Crypto bros have had it as bad - if not worse - as everybody else this year. Crypto assets, particularly bitcoin, has long been touted as an inflation hedge by crypto enthusiasts. In 2022, the evidence in support of that claim is weak at best. Gold, the OG inflation hedge is the best performing asset this year while Bitcoin has lost more than 66% of its value since the all-time highs we observed in the latter months of the past year. I know the haters love to see cryptos turn bearish, but honestly, 2022 had hands for all of us in the financial markets.
Ethereum, Bitcoin’s little step-brother, underwent a major surgery a little over a week ago. The second most popular cryptocurrency in the world is now 99.95% more energy efficient than it has ever been since its genesis. The upgrade, dubbed The Merge, saw the joining of the original execution layer of Ethereum with its new proof-of-stake (PoS) consensus layer, the Beacon Chain. I know, that sentence doesn’t mean much to me either. After reading a few articles, I gathered that crypto bros need a whole lot of energy to power the machinery they use to mine their precious crypto assets via proof-of-work (PoW) consensus on the blockchain.
In 2008, a ground-breaking innovation launched that made it possible to send money anywhere in the world without the need for a financial intermediary for the first time in history. This decentralised payment system appealed to the small guy on the street who holds many reservations about the formal financial system whose fragilities were laid bare for all to see during the financial collapse following the burst of the housing bubble in the US. The innovation was based on cryptography, the branch of Mathematics concerned with protecting secrets. More formally, cryptography is a study of techniques to secure communication such that it can only be accessed by the intended audience. Out of this, some mysterious entity figured out how to create a novel network that could facilitate payments, circumventing formal payment structures and their regulators in the process.
The Merge that went live on the 15th of September 2022 was an innovation to the innovation. Ethereum, which is more a general purpose blockchain than just a cryptocurrency nowadays utilised the PoW consensus mechanism since 2015. PoW is an old concept that burst into the scene in the early 1990s where miners on a network compete against each other to solve complex puzzles to earn the right to process transactions. Correct answers to the puzzles are easily verifiable. PoS promises similar security attributes with much less of the hassle. PoS consensus selects validators in proportion to their quantity of holdings in the cryptocurrency i.e. their stake. The switch to PoS lends itself well to the green investment revolution that is gaining a head of steam in Finance. Even the crypto bros are playing their part in the fight against climate change. Who would’ve thought?
More News
Elon Musk’s college girlfriend was auctioning their relationship memorabilia the other day. It’s Mad! Imagine the person you’re with right now sees the relationship as content to monetise at a future date. I’ve only ever seen this level of disrespect from bafundisi.
Iran’s been protesting against an oppressive regime.
What I’m Reading
I’m reading a book called How Not To Be Wrong, written by one exceptional man by the name of Jordan Ellenberg. It will have to go down as one of the best books that I’ve ever read. It is comfortably near the top of my all-time favourites’ list. In this one, Ellenberg discusses some of the most profound ideas to have ever occurred within a human brain. He presents these genius ideas in a way that would appeal even to those of us who were traumatised by Mathematics in school.
I maintain that people fear and shy away from Maths because they did not have the good fortune to be instructed by a teacher such as Jordan Ellenberg. It’s not that Mathematics is too hard, it’s just taught in school with little emphasis on the intuition behind the theorems and the rules. It becomes so abstract that the only way to pass the exam is to cram a hundred and one formulas into your tiny adolescent head. Some of us can only remember Maths as a collection of unrelated formulas on a quad and margin sheet of paper - a reputation that a field as elegant as this deserves not.
How Not To Be Wrong is organised into five parts: (I) Linearity, (II) Inference, (III)Expectation, (IV) Regression and finally, (V) Existence. I doubt I could do a better job than Jordan in articulating what each of these parts entails. So I will not even try but maybe I will mention a few things. First, have a look at the diagram below.
The x-axis represents tax level chosen by a government, and the y-axis represents how much that government collects in revenue given the selected tax level. Before the hump, an increase in tax rate increases revenue but after you venture beyond the tippy top of the curve, a tax increase decreases revenue. Intuitively, a tax rate of 0%, by definition, would mean collecting nothing. To the other extreme, if the government ever tried to impose a 100% tax rate on the economy, nobody would be incentivised to do any work as the government would be entitled to every last fruit of your labour. Again, the government would end up with zero. The maximum revenue that the government can collect is only possible by legislating a tax rate somewhere in the middle. Ellenberg uses the tax-rate/revenue diagram to make the point that most phenomena are not linear. The economic theory that “more is better” is not always true. Sometimes, less is more.
Jordan also writes about the legend of Abraham Wald who solved a problem about armouring American military aircrafts during the big war of last century. His solution blew my mind. The famous parable of the Baltimore stockbroker who could tell exactly where the stock market was going every time as if he were reading a crystal ball also makes an appearance in this masterpiece. Another important idea which he discusses towards the end is the idea of checking yourself. If you do not want to be wrong, you need to spend the day proving your beliefs (gathering evidence in favour) and the night disproving them (gathering evidence against). That is to say, don’t allow yourself to hold on to beliefs blindly for an eternity. If evidence exists that is against what you believe, interrogate and compare. Keep the beliefs that are robust to reason, and let everything else go.
If you won’t take my recommendation to pick this book up and learn you some Mathematics, maybe you would rather hear from Charles Darwin, whom, in the latter years of his sparkling career, whose ideas shape our interpretation of nature to this day, wrote, “I deeply regretted that I did not proceed far enough at least to understand something of the great leading principles of Mathematics, for men thus endowed seem to have an extra sense.”
If anything else happened this week, I missed it. Till next Sunday 👋🏾.
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