… and Silicon Valley has sadly become peak fiat
Among all the chortling over the demise of FTX, one hilariously timed document stands out: Sequoia Capital’s puff piece from a mere six weeks ago. Now deleted, but archived here for your reading pleasure, Adam Fischer boasted to the world that, in effect, Sam Bankman-Fried is the most brilliant, unorthodox, and ethical entrepreneur alive today and possibly who has ever lived, and Sequoia is oh-so-very wise to have backed him.
Given we now know that SBF pulled off securities fraud on an unprecedented scale (and may yet find out more — it’s only been 3 days) and is not so much an entrepreneur as a brilliant, unorthodox, unethical con artist, one wonders: who could possibly have seen this coming?
But then one actually reads the puff piece and thinks to oneself: are you fucking kidding me? How many red flags do you need before you decide not to destroy billions of dollars of other people’s money on the stupidest idea you’ve ever heard? At a certain point, at a certain fiduciary responsibility, and at a certain ability to see things coming, you have to wonder if maybe this is partly your fault too …
I really do encourage the reader to peruse this rather long article for themselves but to pick out what to me are the two most hilarious examples: first, SBF tells the writer that he “doesn’t read books,” and that, “if you wrote a book, you fucked up, and it should have been a six-paragraph blog post.” Rather than an intelligent response to such an utterance such as, what a fucking moron, our intrepid explorer of SBF’s mind thinks to himself:
“Wouldn’t someone with IQ points to spare realize that dismissing books — all books — as essentially worthless might rile a writer? Was he playing with me? Is this fun? Is this humor? I’m satisfied with my meta-analysis until I realize that one can always increment the level of strategic play in this sort of game. It’s like poker. Level one is just thinking about how to strengthen your own hand. Level two is thinking about what your opponent’s hand is. Level three is thinking about what your opponent thinks your hand is. And so on. And, since SBF is obviously a genius, I should simply assume that, compared with me, SBF will always be playing at level N+1. Which makes my analysis of the intent behind SBF’s “books are for losers” idea spiral into infinity and crash, like a computer program stuck in a loop.”
Second, Fischer writes that FTX’s competitive advantage is “ethical behavior.”
No, stop laughing and just read it, I swear I’m not making this up.
And so we are forced to ask, why would a blue-chip Silicon Valley firm think this person is trustworthy? Why would you boast about this exchange to your LPs rather than never, ever mention it again and tell him keep his god damned mouth shut when journalists ask him these kinds of questions? What is actually wrong with these people and why do they have so much capital to deploy?
My learned opinion is that although your average toxic Bitcoin maximalist might be able to sniff out this bullshit a mile away, Silicon Valley cannot, because Crypto is peak Silicon Valley, and Silicon Valley has sadly become peak fiat.
It isn’t just that they misunderstand the innovation that Bitcoin represents. It is deeper and more cultural than this: they cannot understand Bitcoin because Bitcoin is fundamentally counter to the socio-economic trends Silicon Valley has come to embody and to emanate — trends which are, at root, the inevitable result of the fiat corruption of prices, information, incentives, and everything else in between. Trends that overpower and distract from any real understanding of capital, money, and the principles of economics, and overwhelm you into thinking something as obviously ridiculous, dangerous, and parasitic as FTX is a good idea.
I will highlight three such trends here but will leave it to the reader’s imagination to ponder the likely many, many more threads to be followed: yield-chasing, dematerialization, and monopolization of access.
Silicon Valley’s increased perceived economic and social importance does not, as they would have you believe, follow from their brilliance in identifying technological disruption and making the world a better place. It is not a function of the capital they allocate, but rather the capital that is allocated to them. It is a function of the fundamental insolvency of pension funds all over the world, but particularly in the US.
Of course, this is very much a fiat problem. Global asset management is 10x the size it would need to be if it were possible for individuals to store their wealth in functioning money. The demand for its service in the first place originates from the desperate and perpetual chase for yield that inflationary money inflicts on those further and further from the fiat spigot. In other words, Bitcoin fixes this.
The extent of leverage, unavoidable capital misallocation, and structurally necessary progressive lowering of interest rates that inevitably follows from fiat means that even the funds themselves increasingly need to chase yield. This, and this alone, explains Silicon Valley as a cultural phenomenon. Far more important, more impactful, and more high-returning investments were made by Silicon Valley in the 70s and 80s, and yet the average person had never heard of this metonym. It is only in the past 30 years, and especially the past 10, that the self-importance and cultural cachet of the cohort has ballooned out of any explicability.
Naturally, what has followed is an explosion of profitless, jam-tomorrow, so-called tech companies that makes the problem of capital misallocation even worse in sum. It is easy to see that Crypto is exacly this, on steroids. The shift in return requirements inevitably leads to investment theses comprising increasingly low probabilities of increasingly high payoffs, to the point that there aren’t even coherent grounds to object to obvious stupidity and fraud because, hey, it might work!
Case in point: for FTX, stupidity and fraud did actually work for quite a long time.
Throw in the novel (to Silicon Valley) component of increasingly high exit liquidity, and you check the last fiat box of ultra-high time preference and indifference to real capital formation over long periods of time. Once emblematic of low time preference investing, Silicon Valley has been pwned by fiat to the other extreme: Crypto.
Silicon Valley used to make and sell useful stuff. While the following is clearly a crude generalization, it is accurate per the median investment and per the shift in cultural norm: it has gradually transitioned to making and selling software, then to renting access to software, then to renting access to useful stuff.
This isn’t packaged as dematerialization but as disruption; not as dystopian but as efficient. Of course, the reality is that it is incredibly high time preference. It is a form of leverage, too. Leverage needn’t be debt, specifically, but can be understood more in the abstract as an induced vulnerability to shocks traded for a magnified gain in their absence.
Bitcoin opposes this trend across multiple dimensions, given it is clearly averse to leverage and goes to great pains to avoid introducing new vectors of attack, and hence more vulnerabilities, by prioritizing censorship resistance by way of decentralization. But also, an even simpler defense against vulnerability of any kind is reliable savings. The social vision of Bitcoin is to get you off the hamster wheel. In other words, Bitcoin fixes this too.
Renting access to stuff you need is fine so long as your need for it is perfectly predictable but calling this “efficient” is an intellectual scam. Once the immature and pseudo-intellectual appeal of disrupting “ownership” is rightly rejected, one realizes there is nothing more inefficient than not having control over resources you require.
Crypto is the idiotic apotheosis of this trend, where they just sell you nothing at all. You give them money, and they give you the warm, fuzzy feeling of having broken into the Old Boys Club of world-changing technology investors. What you are buying is most charitably described as ephemeral cachet and least charitably described with lots and lots of swear words.
Dan Held amusingly captured the pseudo-intellectual appeal of this investment approach in his January 2021 newsletter, writing, “ICOs “disrupted” the VC model. What more meta way to invest than investing in something that is disrupting yourself.”
Investing in the disruption of investing. Dude. Woah. You will own nothing and you will be happy.
Monopolization of Access
The pre-Crypto stopping point of the march to owning nothing was renting access to useful stuff, or platform marketplaces. As economic phenomena, these represent a kind of Faustian bargain because while users do undeniably gain transactional efficiency, they do so at the cost of signing over the rights to rent seek in the long term.
A uniform marketplace is great insofar as what has been made uniform is not access but information. This is kind of like saying: as long as it’s predicated on an open-source protocol. But Crypto has again taken this to the idiotic extremity of not only needing to use their marketplace but also needing to use their money.
This immediately leads us down the well-worn path of the fight for liquidity, the pointlessness of re-introducing barter, the technical necessity of decentralization, the applicability of securities law, and so on and so forth.
It is a precise inversion of the legitimate promise offered by Bitcoin: a better money for everything, not a worse money for one thing, which can be easily integrated into open source protocols to better monetize decentralized access to a marketplace that no longer needs to be manifested as a single, monopolistic entity. Last but not least, Bitcoin fixes this as well.
We are all well-versed in these arguments, but I want to focus for a moment longer not on why these arguments are valid, but rather from what intellectual starting point one would be inclined to regard them as invalid — and in particular for reasons of cultural bias rather than intellectual seriousness.
The answer is very simply that this model, were it to make any economic or technical sense, is a wet dream to the degenerate Silicon Valley psyche. The idea is, in essence, to extend closed systems of user control to the money required to commercially engage with the system itself; embrace, extend, and extinguish salability … except, via exchanges they also control.
Anybody know a good exchange worth investing in?
Once again, should blue-chip Silicon Valley investment firms have known that SBF was a moron and FTX a scam?
One needn’t even point to the hilariously fiat traits of what was effectively a fractional reserve credit crisis that knocked over the first domino and from which FTX limped along, half-alive, not-at-all-solvent until finally being put out of its misery.
One can instead realize that the corrupting power of fiat has corrupted Silicon Valley to the extreme. It has warped the incentives of capital allocation so monstrously as to create a bullhorn blasting the cultural noise of high time preference through every price signal and every media channel alike. Bitcoin is the antithesis of Silicon Valley. They don’t get it because they constitutionally can’t.
Once again, how could Sequoia Capital do this? Why would they think it was a good idea? Why would they brag about it in cringe-worthy fan fiction?
Honestly, why would they not?
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Thanks to Giacomo Zucco for contributions in conversation.