After the Bell: Should crypto be banned?

16 Feb 2023

Crypto provides residents of failed states with at least one small option because it operates beyond any state. Of course, the same facility makes it useful for black market operators. Yet I wouldn’t throw out the former because of the latter.

Like a lot of people around the world these days, I tend to get lost down some rabbit hole or other on YouTube and other social media. It’s always intriguing what your algorithm decides you want to see. I often wonder why social media sites don’t cut us some slack and allow us to manipulate our algorithms to make ourselves seem more interesting to ourselves.

But the one good part of my algorithm is that it has decided I’m interested not only in music, dancing and comedians but also in investment. So I get fed hundreds of little snippets of the great and funny things Warren Buffett and Charlie Munger have said over the years, for example.

They both have a gift for entertaining analogies and witty asides, and I’m always amused when Munger says something so outrageous that even Buffett demures. One great example is when Munger was explaining about investing in the internet, saying when you have an investment opportunity that has great potential to improve society but also has the characteristics of a Ponzi scheme, then you are in a difficult situation. But, he added, “If you make turds with raisins, you still get turds.” Buffett, sitting next to him, laughed and said, “You can see why they make me write the annual report.”

Munger also once said that what he really needed to get ahead in life was to compete with idiots, “and luckily they are in a large supply”. He added, “If other people weren’t wrong so often, we wouldn’t be so rich.”

Only an idiot would disagree with Buffett and Munger, whose track record is just astounding. But may I just say Munger has said something with which I disagree. In a short article in the Wall Street Journal, Munger argued that the US should ban crypto. So, well, that set the cat among the pigeons.

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I should say I disagree, but with reservations. Munger argues that “cryptocurrency is not a currency, not a commodity, and not a security. Instead, it’s a gambling contract with a nearly 100% edge for the house.” This kind of wild and woolly capitalism was similar to the kind that Mark Twain was describing when he said: “A mine is a hole in the ground with a liar on top.”

In the US, privately owned companies have recently issued thousands of new cryptocurrencies, large and small. They have been publicly traded without any requirement on the part of the government about what disclosures are required.

As a result, quite often a big block of cryptocurrency gets sold to a promoter for almost nothing, after which the public buys in at much higher prices without fully understanding the dilution in favour of the promoter.

It’s easy to understand why an investor like Munger would find crypto distasteful and, in most ways, I would agree. Munger and Buffett are characterised by a style of investing which emphasises common sense, a thorough understanding of what and why you are investing, and perhaps, most of all, an understanding of value in its truest sense. They are not “value investors”, in the classic sense, partly because they don’t really make a distinction between growth investing and value investing.

But I think what their approach really tries to emphasise, among other things, is that investing takes time, and if you try to shortcut the process, it will cut you short. Crypto’s characteristics offend almost all these deeply held, deeply wise principles.

But I would grant crypto, especially the larger and more established types, some slack, only because I suspect people who live in worlds where currency controls don’t really exist struggle to understand the utility of having an alternate option for holding wealth.

If you want to summarise the economic trajectory of a failed state, it would go something like this: rule badly, observe helplessly the economic downturn, blame everybody else, get worried about being booted out, and impose desperate controls, among which will almost certainly be exchange controls. And there is of course a one-word example of this process: Zimbabwe.

Exchange controls are crucial for thug states because they seem to provide a way out of an impossible situation — and here is the irony, they often do, for a time. The economic collapse of late-state apartheid South Africa provides a great example. Almost everybody wanted to get their money out, so to try to preserve itself, the apartheid government imposed exchange controls in a desperate attempt to keep the money in. The ANC has relaxed exchange controls over the years but has not done away with them, which is in itself a worrying sign.

Crypto provides residents of failed states with at least one small option because it operates beyond any state. Of course, the same facility makes it useful for black market operators. Yet I wouldn’t throw out the former because of the latter.

Maybe I’m wrong, but I think if you were Venezuelan you might agree with me. DM/BM

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