Digital Watch

Not sure what happened there, but somehow we’re ploughing through the new year, I’m on the cusp of returning to work and I’ve not managed to post anything on this blog for far too long. Which I know is inexcusable.

However, by way of an excuse…I’m embroiled in a house-hunt. If you’ve been there, you’ll know that a window into my brain would bore you to tears. You may also have experience of trying to bid for houses, and might recognise the warping effect it has on your sense of value and….self? I’ve spent the last 24 hours wondering if a plot of land in SE London is the ideal place for a climate-hedging smallholding.

It was in this addled state that I read an opinion piece in the NY Times which likened investment in cryptocurrency to magical thinking, whereby value can be created without the actual grind of making lives better. It’s certainly not a unique view, you might be familiar with Warren Buffett referring to crypto, admittedly a few years ago, as ‘rat poison‘. (I would love to know what he thinks about dilapidated Victorian houses on clay soils).

Then you look at data like this. It’s survey data, based on a sample. You might find it less surprising than I do. 45% of those surveyed in Nigeria claimed to have used or owned cryptocurrency in 2022. 44% in Thailand, 40% in Turkey. Closer to home, 11% of UK respondents apparently own or use cryptocurrency. And for most countries, users have increased over the last three years. Peru is an interesting exception, perhaps because it’s penetration in 2018 (15%, down to 14% in 2022) was already so high.

There are many ways this can be interpreted. And returning to the critics, is broad usage and interest at a point in time a guarantee of enduring value? Of course not. Even monetary theorists diverge in their views on why (non crypto) fiat money has value. It’s not as simple as something being scarce (Bitcoin is famously limited to 21 million discoverable Bitcoins), unique, or accepted as tender. We have to have trust, somehow, that it will continue to be useful to us.

So, what could make crypto/digital currencies useful in the long-term? We know there are obvious practical benefits in reduced remittance fees (and at a very simple level, that is surely behind some of the adoption rates cited above). But thinking much more broadly, what is the belief system that could be emerging?

One theory in relation to fiat money that it holds value because governments guarantee they will accept it as payment for future taxes. What’s the analogy for crypto? There must be miners and investors who are preparing for an alternative future in which existing institutions have a diminished role, and we rely on decentralised networks to trade our digital assets. Right now, this vision has been curdled by the fall of Sam Bankman-Fried and severely tested in El Salvador.

But the theory of decentralisation and alternative currencies is worthy of examination even if it sounds strange and off-putting. Remember that those digital assets require physical infrastructure to create and mine, with a very real, calculable energy cost. The more you think about it, the less clear it becomes what value is being created, for whom, and for how long – and the more important it becomes that this is something we do, all, understand.

I reflected on this briefly with a friend earlier today. We talked about how physical capital is being consumed in the creation of digital assets. As technocratic and empowering as the concept of decentralisation in the creation of those assets might seem at face value, couldn’t it become another route to deepen the inequality that results from an initially wonky capital distribution?

Value, impact and allocation of benefit. Those are some dimensions I’d like to understand about digitalisation this year. I suspect it requires falling into the rabbit hole of web 3.0, but if it serves as a distraction from Rightmove….maybe it’s the healthier choice.