bitcoin would be an understatement.

Chancing, Value and Death on Social Networks

Published 2018-01-19 by StartUp Daemon
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Metcalfe’s “law” has become the normie basis for valuing social networks. Robert Metcalfe conjectured that the cost of a network is proportional to the number of nodes N, but the network’s value is proportional to the squared number of nodes N^2. In human, he figured that networks tend to exhibit massive economies of scale when connections to other users matter more than connections to a mainframe (example: telephone v. electric grid).

A common way to translate this intuition into a metric is to take some function of the possible unique directed connections N^2-2 as the “natural” upper limit to a network’s value. There also are many empirical ways to measure network connectivity all the way down to digraphs, cluster maps and node valences. The core use case for each of these valuation metrics typically is derivative of the insight behind Metcalf’s law. They rely on counting nodal links (even if those are repeat connections over time).

Such metrics and ideas made Google and Facebook possible – and dominant. They also put them to sleep in the bed of Procrustes.

Waking Up to Value

Counting nodes, clicks and likes is easy. Grasping value is difficult.

Remember print and TV? Using Metcalfe’s law to measure the value of a social network is the digital equivalent of print media’s charging advertisers on the basis of circulation and placement. Social networks which substitute nodal metrics (including “engagements”) for value will earn old media’s fate. Yet, that is the path of least resistance, and some are taking it.

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Social monetizes network value through “eyeballs” (clicks, impressions, purchases etc.) and “meta” (what the company knows about users’ habits and identities). Eyeballs are easier to monetize. They are an incremental improvement on old media (for example, Google’s charging for clicks on ads rather than for displays or impressions). Meta are more valuable overall. They are a game-changer which increases eyeballs’ revenue stream, helps build moats and commits users.

While eyeballs’ value is linear and one-off, meta’s value is exponential and recursive. An extra unit of time spent on the network increases the value of each previous unit of time. Or: an extra data point increases the value of each previous data point (for that user). (The more I know about a user, the more I can charge for that user, including by direct-selling user meta to a third party. The more I know about a user, the more the user commits eyeballs and meta, the more I know about the user…) You can easily see a future where social has virtually complete control on access to a user because of meta. Even a mainframe network can get that kind of control.

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Social’s uses of eyeballs and meta have a common foundation: they are relatively easy to “measure” or “capture”. Use value isn’t.

Captain Obvious: “Users can find a wide variety of value on social.”

A powerful frame for use value is “proactive versus reactive”. Proactive value is derived from “hunting” for the new, reactive value is derived from “herding” around tried-and-true concepts and dopamine paths. Herding makes the network measurable and monetizable, hunting makes it… alive.

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Yes, abstract categories are just mental constructs, and yes, this distinction is not easy to handle. Which is exactly why I will mostly show it rather than explain it.

Reactive drives the dopamine-fueled metrics behind eyeballs’ monetary value and the quarterly report to shareholders: likes, clicks, impressions. Reactive use(r)s are behind the “network” value metrics of the network à la Metcalfe’s law because they are the most numerous. On the reactive channel, dopamine is fed from the social network into the user.

Proactive is hard to measure even at the meta level because it is by definition out of the ordinary or established. Proactive helps build the network and increase user value by adding new types of content or new use cases for the network. For example, trolling is a “new type of content” that wasn’t feasible at scale before the advent of social. Trolling is an especially good example because it is perceived as inherently discomforting, but can be very entertaining and – heavens forbid! – someone might even end up learning something.

From the network’s perspective, proactive “hunters” are testers and innovators and reactive “herders” are test subjects and consumers of those innovations. The testing bit of this social structure can feel onerous and untoward. Most of us don’t like being in the position of guinea pigs. However, innovation suffers when testing is restricted. (Yes, this is another quote from Captain Obvious.) There are a couple of much less obvious and much more frightful consequences though.

First, restrictions (such as “fact-checking”, language policing and other forms of censorship) may have predictable and linear effects on testing behaviors, just as they do with regard to reactive uses. These effects are easily captured by eyeballs metrics. However, the effects on testing outcomes are nonlinear because disruptive innovation does not occur around the mean. Those effects become apparent to decision-makers only when it is too late.

The second hidden consequence is about how hunter types tackle changes in the environment. And this one is the real kicker. When they face restrictions, hunters will not just test less, but test less outlandishly because what use is it if you get banned or muted? This narrows the possible set of chance innovations much further than the measurable censorship filter. But hunters, by definition, see chancing as the driving value in social. So when you restrict chancing, the hunters don’t just stop testing – they move their testing elsewhere, to your competitor’s platform. When they leave, content innovation dies. Without content innovation, the herd leaves for greener pastures. Gradually, and then suddenly.

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Herding & Hunting

The herd is structured on the dimension of agreement/disagreement – about goals, definitions, protocols, knowledge, technologies, values. The hunt runs on the tension of obsolescence/innovation – in skills, practices, vantage points, heuristics, applications, intuitions.

The ultimate rite of passage into a herding community is about suffering through humiliation and other forms of credentialing (example: American college fraternities). The community values members’ taking on absolute loss just because the group demands it as a signal. Suffering ensures that the member has a strong identity (which makes conformity valuable), the humiliation/credentialing rite brands the group identity onto the personal identity. The herd’s survive & prosper strategy is “cohesion against adversity”. Never underestimate how powerful this strategy is.

The ultimate rite of passage into a hunting relationship is survival through pain and other potent reality filters. The relationship encourages members’ testing their own and each other’s limits and personal skills (example: US Navy Seals). Pain is a required byproduct of that testing (if you haven’t gone through a pain episode, you don’t have hunting cred), survival is reality’s passing grade for having developed the right abilities and combined them with the right relationships. The hunt’s survive & prosper strategy is “skill-testing against adversity”. Never underestimate how painful this strategy is.

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Herding is collectively fractal (herders are herded). Hunting is personally fractal (a hunter is hunted).

Herding is monotonic and convex in the number of sheep and the number of herders. Hunting is nonmonotonic, concave and discontinuous in the number of hunters and the availability of game.

Herding is about risk management. Hunting is about opportunity generation.

Herders apply the same standards and expectations to everyone – friends and strangers. Egalitarianism fosters cohesion, and the strength of the herd is in sticking together (herders coordinate not to overgraze pastures, to fend off predators etc.). Hunters are more exacting with family, friends, business partners and anyone deemed “high-potential” – higher standards apply to them than to the plebs. Filtering through repeated testing selects for hunting partners who are not just adapted to the current situation, but adaptable to changes in it.

Herders build master skills to avoid pain and loss. Hunters’ master skills are incomplete without ample pain and loss.

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A herder pens the same sheep tonight that were penned last night. The herder actively hopes to pen the same sheep. A hunter has to find new prey every time. The hunter must find new prey before starving to death or dying of hypothermia.

If the grass fails, the herder will have to lose some sheep and slaughter more than usual to get by. Herders’ effective response is to do more of the same. If the bison and geese don’t show, the hunter will go into the deep woods and into the deep waters for fish and elk. Hunters will even go to herding for a while if nothing else works.

Where the herder grazes cattle today, the hunter killed the predators some years ago.

Herders slaughter cattle. Hunters slay game.

The herder shaman sees the future on peyote. The hunter shaman seeds the future with blood.

Before jumping the shark on the herder/hunter frame, understand that the distinction is about emphasis, not exclusivity. We all do both. The insight is about the driving rationale for our decisions and strategies. One heuristic for distinguishing your frame for any one decision is to be clear about what you are seeking out. By making that decision, are you seeking out safety or are you seeking out opportunity? Is your question itself framed as safety-seeking or opportunity-seeking? How likely are you to get what you seek in the conditions you face?

The Social Network Lifecycle

To understand the lifecycle of social online, you need look no further than the typical lifecycle of an individual’s offline social network, and how the herding/hunting dynamic evolves over time.

When we are young children, we build our first networks around received structures – family, kindergarten, school. Even early signups for Facebook and Twitter happened through pre-existing networks like club memberships and referrals. At the childhood stage, although networking is rigidly structured, we can still enjoy a lot of chancing simply because it is a numbers game – when you change schools, neighborhoods etc. Everything is new, even the old and established.

The early days of online social are just like a child’s brain. You have a live exciting product and you have no flipping clue what to do with it. Every new stimulus (use case) is an explosion of excitement (new features, new content, new users). Stress levels are high and endorphin payoffs are stratospheric. You know that building the product is more important than monetizing, so you suckle off your angels (parents) until you figure things out. If you have good angels, they will help you structure your learning (make better use of experience) without restricting your chancing opportunities. The hunting mindset dominates amongst your founders, supporters and early users simply because the herd does not like this sort of environment and you are too small to get noticed by the collective.

Adolescence to early adulthood is when the chancing numbers game best combines with an appetite for deliberate risk-taking (if not opportunity-seeking). This is peak chancing. High school, college and early jobs is where the hunter mindset peaks in a typical human life. We shift “career” paths and skill sets in rapid succession, meet new people as we take different courses, build new business relationships as we look for new jobs/skills and business partners. The number and diversity of people we seek out and meet – some of whom we add to a sustained network – reaches a crescendo.

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On online social, a lot of the crescendo comes from herders flocking in after hunters have cleared the space and populated it with content. Numbers are positive for chancing, so hunters and hunting behaviors continue to proliferate. The herds make hunters’ testing strategies much easier to run in both time and scale. Use and content bloom. Use value (the value of your network to users) peaks. This golden age fizzles quickly and stealthily.

Into middle age, two big changes have happened. One is mechanical. People settle into the nine-to-five, get married, have children, mortgages, car loans, etc. All these life choices impose severe time costs and restrict one’s risk-taking budget. They cull social networks and make them more rigid. Because all of this appears to be progress – and a lot of people do have happy family lives, happy homes and happy lifelong friendships – there is little mental resistance to our herding instinct. The mind drifts with the herd until game is forgotten. The hunter mindset withers in the slow boil of the Indian summer, not in a volcanic eruption.

The other change is related to how brains work. With experience, our brains weed out more and more of the environment as insignificant noise. Our “significance” filters become much more constrictive, and often get clogged with generic noise (for example, not getting the latest phone that you can’t use to make phone calls). This narrows the range of chancing events we register and the depth of their penetration to our deliberative apparatus. We are blinded to ever more of the chancings we encounter and we make ever poorer use of the ones we do notice.

To naïve minds caged in semantic systems, curation features such as “fact-checking”, news filtering, ICYMIs, push notifications users can’t disable and speech policing appear to be progress because they may boost eyeballs in the short run and limit legal liability. Such antics can stimulate dopamine-fueled herding. Such effect is transient because of adaptation. The permanent consequence is that they kill the dynamics that make the network great in the first place. Curation is the death of chancing. Without game, hunters pack up for the remotest wilderness. Hungry hunters skulk about fringe forums designing decentralized systems to escape Big Social. Much of this is invisible to the eye until it is far too late.

The late days of the curated middle age feel like a permanently high plateau, often until long after the sharp descent has started. The fences that herders build can create a false sense of security that lasts long after the fences have become pointless. Big Social like Facebook and Google seems invincible behind its moats of network effects, logistics, regulation and content death squads. While we fence ourselves in, the world moves along on its path. Friends begin to die, marry or divorce away; children move out; spouses drift apart; longtime partners go out of business; entire industries and skillsets are rendered obsolete. Hunting skills having atrophied, old age is mired in phantasies of the good old days.

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Chancing, My Love

The more you get into the hunter mindset, the more you tend to value chancing. Hunting breeds an addictive self-reinforcing cycle jacked on adrenaline/cortisol bursts and an endorphin high. Pavlovian conditioning pulls the intoxicating effects forward to the chancing stage. The opportunity itself becomes the reward. You become more willing to invest time and energy into opportunity generation. The more and better opportunities you get, the more selective you become about the types of opportunities you are willing to entertain. To you, the value of chancing – opportunities that dropped into your lap without much effort – goes stratospheric. The shift from risk management to opportunity seeking turns chancing from a bonus sideshow into the main event.

Chancing is about things and ideas that you never knew existed nor would ever know how to look for. The typical chancing event is a failure of your network filter. The correlation is especially strong in adulthood, and applies even in the rare cases when the social filter is intended to encourage chancing. The vast proportion of chancing value comes from encountering things which run contrary to your existing understanding; which are emotionally “negative”; which are offensive, ugly, useless, harmful or otherwise toxic; or which are simply wrong. Products and entire business models are invented because a future founder was fired up by need or annoyance. Chancing is about noticing the blank space, and the dumpster fire hiding behind it.

Your chancing opportunity set grows exponentially with the number of nodes on the social network even and especially if that makes the network noisier. When you value time, noise is error, and error is where chancing is. Curation/moderation/categorization or any other form of penning or censorship restricts your chancing opportunity set. This is true by definition because the core of chancing value is about finding new/unpredictable relations where your existing filter didn’t expect them to be.

Death

When Facebook implements another of its clickbait gimmicks it does introduce noise into the system, but that noise is uniform because it draws on averaging algos and pedestrian data mining. White noise is like rain pounding on the foliage while you're attempting to track a doe. And even if water-snake videos are something new and annoying which spurs you to activity and creativity, that effect fades quickly. Your filter adapts to it even if it doesn’t brush it off outright. What had chancing potential yesterday is old news today.

This is why Facebook is dead to me as a user.

Coin Fiends, Tulip Jokers, and How Kondratiev Invented Bitcoin and Extreme Tail Risk

Published 2017-12-09 by StartUp Daemon
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Some hundred years ago, Russian political economist Nikolay Kondratiev proposed a technological supercycle of 45-60 years, roughly corresponding to a human lifetime. Kondratiev’s core idea is that technology born in the ashes of the prior period drives the growth and investment in the subsequent supercycle. Each “Kondratiev wave” ends with a long “winter” crisis, distinguished by contracting investment and collapsing birthrates.

Kondratiev waves are easily observable in modern history. The steam-power wave ended with the depressions of the 1870s, which lasted through the mid-1890s. The electricity wave ended with the depression of the 1930s, which lasted through the 1940s. The semiconductor wave likely ended with the housing bust of the late 2000s.

This is winter.

To combat the deflation and unemployment of the winter depression, global central banks have unleashed unprecedented credit creation and desperate asset purchases to keep prices rising. The inevitable result has been record-low, even negative interest rates. Risk premia across asset classes have been crushed. Volatility has been pancaked.

The low interest rates have clobbered active management and the hedge-fund industry in particular. This is especially true in fixed income, where compressed yields mean you need massive defaults to make money. Some of the best fund managers (who, as a rule, don’t just look to sell-sell-sell and skin their clients) have returned money or completely shut down services for the public.

As a result, the industry has downsized and bifurcated. On one hand are the large “passive” funds, which can only survive by strong asset-allocation (esp. macro) research. On the other are boutique firms, which can only survive by offering a unique product. Whales of the investment world such as public pension funds can’t enter those narrows because they would wreck the investment strategy with sheer size. This is the barbell writ large. And everywhere survival is tough because ever more freshly created money chases ever more elusive yields. Volatility is record low while tail risk scales ever greater highs.

The technology sector is probably where the thick blanket of free money over Kondratiev’s winter has fallen heaviest. From bloated VC portfolios to unicorn IPOs we can only guess what the scale of the damage is and how much of the tech “industry” will be swept into oblivion by the end of the supercycle. Bitcoin was born into this strange winter of excess.

Let’s get something out of the way right now: anyone who purports to know why bitcoin has exploded in price is an idiot.

However, we do know that much of the recent price action has been driven by retail investors (famous in the industry as “the dumb money”). Some may be buying $BTC in hopes of solving their financial problems, much like they’d buy a lottery ticket. Others may be trying to escape central banks’ redistribution of wealth to the superrich. Yet others have undertaken to promote and own “digital currency” in hopes that it will “democratize” money and financial transactions, taking governments out of the picture.

Hodl is the operative word here. You may hodl bitcoin as a matter of faith, speculation or diversification, but you may not hold it as an investment, let alone one that can be valued.

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One reason I have been ignoring $BTC is that it's technologically dead on arrival. It simply does not do most of the things its evangelists claim it does (more on that in another post). A big part of this is about the transparency and complexity of market structure. More recently, it has also surfaced that a relatively small group of people own about 40% of all bitcoin. This makes the bitcoin “market” ripe for manipulation worthy of the robber barons of the Gilded Age.

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A huge misconceptions about bitcoin is that its supply is limited. That belief is founded on the fact that most Coin Fiends have no practical knowledge of how the financial industry works. No domain of human activity can be considered immune to financialization. Not even traditional “money” like gold and silver, which many gold bugs considered the ultimate antidote to financialization. With the tacit support of regulators, the financial industry wrecked the gold market by issuing virtually unlimited (another pun) amounts of paper gold.

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Tomorrow, the CBOE launches the first bitcoin futures. And a number of other traditional exchanges have plans to make bitcoin futures available soon. Yes, traders will be subject to draconian margin requirements. But this won’t prevent any large institution from flooding the market with supply. Some less naïve Coin Fiends even expect full-out war with the financial industry from day one. This is possible but unlikely. Bitcoin volume is too small to be a real threat yet, especially to an industry which has government regulators in its back pocket.

A lot of the early demand for BTC futures will likely be from 17-year-old hedge-fund managers downsized from the fixed-income desk of a global major. Experienced mom-and-pop traders, who sometimes get sharky, will probably be some of the early adopters as well. Large institutions starved for yield will wade in over time, but probably much more cautiously and not at scale. The biggest impact, at least initially, will likely be from removing the barriers to speculative demand imposed by the high transaction costs and latency of crypto exchanges. Retail buyers too unsophisticated to set up a coindesk account (the dumbest money) will flood in as more $BTC products become available.

These are some reasons why I am willing to be a contrarian and see imminent financialization as short-run bullish for bitcoin. With the CME, CBOE and other traditionals in the game, one has a much higher expectation of getting paid at the end of the day. Transaction bandwidth will increase by orders of magnitude, which can reduce the frequency of extreme price swings. Tail risk will also increase – exponentially – because of the concave scalability of financial markets in size and complexity. Extreme moves will get rarer and extremer. Which is short-term bullish and long-term devastating.

I have to pause here and address the elephant in the room – ludicrous analogies between bitcoin and Tulip Mania. Understand that historical volatility is a very poor measure of real and present danger. Yes, bitcoin is probably just a massive bubble (like most other assets right now). Yes, it could lose all of its value in the matter of minutes. And yes, I won’t be surprised one bit (pun intended) if it reaches $100,000 by yearend 2017. This is what tail risk is all about. Speaking of which, I would like to remind any Tulip Jokers that their retirement money (if they have any) is likely held in a 401k with inane levels of tail risk.

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Tail risk has spread like wildfire because of the financial repression imposed by central banks over the past decade. It’s metastasized everywhere and it’s very hard to measure. So before you go on giggling about Coin Fiends, it may be a good idea to consider how your job, house and the rest of your risk portfolio are hedged. Willingly or not, today we’re all dwellers of Taleb’s Extremistan. We ought to plan accordingly.

The thing about tail risk is that it lurks where you are least likely to see it. Remember that a lot of the run-up in financial markets is always driven by a few momentum names such as the infamous FANG stocks. Each asset class has a limited capacity. Large-cap momos are where the smart money piles in first and the dumb money leaves last. Because momentum is the only remaining game in town for institutions and retail alike, when volatility makes a comeback it will strike first and hit hardest household names like Apple and Amazon.

The impact on such B2C companies will be unexpectedly large because of the immediate effects of market volatility on consumer spending. The more complex a system and the more repressed its volatility, the greater the fragility. The greater the fragility, the higher the vega. Traditionally volatile illiquids such as private equity and venture capital surely have benefited from financial repression. But they may have less vega exposure than expected because their access to free money is not as large and their valuations are less dependent on near-term sales.

Kondratiev’s winter has a purging effect on the economy and cannot be repressed indefinitely. Hedge wisely if you don’t want to be one of the purged.

BANNED: Jack’s Unsent Message to the Community

Published 2017-11-17 by StartUp Daemon
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(Note: Jack didn't write, sign or send this message.)

Dear All,

Thank you for making our social platform the most exciting and diverse public forum on the planet.

Because of you, we have survived and thrived for nearly twelve years now. The road has not been without bumps, but here we are, thanks to your support. Our first profitable quarter is a good time to reflect on some of the things we have done well and where we have gone wrong. Most importantly, I’d like to talk about our learning and how we will do much better from now on.

We need to be a profitable company – one able to sustain itself. But we also want to be a force for good in the world, as we have from Day 1. In striving to create a better and more sustainable product for you, we may have sometimes lost sight of this mission.

We have been listening closely to your feedback and remain committed to making our platform more transparent and more useful, so let’s get something out of the way right now. We are biased, and we know it. We are biased because we are human. We are biased and we cannot credibly police speech or “fake news” beyond obvious threats and harassment. We cannot and will not act as a Ministry of Truth. But we can take steps to get our bias out of the way, and today I want to talk about some of the things we are going to do about it.

We are committed to being the go-to place for free exchange of ideas, promoting peace, open dialog and innovation. We are already taking action on these commitments and in the coming days we will roll out a number of improvements, many of them suggested by the community.

First, we will upgrade our safety review process. We understand that trust is a two-way street, so we are going to make some significant changes, which aim to achieve less bias and more transparency in our decision making. We hope the result will be improved safety and less unnecessary disruption to our users and advertisers.

  1. While posts and accounts can be flagged by both algorithms and users, no user account will be suspended without review by at least three different reviewers in three different locations around the world. We will only deviate from this rule and allow automatic suspension if we have too many reports of abuse, violence or self-harm to handle at any given time. Such reports requiring immediate action will obviously have priority in the (human) review process, followed by accounts which have been auto-suspended.
  2. Our reviewers will not be able to see any identifying information about the flagged post or the reports against it. If a post contains possible threats of violence or other information requiring urgent action, reviewers will immediately escalate to a supervisor who can unmask the metadata and notify law enforcement. Any decision to suspend, however, will still be done through our double-blind process.
  3. Reviewers will see a randomized mix of flagged and non-flagged items to help us calibrate the process, improve training and further reduce bias.

We do reserve the right to deviate from this process at our own discretion, but rest assured that it will be applied broadly. Obviously, we remain obliged to suspend accounts if local law-enforcement legally requires it.

We will notify the community as soon as these changes take effect. We are working around the clock to make them happen as soon as possible. Expect – and demand – more improvements to our review process as we learn from it.

Second, we are going to change our practice of verifying accounts. Within a few days, we will provisionally replace the current verification symbol with a small “identity verified” label. We will work to design the most judgement-free, yet convenient way to mark accounts whose identity has been verified. We will engage the community in this process, as well as expert psychologists and anthropologists with proven success in designing human-centric interfaces.

Please keep in mind that “verified” does not mean we approve or agree with the speaker – just that you can be confident about the identity of the speaker. The rest is up to you, the community.

Third, as part of our commitment to transparency, in the coming days we will start rolling out a new feature called TestDrive. Users and advertisers will be able to access TestDrive through their Settings panel and opt into trying out new tools and features before their full rollout. We may also provide ad credits to select users and advertisers as an incentive to participate in TestDrive. We will also use ad credits to reward those of you who have provided useful feedback on existing and upcoming features.

Here is a partial list of what will soon become available in TestDrive:

  • Threaded posts.
  • A dislike button.
  • Ability to designate posts as public or private.
  • Private-post subscriptions.
  • One click opt-out from all timeline curation (including ICYMI).
  • A system for instant (one-click) micro-payments to your favorite posters.
  • Custom character counters for composing messages.
  • An option to reduce all message previews in the timeline to three lines or less.
  • A much more powerful and accessible advanced search (with reverse image search).
  • Ability to delete or hide notifications from the Notifications list.
  • Notification and direct-message search on both desktop and mobile.
  • “Live Now” and “Subscription” tabs for current video broadcasts.

And more.

Please understand that to be able to provide you with an ever-better community platform we have to be far ahead of the pack. Thus, it may not always be feasible to TestDrive new features long before full release or while in early development. In making those decisions, we will err on the side of transparency and listening to our community.

With gratitude,

Jack