We are happy to announce our newest column: Banking on Bitcoin. The column will explore the potential of Bitcoin and other digital currencies from the perspective of an anonymous Wall Street insider. Bob Fogg is an anonymous finance insider and our newest contributor at Coinprices. He works at a large buy-side firm, which provides him with an intimate view of the industry.
When bitcoin gets brought up in my office, the idea of it being part of our future societal infrastructure is dismissed with remarks such as, “sounds like a ponzi scheme to me.” Granted, comments like this are semi-facetious, but there is still a level of seriousness to them. There are plenty of good arguments for why individual digital currencies such as bitcoin, litecoin or ripple may not succeed, however most of these arguments focus on individual technical reasons (such as the increasing size of the blockchain or the diminishing payoff from mining) that are specific to each currency. These individual arguments have nothing to do with the concept of digital currencies being part of the future of society. In most cases, the comfortably privileged lives of first world citizens makes it difficult for them to embrace digital currencies; more specifically, it is one’s inability to step outside of his specific viewpoint and reflect in an abstract manner.
When surveying members of the finance industry, typical first world qualities are prevalent. The atmosphere around the world of finance has incentivized an unrealistically objective and one-track mindset. Abstraction is frowned upon as foolish and unproductive. Instead, everyone is simultaneously taught to take credit for anything positive (regardless if the credit is warranted) or to “cover your ass” (“CYA”) and blame someone/thing else if anything goes wrong. Empirical track records are valued over logical possibilities (for both better and worse). However, in order to fully understand the structure, potential, and scope in the infancy of digital currency technology, it is absolutely necessary for one to think in an a priori, abstract manner.
Thought experiments are a necessary way to understand and project the future of digital currencies. When my colleagues move past the ponzi accusations and serious conversation ensues, they have trouble understanding what digital currencies are because the technological structure does not directly replicate something they previously understood. They cannot wrap their minds around the fact that something that has a tradable price per unit is not a stock, or something that can be used to buy a coffee is not a currency, or that something that can’t be physically held has a commodity-like store of value. There is absolutely no precedent for digital currencies and most people struggle with accepting this concept. The multi-faceted makeup is why I prefer to refer to digital currencies as a technology. Without seeing the technology in action, it is easy to dismiss bitcoin because of an inability or unwillingness to consider the reality of something that had not previously existed.
Once one gets over the fact that digital currencies are something new, the next argument presented usually centers around the volatility of the price of bitcoin. To use the past and present price volatility of Bitcoin as an argument for why digital currencies will fail in the future suffers from a problem of evidence-based induction. The problem of induction can be outlined as such: Every apple I have seen has been red, therefore all apples are red. Or more appropriately, every currency I’ve used has been printed by a central bank, therefore all currencies must be printed by central banks. Both statements can easily be falsified in one instance of a green apple or non-central bank produced currency.
When a person makes assumptions from empirical data, an easy yet fatal mistake is to misappropriate an absence of evidence with evidence of absence. Just because you don’t see it doesn’t mean it’s not there. One makes this mistake by assuming: I have seen the price of bitcoin swing wildly; therefore the price of bitcoin will always swing wildly. Amusingly enough, however, the finance industry (or maybe the compliance industry) seems to understand this concept in the world of footnotes by printing, “past performance is not necessarily indicative of future results,” on every single page of any distributed materials. People’s knowledge is inherently domain dependent; conscious effort is necessary to transfer the known concept of why a footnote is necessary to projecting bitcoin’s unknown future place in society.
Understandably, it is hard to to break out of a comfort zone, and first world comfort zones are generally very well padded. It goes against human nature to disregard all past understanding and experiences. Adjusting your worldview doesn’t feel good, especially when your worldview has been attached to a comparatively privileged life. But, just because you love the taste of red apples doesn’t mean that green apples are bad for you.
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