Crypto Asset Investing in the Age of Autonomy

Jake Ryan

• Publisher: Wiley
• Year: 2020
• Print ISBN:
  9781119705369
• Edition: 1
• eBook ISBN:
  9781119705376
• Topic: Business
• Subtopic: Finance
• Index: Business

Competition, the drive for efficiency, and continuous improvement ultimately push businesses toward automation and later towards autonomy. If a business can operate without human intervention, it will minimize its operational cost. If Uber can remove the expense of a driver with an autonomous vehicle, it will provide its service cheaper than a competitor who can't. If an artificially intelligent trading company can search, find, and take advantage of some arbitrage opportunity, then it can profit where its competitors cannot. A business that can analyze and execute in real-time without needing to wait for a human to act, is a business that will be able to take advantage of brief inefficiencies from other markets or businesses.

This trend following a thesis that is based on 100 years of proven economic theory. Short-wave economic cycles, those 5- to 10-year cycles, are driven by credit but the long-wave economic cycles, those 50- to 60-year cycles, are driven by technological revolution. We've had 5 cycles over the past 200 years with the last wave, the Age of Information & Telecommunications.

We've seen evidence that a new cycle has begun. Technological revolutions come by way of a cluster of new innovations. About a decade ago, you started to see AI, robotics and IoT (sensors) delivering on automation. That's been powerful, but not transformational. It does not force businesses to fundamentally change how they do business. The last piece of the puzzle was cryptocurrency because it allows us to process and transfer economic value without human intervention. Soon, there will be a global race to build autonomous operations. Businesses and organizations without autonomous operations simply will not be able to compete with those that do because … autonomy is the ultimate competitive advantage.

Crypto is the mechanism that will accrue value from being the infrastructure for the next digital financial revolution. Crypto Asset Investing lays out a case that we've begun a new technological revolution similar to the Internet Age of the 1990's. Artificial intelligence, the Internet of Things, robotics and cryptocurrency are converging to deliver on a new age, what I call the Age of Autonomy. Understanding the transformation that's taken place before anyone else can yield enormous investment opportunity. In this book, you'll learn how and why to invest in crypto assets.

PART I
THE HISTORY OF ECONOMIC CYCLES AND MONETARY POLICY

History doesn't repeat itself, but it often rhymes.

— Mark Twain

It's important to remember that the global financial market has been here before in some form. I would say almost everything in nature moves in cycles. There, too, are economic cycles. Global central banks over the past two decades have been trying to stop the economic cycle from progressing. The powers that be don't want a recession. They don't want deflation. They are doing everything in their power to change the shape of an economic cycle from a circle to a diagonal line that just continues to go straight up. But no matter what they do, they are fighting the natural order of things and they will not succeed. History has shown this time and time again. When the state tries to intervene in the economic cycle, it has always ended badly.

Understanding where you are in the economic cycle, as well as other cycles, along with understanding what monetary policy regime you're under will go a long way to improving your returns as an investor. One of the most important factors in developing an investment strategy, when in a credit-backed currency regime, is to figure out whether the economy is about to go through inflation or deflation. Part I of this book helps set the context for you the investor to be able to answer these questions for yourself. I intend to show you that the current system is fraught with risk and what you didn't see before now becomes apparent for all who pay attention.

1
The Fed and You: A Brief History

I was reading in the paper today that Congress wants to replace the dollar bill with a coin. They've already done it. It's called a nickel.

— Jay Leno

It may feel like you have no relationship with any federal entity. But, if you're using money to transact business or if you're investing in the stock market for your retirement, you have a deep relationship with at least one – the Federal Reserve. It's ironic, too, because the Federal Reserve (the Fed) isn't a public body nor is it an official part of the government. The Fed is a private bank with the superpower of managing the country's money. The Fed has a dual mandate – to maintain full employment and to keep prices stable. However, it's this one power of managing the money supply through the setting of interest rates and the printing of money that allows it to have massive influence the world over.

How It Was versus How It Is

During the post–World War II period job security, pension security, and health security were relatively more stable than has been the trend since the 1990s. You could save money in an account that generated a decent return and you were able to maintain purchasing power in part because you had US currency that was also money. It was a store of value because it was backed by gold. If you wanted to get a higher return, you could buy government or municipal or corporate bonds and, for risk-adjusted returns, you were doing quite well. There wasn't any need to take big risks in the stock market or to start your own business if you wanted to lead a middle-class life.

Figure 1.1 Productivity versus Compensation

Source: Economic Policy Institute.

Until the early 1980s, the gap in income between blue-collar and white-collar workers was relatively stable. Moreover, the average multiple between the highest paid person at a company (like the CEO) and an average worker was between 10 and 20 times difference. There was more equality within the income system, which favored being an employee in the risk/reward calculus as productivity was shared across the organization. In 2016, the US CEO-to-worker pay ratio was 276 to 1. We see productivity continuing to increase (see Figure 1.1) while pay has remained stagnant. Therein lies the opportunity. Start a business and take advantage of productivity to increase your personal income return.

The tax structure was also completely different. Back in the 1950s and 1960s the highest tax bracket for earned income was 90%! Can you imagine that? This influenced lots of decisions. One was the risk-versus-reward ratio of trying to start a business. If you could only keep 10% of your earnings after taxes, would it be worth it to take outsized risk? Probably not.

In the twenty-first century, many companies don't expect to keep their employees for 10 or 20 years. Employers let workers go through reduction in forces (RIFs), layoffs, or a variety of other means. Due to the Employee Retirement Income Security Act (ERISA), a law enacted in the 1970s, the government made a huge change to retirement and how we go about saving and investing for retirement. Like so many laws, the law enacted did the exact opposite of what its named implied. It did not secure employee retirement income. It converted risk from the employer to the employee by moving from a defined-benefit plan to a defined-contribution plan. This was an enormous change.

Now we have defined-contribution plans like a 401(k) or a 403(b) where the risk and onus of a person's retirement lie squarely with the employee. That was not the case under a defined-benefit plan. Today's savings accounts do not produce any real return. You're lucky if you can get 0.1% interest rate per year. The US dollar is not maintaining its purchasing power like it did in the olden days. This happened in 1971 when Nixon took us off the gold standard. He turned our US dollar from a commodity currency to a credit currency. The US dollar is now good for being a medium of exchange but not good as money that is a store of value. Inflation eats away at purchasing power over time. While we're conditioned to think 2% inflation is healthy, inflation is actually a stealth tax that hits every American. It is disproportionately worse for the poor because they pay the same tax of inflation as the rich at the same rate. Moreover, they are more likely to use savings accounts versus investing if they have any wealth at all to save.

So how is it that our pillars of middle-class security were shaken by these megatrends in monetary policy, demographics, technology, and the global economy?

Monetary Policy – The History of the Federal Reserve

In search of an answer to this question, I start with a week-long discussion with my friend Dax about the Federal Reserve (the Fed). It was a few years ago when we both read an article about the Federal Reserve and it sparked a discussion about whether the Fed is harmful or helpful. Our conversation focused on an article written by a former Fed advisor, Danielle DiMartino Booth, “How the Fed Went from Lender of Last Resort to Destroyer of American Wealth.”¹ Dax was skeptical of the article and wanted to discuss its positions. Dax (DH) started the conversation with this question:

1. DH: One of the recurring complaints I hear from some fiscal conservatives is about the Federal Reserve and how evil it is. I'm trying to understand why and have been doing a little research. I have read a lot of people complain about the era of “cheap money” and how it is having a terrible effect on the real US economy despite all the traditional markers like the unemployment rate and the Dow looking really good. Is it justified?
2. JR: Consider this. If I offered you a $100 bill or $100 in gold, which would you take? What if I made the same offer to you in 1913 when the Federal Reserve (the Fed) was established? Which option would provide you with more purchasing power today? The answer is $100 worth of gold in today's currency. The US dollar has lost over 95% of its purchasing power in 100 years. One hundred dollars' worth of gold in 1913 would now be worth over $2,000 in today's currency.

The Fed decided to situate the entire economy on top of an abstraction of the monetary system. The abstraction, decoupling the money system from real assets, allows them immense and unchecked power. Most people are not aware of it. The Fed does not answer to Congress. They are not audited by our government. The Federal Reserve is a private corporation. By targeting 2% inflation, you're targeting a 2% “tax” on the entire economic system and it's a regressive tax. With that target, we are all agreeing to reduce our purchasing power by 2% per year. Every percentage point of inflation erodes everyone's purchasing power by design. And, this “tax” affects the poor most.

The Fed has helped the US dominate the world economy by using many levers and tools. We can import or export inflation as needed by many Fed maneuvers. It has been great for US citizens, but the rest of the world has caught on and they are tired of it. They are tired of the US dollar reigning supreme as the world reserve currency bec...

Table of contents

• Cover
• Table of Contents
• Title Page
• Copyright
• Acknowledgments
• Author's Note
• Introduction – Why This Book and Why Now
• PART I: THE HISTORY OF ECONOMIC CYCLES AND MONETARY POLICY
• PART II: THE RISE OF BLOCKCHAIN AND THE AGE OF AUTONOMY
• PART III: CRYPTO INVESTMENT STRATEGIES
• Further Reading and Resources
• Appendix
• Index
• End User License Agreement