Add Jim Chanos to the list of venerable experts who consider cryptocurrencies to be a scam.
Warren Buffett, Gates , Robert Shiller and lots of others have made their opinion clear. consistent with 99bitcoins.com, bitcoin has been declared dead 300 times.
In a recent interview, Chanos says, among other things, “Cryptocurrency may be a security speculation game masquerading as a technological breakthrough.”
Jim Chanos is an expert on financial fraud. He even teaches a course thereon at Yale. But he's not an expert on cryptos. Neither is Buffett. Their cluelessness about the subject shows. In positing an argument, they subscribe 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 do know crypto.” Finance is one among many aspects of crypto. Treating crypto as “just another financial instrument” is naive. It’s not an equity. It’s not a commodity. While Chanos isn't the sole one guilty of misusing the term “cryptocurrency,” it’s still seriously misleading.
Not every crypto may be a currency. Ethereum arguably isn’t. Cardano isn’t. Hundreds more aren’t. If he took the time to find out more about crypto before 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 high-level description of monetary fraud patterns. As he's an expert thereon , and I’m not, I assume that what he writes on this subject is airtight. Once he veers into crypto, I not give him the advantage of the doubt.
After covering fraud patterns, Chanos makes the subsequent logical jump:
“So today we’ve got bitcoin and ICOs [initial coin offerings], which went ballistic in 2017. i think going forward we’re getting to see more and more evidence of questionable companies as this market keeps advancing and aging. We’re now nine years into this market , same because the ’90s, so i think that now things are beginning to percolate. i feel bitcoin and therefore the ICOs are only one manifestation of that.”
Chanos is saying that 1) bitcoin and 2) ICOs fit the pattern of questionable investments typified by the tail end of a market . He doesn’t provide any detail of why they fit the pattern. they only do.
By an equivalent logic, the planet was flat because people declared it had been flat. And by this argument, any new venture within the tail end of a market are often lumped into this category, shy of any analysis of why or why not it'd fit the pattern. It’s a round hole, so it must be a round peg. actually , it’s a square peg, but regardless of . Hammer it into place!
Apples and oranges
Additionally, lumping in bitcoin with ICOs is sloppy at the best . Bitcoin has been around since 2008. ICOs weren't . And 2008 was … not a market , to mention the smallest amount . The phrase “bitcoin and therefore the ICOs” is an apple-and-orange salad of meaninglessness.
And “the ICOs” may be a hugely diverse set of projects. Chanos is correct that some, perhaps most, are questionable, as a recent Wall Street Journal article demonstrated. That doesn’t mean all of them are.
When the web took off, “the dotcoms” included Pets.com and Amazon.com. many losers and a few really big winners. If you wrote off the whole class, you did not understand what was happening. Distinctions matter. Precision matters.
Separating wheat and chaff may be a natural development during 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 aren't browsing bizarre growing pains unique to them. Instead, they're experiencing an equivalent evolutionary process that new asset classes over many years have had to travel through as they matured.”
In writing about the interplay between financial and capital markets, Venezuelan economist Carlota Perez posited an identical dynamic.
Chanos then says, “At one blockchain gathering there have been a group of rented Lamborghinis parked outside to entice the traders and day traders and retail investors: this, too, are often 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 couple of spoiled traders prefer to embarrass themselves flaunting symbols of consumption , they’re easily lampooned. But it’s not relevant as to if cryptos are innovative or fraudulent, any longer than Tesla dying a pauper reflects on the worth of his inventions.
The idiots with the Lambos aren't bitcoin. They’re just idiots with Lambos.
After a quick exposition on the connection between government and fiat currency (which struck me as right target), Chanos adds: “In the new bitcoin and crypto-craze, the entire idea is that we'd like to urge faraway from fiat currencies by creating our own fiat currency that there's no lender of pis aller , no third party adjudicator.”
Well yes. And no. the entire idea with bitcoin (but not all cryptos) is to make a currency which governments and banks cannot screw up. As in Weimar Germany. As in 2018 Venezuela.
As far as third-party adjudication goes, which will be used permanently or ill. China, as an example , uses financial control to punish dissidents. and appearance at Venezuela. And Argentina. Chanos only cites the great , not the ill. that basically weakens his point.
But here is where Chanos really pops the rails:
“For those that believe it’s a store useful within the coming apocalypse, the thought is that you’re getting to need to safeguard your key under a mountain with fingerprint and eye scan security while the hordes are outside your bunker trying to urge in to use it – for what, I even have no idea. Because for those that believe that you simply got to own digital currency as a store useful within the worst-case scenario, that’s precisely the case during which a digital currency will work the smallest amount . Food would work the best! … And if you say, well, fiat currency goes to bring the planet down, which could, of course, happen, then I say the last item I’d want to have is bitcoin if the grid goes down.”
I’ve spent about 2,000 hours reading abreast of cryptos and never once saw that apocalyptic use case. Chanos apparently has crypto asset enthusiasts conflated with survivalists.
He also singles out one among the three aspects of cash that cryptocurrencies (a subset of crypto assets) are used: a store useful . they're also a way of exchange. For rhetorical purposes, the end-times store-of-value rant is catchier, but it’s not grounded actually . Gold is widely accepted as a store useful that's outside government control, but its use isn't de-legitimized if a small fringe hoards it in anticipation of Armageddon.
The other distinction Chanos conveniently ignores is that while an apocalypse could also be a binary event, economic misery produced by failed governments isn't . Witness, Venezuela. The people of Venezuela aren't sitting in bunkers hoarding private keys, but they're using crypto assets to figure around real, in-your-face, economic woes brought on by a clumsy government that badly mismanaged its economy and its fiat currency. Cryptos make their lives better, because the govt cannot screw them up, aside from by making a bogus national crypto that nobody wants.
In this environment, yes, cryptos are valuable as both a store useful and a way of exchange. Even Jamie Dimon, not exactly a crypto fanboy, saw the worth of bitcoin during a disaster like Venezuela. simply because we within the us haven't experienced this type of catastrophe doesn’t make it less real.
Next, Chanos makes the common error of confusing pseudonymous with anonymous: “Bitcoin remains the world for people that try to avoid taxation or other examinations of their transactions. That’s one thing where i feel it probably still has utility, but the governments have figured that out.”
Yes, the governments have figured it out, using tools like Chainalysis, and no, it's not the perfect area for people that try to avoid taxation. There are anonymous, not pseudonymous, cryptos for that, and therefore the privacy they supply isn't merely to avoid taxation: there are a number of reasons why people would want to stay their transactions private.
Cynics assume the sole possible motivations for wanting transactional privacy are to avoid taxes, buy drugs, or launder money. Those are reasons. They’re not the sole reasons. Anyone who knows anything about bitcoin isn't getting to use it (in the U.S. anyway) to dodge taxes.
Next, Chanos regales us with a story about the effort an investor went through when trying to live his bitcoin. this is often yet one more blunder by Chanos, of the crypto-ecosystem-is-not-crypto variety. The aforementioned hassle, no doubt, had to try to to with exchanges trying to suits government know-your-customer and anti-money-laundering laws.
Using that story to indict bitcoin may be a huge reach, and reflects a fundamental misunderstanding of the boundaries of cryptos relative to their surrounding ecosystems. If your Facebook iOS app repeatedly crashes, you don’t 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 often simply a security speculation game masquerading as a technological breakthrough in monetary policy.”
There is no detail or analysis within the interview that justifies the conclusion Chanos reaches. And crypto assets aren't a technological breakthrough in monetary policy. they're a technological breakthrough in building secure and personal markets, counting on mathematics instead of counterparty trust, with transparent, immutable records not subject to one point of failure.
But to Chanos, an expert on financial fraud, because some investors treat bitcoin sort of a speculative asset, and that we are late during a market , and a few morons prefer to flaunt their Lambos, then bitcoin must be a fraud. that's not rigorous logic.
And this is often the matter with the rants by these experts.
Buffett, Chanos, Shiller … all brilliant people, experts in their domain. But crypto isn't their domain. They haven’t taken the time to know it, but they weigh in as if they are doing .
Warren Buffett called bitcoin “rat poison squared.” Though late to the party, Berkshire Hathaway is now an enormous Apple investor. If someone 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 may end up , of course. It’s entirely possible that Chanos and Buffett, et. al. are right about cryptos. they'll end up to be an utter failure.
But if so, Chanos got lucky. He could have reached an equivalent conclusion by flipping a coin.
Chanos was lazy. He did no rigorous logical analysis, which needs an understanding of what you're analyzing, because while he understands fraud, he knows almost nothing about cryptos.
He’s famous, he has been right about many things, and he teaches at Yale, so within the eyes of journalists, he’s an expert. Maybe so on financial fraud.
But when it involves cryptos, despite trying to sound smart, he’s willfully ignorant and lacking in humility.