In today’s Exponential Investor:

  • What did the survival strategies of Uber and Airbnb involve?
  • Who is taking over crypto?
  • How could crypto be rejuvenated?

Sure enough, my thesis that governments manage to make a mess of any and all government policies they try to implement, including privatisation, has struck again. This time, a government has managed to cock-up crypto.

My go-to source for trusty news analysis, CNN, explained what happened…

El Salvador’s “Bitcoin Day” did not go especially well.

The impoverished country’s vaunted adoption of bitcoin as legal tender on Tuesday was marred by street protests, technical glitches and an extreme drop in the value of the controversial digital currency.

What went wrong?

  • “Chivo Wallet,” a storage app created by the government, wasn’t immediately available on major app stores. By the end of the day, it had appeared on Apple and Huawei platforms.
  • Hundreds of people marched against bitcoin in various protests across the capital city, the Financial Times reported.
  • The price of bitcoin started the day around $53,000 before plunging by as much as 19%, according to data from Coinbase. The digital currency has since recovered some losses to trade near $46,270.

That’s what you get for celebrating government initiatives, crypto “enthusiasts”. Partner with a politico and you get what you deserve.

The idea that a government’s adoption of bitcoin gives it credibility is like claiming the government’s monopoly on money is a good idea.

Cue a 99.5% drop in the value of the pound since the Bank of England was founded. Nice work, if you can get it… by government charter.

While crypto investors celebrate the news out of El Salvador, and from crypto-adopting Wall Street, believing the big-government and big-business adoption of bitcoin gives it credibility, I’m declaring the opposite. The crypto revolution is over.

I’ve seen and anticipated something similar before. Let me tell you that story before we get to how it applies to crypto…

In 2016 I found myself sitting in a very large hall in Bulgaria, with a painted ceiling and lots of Roman columns. A speaker at the event had bailed at the last minute, or had been held up by border guards more likely, and so I was asked to jump in and take their place.

This was one of my roles on the Free Market Road Show of 2016 – backup speaker when one of our more radical keynote speakers was held up at the border. That is something that I saw happen in person to my friend Ron Manners in Ukraine.

By the way, you can watch the 2021 Free Market Road Show’s London event here now. The topic was Regulation vs Entrepreneurship. And if you enjoy the video, don’t forget to attend round two virtually here on 18 September, starting at 3pm.

How disruptive businesses protect themselves from disruption

But back in 2016, I found myself on stage to talk about the disruption which Uber, Airbnb and similar companies had caused to the taxi and hotel industries.

You might remember, they had skirted lengthy and complex regulatory and licensing systems to meet customers’ needs better than their established competitors. Libertarians were rejoicing at the proof that the free market could do what it does. Everyone else was outraged about the use of regulatory loopholes. Or just outright breaking of the law.

As ever, I told the audience what they didn’t want to hear. A message of doom and gloom about how Uber and Airbnb were already kow-towing to the government and becoming the very thing they had been created to challenge.

I also called out a representative of Uber or Airbnb who was in attendance for this hypocrisy. I don’t recommend doing so in Eastern Europe, where criticism of politically-connected big business is a bad idea.

Once disruptive businesses become successful, their incentives radically change from growth and serving customers to a simple question of survival. And, in our over-regulated economy, your best bet to survive is not to serve customers better than everyone else by continuing to innovate, but to capture the regulators and grow the barriers to entry. The banking system being the best example of this. Back to that in a moment, as I’m sure you’ve guessed.

Sure enough, Airbnb began to comply with expensive hotel and safety regulations to ensure that nobody else could challenge its now dominant position by doing a better job of connecting empty bedrooms with travellers. The regulatory and compliance burden would be too much for a start-up these days.

And Uber gave way on complex, expensive licensing and employment rules to try and prevent competitors from emerging who could undercut them by skirting the same rules and regulations that Uber once had.

The regulators are now on Uber and Airbnb’s side, protecting their businesses from precisely the sort of innovation they had once led.

The innovative, disruptive and libertarian companies became part of the regulatory state’s machinery and joined the interest group of the politically connected.

The same process is underway now for cryptocurrencies. The government, the financial sector and big businesses are co-opting them in ways that undermine their very purpose.

The nationalisation of crypto

They have gone from being a libertarian’s dream to slowly becoming part of the system they were meant to evade and then destroy.

This is the opposite to what FA Hayek argued for in The Denationalisation of Money. It is the renationalisation of digital money after a brief period of freedom. It’s the opposite to what Satoshi Nakamoto had in mind when he launched bitcoin to be independent from the existing system.

And yet, bitcoin believers seem to be rejoicing about El Salvador’s use of bitcoin. As Airbnb and Uber shareholders once rejoiced when their companies settled with regulatory agencies and complied with compromises that made competition incredibly tough for anyone who thought they could do better than Uber or Airbnb.

In the eyes of cryptocurrency investors, recognition from big business and government gives them credibility. In my eyes, it removes the one thing they had going for them. That they were apart from either.

Today, everyone from Facebook to Paris St Germain is in on the crypto craze, launching their own tokens.

Even Visa, the company which crypto was supposed to destroy, is enabling cryptocurrency payments.

And banks, who we are told won’t exist in a crypto world, are investing in crypto on the one hand while also trying to prevent anyone from buying the coins. Think about that carefully.

El Salvador is the nail in the coffin of the cryptocurrency revolution. Bitcoin is now a government money. That is precisely what it was designed to avoid.

Let me re-emphasis just how ironic all this is.

The whole point of bitcoin was that it is separate to the government and financial system. A democratisation and privatisation of the money system without middlemen.

Now governments and the financial system are at the forefront of bitcoin, not everyday users transacting between each other. And the same middlemen of the financial system are now the middlemen of cryptocurrency transactions.

Bitcoin, like Uber, Airbnb and the internet, has been co-opted by the government, central banks and the political-industrial complex. And they will muck it up, somehow.

What does all this mean for the only thing that most crypto buyers are really interested in?

No, not establishing an alternative monetary system to undermine banks and governments, with which they can transact quickly, easily and cheaply without risk of interference. They only care about the bitcoin price.

I have no doubt the price of crypto can surge now that it has the backing of the institutions it was supposed to do away with altogether. Perhaps it will even become the pump and dump scheme they accuse it of being, now that they’re involved.

A last hope

Indeed, the adoption of bitcoin in Wall Street has become the key argument for why and when cryptocurrencies will surge. It’s adoption into the existing system which it was supposed to undermine.

Or maybe Dylan Grice of Calderwood Capital is right with this post on Twitter:

Here’s my El Salvador prediction: even though no one points to the countless Latin hyperinflations to say “see? fiat systems don’t work!”, when el Salvador’s bitcoin experiment goes tits up, crypto won’t get the same leniency. everyone will say “see? crypto systems don’t work!”

Either way, buying crypto was supposed to be about using it to evade the banking system and the government, not to speculate on the price. It has lost the former. The latter may remain intact.

My last hope is that a coming monetary crisis and the mass adoption of crypto as a speculative asset will be a combination that leads to a surprise rejuvenation of what crypto was all about. When people need an alternative monetary system that evades government and big business, they will know where to turn.

With some student debt-loaded graduates paying a marginal tax rate of over 50% while working from home, we might just be close…

Nick Hubble
Editor, Southbank Investment Research