By Arthur Hayes
Imagine yourself part of an early human civilization thousands of years ago, before gold was accepted as money. Your tribe or village uses shells as money. The shells are sufficiently rare that they hold value. They are easily recognized and hard to counterfeit. However, it is hard to store the shells in vast quantities, and over time the shells degrade. Carrying a large quantity of shells is also quite difficult.
One day you discover specks of a yellow metal. Its luster entices you to pick up a few small rocks and study them. Unlike many rocks and metals you deal with, gold is quite soft. Over a hot fire, you melt some of these gold nuggets together and find it is quite easy to manipulate.
The next day you tried to remember where you discovered the gold. After a few weeks of searching you were able to locate another few nuggets. Another thought: perhaps gold is rare.
As a civic-minded person, you arranged a meeting with the village leaders and showed them your new discovery. You asked if possibly gold could replace shells as the accepted currency. They laughed at you. Everyone knows that shells are money, and shells will always be money. You feel deflated but not defeated.
Gold has its day
Yet… A woman at the meeting thought the gold would make good jewelry. It was very shiny and looked much better than the drab trinkets townspeople wore. She asked where you acquired the gold and if you could help her fashion it into jewelry.
You were able to find a location where if you dug, gold appeared fairly regularly. It was a hit. Everyone loved their new gold jewelry, it looked much better, and it held its form over time.
Given the primitive tools at your disposal, it was very difficult to find large quantities of gold. Gold jewelry began to function as a proto currency. Those who wore it were richer, as it required more and more shells each year to purchase a standard bauble.
At this point the village elders began to worry. Their wealth was stored in the form of shells. In the face of a better monetary instrument, gold, the shells depreciated in value every year. Even worse, because gold is rare, inert, impossible to counterfeit, and easy to transport, some merchants preferred to sell goods for gold rather than shells.
Because the village had a limited history handling gold, its value fluctuated wildly. No one know what it should be valued at vis-à-vis real goods and services so it still wasn’t as stable a monetary instrument as shells. The elders used this fear and price volatility to warn the plebes not to consider a pretty rock as money.
The network effect takes hold
Over time the village could not ignore that gold and metallic monetary instruments in general were technologically superior. Slowly then quickly, the value of gold versus real goods and services skyrocketed. Those who had “invested” in gold saw their purchasing power increase dramatically as the society switched to a better monetary technology.
From barter, to commodity money (gold), to paper fiat money, to cryptographic money, each one of these transitions features extreme volatility then stability. The new form of money at one point will not be able to purchase any goods and services – then all of a sudden its purchasing power increases quickly. The network effect ensures that the transition between different forms of money is chaotic.
A monetary instrument can only have value if a sufficient percentage of the network will price their goods and services in said instrument. However, no one wants to be first. The chicken and egg problem of monetary adoption ensures that once the switch happens, it occurs quickly.
Becoming the CEO of a multinational bank is incredibly difficult. CEOs like Jamie Dimon dedicated their lives to the organizations they lead and have made many personal sacrifices. Being human, it must irk them that youngins have become worth $100 million-plus in a few years due to a belief in a different way of transferring value.
It also annoys senior financiers that these same pups’ stated goal is to dismantle the monetary system that they sacrificed everything to lead. The smart financiers are busy buying crypto assets while they publicly deride them. The dumb ones double down on the supremacy of central bank printed fiat-denominated assets.
Arthur Hayes is CEO of BitMEX, a crytpo-currency exchange in Hong Kong.