I thought I might engage in a more philosophical topic this week, and one that I often touch on in my posts on Twitter. The idea being to explore it a bit more fully for those that might be interested. Though it deals with a few ideas, I do not think this need be divorced from our real world activities of trading and investing in Crypto. Indeed, in clarifying these ideas, my aim is to make those activities more conducive to the actual building of material wealth.
If critical thinking is about anything, it is first about the drawing of distinctions, to distinguish ideas that might otherwise be con-fused together. One such distinction, crucial in the field of investing and trading in my opinion, is the difference between real and abstract wealth. As I wrote in The Money Illusion:
As money exerts an inordinately powerful influence over us today [especially amid speculative markets], it’s incumbent on us to better understand it that we might better position ourselves. In approaching it more critically, we can turn what is so often that master/ slave relationship on its head. Much is about perception, and for astute perception we need perspective, and for perspective we need distance. It’s this ‘distancing’ that allows us to see through some of our perceptions that would otherwise be illusory. Without this distancing, we can find ourselves easily disorientated, with no external points of reference as in a labyrinth, or, in today’s equivalent, down the topsy-turvy shrunken world of a rabbit hole. A self-determined life [if freedom ever meant anything] must largely consist in extricating ourselves [yes, the responsibility is ours] from such illusions, and then having that power of money, for a power it is, restored to its proper function as a means to our own ends.
This article will look to explore that distinction between real and abstract wealth in what will be more than just a theoretical exercise, seeking more practically to describe how real wealth is to be actualized, or enjoyed, in contrast to holding it in mere abstract terms.
Personally, I think this is a timely discussion to have in the digital world, for all too often we become so accustomed to abstractions, and so immersed and enamored with them, that we can end up over-valuing those abstractions at the cost of under-valuing the actual world within which we are actually immersed. Note that in highlighting the idea of over-valuation, this article is not dealing with absolutes, which only serve as distractions in my opinion. Rather, we’re dealing with the relativity of various values here, and the degree in which they relate, optimally or ideally, to their particular object. I discussed this idea of value more fully here in Re-Evaluating Value.
First, I’ll discuss money as an abstraction, then go on to examine the optimal relation of money to real wealth/ assets, and finally look at how this could apply practically to our Crypto investments. All of this is of course is a perspective, which is all we have.
Money as an Abstraction
It’s no controversial point to state that the idea of money is the very primal condition of economy and civilization. It enables us to collectively practice economies that develop industries, technologies, and ways of life that are far superior to the less than golden age of that state of nature, where life was ‘solitary, poor, nasty, brutish and short’.
And money is primarily an idea, the idea of stored value, that others besides ourselves might value just as we do. It is via the means of this useful and collective fiction that wealth is generated. Where money is the idea, actual currencies are the forms that money takes. Some are stronger and some weaker, and some are in the process of becoming stronger, once again, on the basis of collective valuation. What is interesting today, given that currencies are no longer tied to a gold-standard, is that currencies are now collectively valued in the free market. Economists watch the price movement of USD as relative to gold, while investors watch the price of gold relative to USD. Investors and economists may also be interested in watching the price movement of a burgeoning currency such as the digital gold of Bitcoin, that is arguably in the process of capitalization.
One could also say that money is a power, though a latent one until it is spent. It has a potential to change the world around us, and our own personal circumstances, where it can improve our material conditions leading to a higher level of material wealth. Yet it is also a power over our imaginations, which it needs to be in so far as it is collectively valued. It is here that money, for want of a better word, can become ‘problematic’.
Enter the miser, or the money bug. I believe that it was Edgar Allan Poe that first used the term gold bug in his story of the same name. The bug is dwarfed in stature, where all value to be recognized is compressed into money, of whatever form. Where the proper balance of money is one of saving, investing and spending - abstract and real wealth - the bug retreats to simply hoarding money. We’ve all heard the stories of the old miser living in the humblest of circumstances, where on the demolition of his shack gold coins are discovered in the walls…. or the merchant that insisted on saving his heavy stash of gold on a sinking ship, only to have it drag him down and drown him. In these exaggerated accounts, you get the idea of an over-valuation put on money at the cost of an abundant life itself. Here old John Ruskin comes to mind with his insistence that ‘there is no wealth but life’.
Of course, I am not at all interested here in providing some socialistic rant and diatribe about the evils of money. How could I when I think money was the best thing since sliced bread… or rather the means to the invention of sliced bread. On the contrary, I’m interested in portraying the balance that sits at the very notion of money itself, and where the observance of that balance leads to the healthiest, the least risky, and the wealthiest outcomes for ourselves. This brings me to the second part.
Not an Either/ Or, but One of Degree
More often than not, we find that in the practical world, as contrasted to the theoretical one, the optimal path lies between extremes. And this notion is indeed institutionalized in the very idea of money. Money is to be saved, where immediate consumption, or gratification, is postponed, where money is then spent at a later date on an object worth spending it on. Here you have a balanced middle position equidistant between the hoarder on the one hand, and the profligate on the other.
The tendency of course is to lose the balance and to slide into one extreme or the other. The healthiest position - and wealthiest I’ll argue - consists in investing or spending a portion, perhaps the greater portion, of money at your disposal while also remaining liquid with a portion, which for some may be up to half of their worth.
One here would be exercising all the functions for which money was invented, and civilization enabled - money as a pricing mechanism, a means of exchange and a store of value. Though we tend to slide into an antithetical position on this, to focus on either the store of value function of money [its private aspect], or its function as a means of exchange and the life-blood of the economy [its public aspect] just like the economists, the Keynesians and the Austrians in more abstract terms, the optimal and most practical position is to keep a moderate balance between these two functions in my opinion…. to both save and spend.
As stated at the beginning, my intention was to make this article more than a merely theoretical exercise, and accordingly, having described some of the theory, I’ll now look at how this might apply to us who are currently concerned with the world of Crypto.
The Practical Application to Crypto
Bringing this back to the world of Crypto, and in particular to Bitcoin, the main tendency I see at work in this space is a gravitation and tendency toward hoarding; that is, an over-valuation put on the abstract nature of money. Of course, in and of itself a certain amount of ‘hoarding’ of money is required in order to build wealth, yet this is properly called saving and investing…. when it is balanced out by the taking of profits and spending in the real world, where real wealth balances out abstract wealth, or money.
It’s a curious fact that in our contemporary situation those that have investigated the nature of money have often become a lot less enamored with it in its conventional form. For some, the key word of ‘fiat’ seems to have unlocked all the monetary mysteries, even as it continues to bewitch the masses. And yet the object of their affection shifts to gold, or in our day, to digital gold. Yes, these are arguably better currencies, and something I have argued in other articles, especially from the long-term and macro side of things, but the tendency to hoard can develop. To paraphrase Milton Friedman, ‘hoarding is always and everywhere a monetary phenomenon’, whichever form, or currency, money takes.
Of course, the reader might respond here that they think Bitcoin is both the best currency and also a real asset that should be accumulated, to which I’d half agree. Yes, half-agreement is possible within a practical mindset - it is called hedging. The half agreement, or confidence, is found in recognizing Bitcoin as digital gold in the process of capitalization. The lack of full agreement, or certitude, is found in the uncertainty principle by which we hedge - though we might be confident of a possible or probable future, where Bitcoin attained something like the market cap of gold, this can in no way be thought a certain outcome, and so the hedge.
Bringing this back to abstract and real wealth - given that a wider practical outlook is the point of the theory - the accumulation of abstract wealth, money in whatever form, should be skimmed into real wealth when the going is good. This is because one never knows what is around the corner - a crash in the market, the crash of an exchange, complete government regulation, a hack, a loss of hardware, a wider technological development, any manner of thing could eventuate to unsettle our theoretical and often wishful certainties.
In this scenario, where the market remains volatile… and always threatening to implode, investor/ traders are better off to take some profits in some strategic manner in order to not only allay the anxieties of one’s own mind, but to realize wealth in the real world… as their projected path to riches is yet again delayed. Time, and in particular the time of one’s own lifespan, has to be factored in, This is something that is easily lost in timeless abstractions, where the reality is that a certain degree of consumption, or spending, cannot be endlessly delayed in so far as one is interested in elevating their living standards and attaining a higher level of real wealth. Having focused on uncertainty, the other side of the coin is confidence.
Most longer term readers of mine are familiar with my Bitcoin model, that of the LGC. always a fallible thing, whereby Bitcoin is projected to march on up within a couple of decades to a market cap akin to gold. Though not certain of this, I’m confident of it given the nature of the model. Say it eventuated, and the Bitcoin hoarder still sat on their stash and was determined to continue to do so, still no real wealth in the real world would be realized without some spending. The hoarder would continue to have abstract, digital, or potential wealth just like the old miserly gold bug at the beginning who clung to his perceived wealth within his likely rat-infested walls.
To conclude, in the face of uncertainty, there are two ways one can go with Bitcoin investing - either face the uncertainty squarely on and proceed from there in managing it, or retreat from it into a cocooned echo-chamber that would keep any dissidence or cognitive dissonance well at bay. The first is practical, the second is the construction of an ideology that is tautologically true on its own terms. The first is the healthiest in my opinion, and arguably leads to the wealthiest option also, where the second… not so much so. Again, the first is rigorously realist, the second is an escape from reality.
Yes, Bitcoin is a great investment and instrument by which to save money, but that is all it is. It can not perform the function of a worldview, the basis of all value. This would be the mistake of the miser, who might be wealthy in abstract terms but who, I think we’d all agree, lacks that abundance of life in which true wealth consists. The truly wealthiest outcome, in my opinion, has to involve the taking of some profits along the way, while the going is good, and this may involve some trading of market volatility as a hedge against your core Bitcoin position. For it is in some trading and selling for dollar profits that some real assets are bought, and real wealth enjoyed.