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Spirited Reflections on a Spiraling Path
Is mass retail ready for the financialization of everything?
My 36th birthday. A funny age, one notable for its lack of notability. The mind, in its rush to attribute significance to fleeting moments in time, goes wandering in search of meaning. Mine gravitates towards halves and doubles. Am I twice the person I was at 18? Have I accomplished half of what I hope to by 72?
The mind jumps to the last time I dwelled on halves. I was just starting university in the summer of 2000. Intensive Korean 101, my first friend a 28 year old retired army paratrooper, both starting freshmen. We had grown quite close, when one day, he asked how old I was. When I responded, “Half your age,” he was mortified. Less because of me, and more because of where his mind wandered through my reflection: double my years, yet starting from the same point—what had he done with his life?
At 28, I had cause to reflect on this memory, shoes reversed. I was in a great spot, on a rapid career ascent, and came to what hindsight would reveal was the exact wrong conclusion: that I had aced the test. Admitted to the Early Entrance Program at the University of Washington, I started undergrad at 14 and graduated at 18, went straight to Columbia Law, and began working at Cleary Gottlieb from 21. Cutting my chops during peak financial crisis in bankruptcy, derivatives and regulation, I moved on from five years of biglaw to join the markets business, where I’d assume a leadership position in the trading business at J.P. Morgan and eventually Goldman. A prominent role at a prestigious bank, the kind of story that gets you a profile in the newspaper, fulfilling your parents’ long dreams that somehow some day, one of their kids would finally “make it”.
As the youngest of four, my dad had me at 48. During my teenage years, he placed his weight and expectation on me as the prodigal son. His exhortation: move fast, his years were ultimately limited. And so at the same time that I dug myself into my studies, I searched for shortcuts to “success”. It started with stock trading at 15, then poker during law school, then leveraged FX trading, and eventually crypto. In hindsight, 28 was a local top, and I would spend the next few years digging myself into an extended tailspin, leveraging my accumulated instincts to run faster and deeper towards my own unraveling.
If only I could go back to the frenetic energy of freshly minted adulthood, capture it like a ship in a bottle, and bury it deep in the recesses of the rocket that is life. I’d tell that sprightly 18 year old, dear sir, you have a a gift and a curse. The gift is that your passion and curiosity grants you foresight into the future two steps early. The curse is that your impatience inevitably leads you to disembark one step too early. And so you have the anguish of realizing a paradigm shift is going to happen, seeing it realize while realizing you’re not there to live it, all because you don’t have the fortitude to hold on. Even if I were somehow able to travel back in time, I’m not sure I would have heeded my own advice: I was too grounded in zero sum thinking. In a world of abundance, not scarcity, career grounding in zero sum markets will lead you to all the wrong conclusions. In your rush to get somewhere, you end up going … nowhere.
In December 2015, I read Arvind Narayanan’s Bitcoin and Cryptocurrency Technologies. Fascinated by the promise not just of bitcoin but a cryptocurrency acting as the “world’s computer”, I bought $10k of ETH at 97 cents on Poloniex. If this was going to work at all, it would be truly massive: I set a 100x price target for my position, transferred the ETH to a paper wallet and hid it in my closet—out of sight, out of mind. Less than a month later, I realized ETH had 2.3x’d and felt the urge to take profit and sell out the position at $2.25. By traditional risk/return standards, it was a great ROI. Busy with work, I forgot about it until my analyst told me ETH was a screaming buy at $20 several months later. I nearly fell out of my chair.
Minds have trouble grasping exponential rates of change, particularly in conjunction with intersecting non-linear trends that combined produce “lollapalooza” effects. Perhaps the biggest mistake that can be made is in trying to model the complexity of reality with our puny mental faculties at all. It’s easier to gain conviction in a macro shift than it is to spot the relative value winners on a micro level. Davidson and Rees-Mogg identified our current environment masterfully before the start of the century with the Sovereign Individual. The hard part is less spotting the trend, and more (i) getting in at the right time, and (ii) holding on for long enough for the trend to actualize.
Core to the tenets of web3 are the notion of self-sovereignty through cryptography, the ability to organize into global communities that resonate with our tailored values and interests, and the redistribution of network value back to users through incentivized participation. As I wrote in Thoughts at the Intersection of Web3 and Creative Culture:
My overarching thesis is that we are at the early stages of a multi-decade super-cycle of retail empowerment driven by the fact that “consumption, culture and community” are now tradeable assets. Consumption is no longer ephemeral, but persistent. No longer private, but communal. No longer limitless, but scarce. Consumption is, for the first time, collectable.
In this movement, retail should be king. Tokens are the lifeblood of networks, and individuals are uniquely positioned to participate (in contrast to institutions, who are still dealing with the complexities of key management and regulatory regimes that don’t yet have a place for the currency of networks). The only thing that can get in the way of this vision is … retail. I worry that we as individuals are simply not ready for the financialization of everything, especially those coming to web3 from finance.
Just because tokens have a price doesn’t mean that price needs to be relevant. Yet, it is (and at times of heightened volatility, it’s the only thing that seems relevant), because mass retail has not received the mental training needed to convince themselves otherwise. Most individuals are horribly unequipped for the traumas of web3, with the psychological variance wreaked by price volatility threatening the core tenets of the movement itself.
The decentralized web should be conceptualized as three distinct spheres: one for speculators (trade), one for participants (earn), and one for consumers (burn). The speculative web encompasses any risky activity where one outlays capital for the purpose of earning a financial return. The participant web involves anyone building or participating in decentralized networks and earning tokens for productive work. The consumer web encompasses anyone spending tokens for consumptive (not speculative) reasons—e.g., art purchased for enjoyment, skins purchased for cosmetics reasons, donations to charitable causes, etc.
In extolling the virtues of the mass financialization of everything, these three spheres are often conflated into one, but they don’t have to be. I myself am guilty of this, where in the quote above I spoke of TAM unlock from consumption, culture and community being “tradeable”, when I should have used the word “ownable” . Ownership and tradeability are not the same thing. The real consumer unlock was the instantiation of engagement value into independent identity, not the trading games that are a byproduct of that.
The biggest risk to making it in crypto is short term burnout leading to long term exit. In a world where all value seems reducible to price on a Uniswap pool, it seems only natural to believe that tokens without prices have zero value. Yet I believe that the best projects will encourage ownership while deemphasizing the short-termism that liquid markets bring. In other words, the participant and consumer spheres of web3, not the speculative sphere. Some are good at trading the metagame. Most are not. With this in mind, here’s what I would say to my 18 year old self:
Play games of abundance, and bind optionality by relinquishing access to the speculative sphere entirely. Don’t be a trader. Be a builder and participant. You may lose out on short term profit opportunities, but you’ll end up a winner in the long run, for holding onto the exponential returns that you would have sold far too early.
(i) This “HODL mentality” is used to justify short term ponzi cycles, most often by ex-poker kings who are selling while you’re buying. It’s particularly pernicious in the NFT PFP (profile pic) space, where grand overtones of “community”, “roadmap” and “vibe” are used to justify unsustainably high entry prices with weak long-term metagames.
(ii) Never selling works for those who’ve already made it, but what about those who are just getting started? It’s all dandy to talk virtuously about “buy and hold” mentality for those with the capital to pontificate, but what about those who are just getting started?
To (i), I would say that “don’t trade” as a mantra categorically does not apply to trading games. If you do decide to participate in the speculative sphere, the worst thing you can do is believe the NFT influencers and token peddlers who are trying to convince you of “up only”. HODL is not the game theory optimal strategy in the context of Ponzi cycles. The vast preponderance of flipping games are Ponzis.
To (ii), I would point to all the earning and learning opportunities that exist in web3 that require zero capital outlay. Find a way to earn tokens for productive work (either as a participant or builder), not flipping games that could result in principal loss and psychological scarring. And when you do earn those tokens, view them as seed stage equity: ownership units in an enterprise, not as GME stock to be flipped alongside the latest crypto narrative and meme.
Finding a way to distribute value for time with zero financial outlay is a point the P2E space should be particularly keen on designing for properly. There’s no better way to lose your player base then to expose them to an instant loss on their buy-in (one reason why gamers used to a decade of aggressive lootbox and microtransactions are so skeptical NFTs). Any games without a F2P loop (whether embedded in the game or derivatively through guilds/scholarships) are unlikely to achieve mainstream scale or relevance over the long-run.
As for the things you consume, buy them because you like them. Not just because you think they’ll go up. If you stick with art from artists you love, music from musicians you love, and photography from photographers you love, it’s hard to go wrong if you assume that what you’ve spent is … spent. Does this mean you should never sell an NFT? Of course not. Especially as tastes refine and opportunities present themselves, you can be a long term believer in a space without always staying max long. There will be those who accuse you “flipping” if you ever do this, but don’t mind them. It’s your own clarity of intent that ultimately matters.
If you do apply an investment lens to virtual goods, think less about the short term memes that can lead to a successful flip, and more about which items have a reasonable expectation of retaining value over time:
When I think about how to measure consumption value, I start by asking two questions: (1) What does the asset provide by way of patronage, status, access, exclusivity or utility within the community in which it is recognized? (2) Is that community likely to be around for the long term, such that “squad wealth” can be created from sustained engagement? From these questions, it is possible to form an investment view based on the likely trajectory of these trends over a sustained period.
The key is to find sustainable network effects. Stick with the projects that are likely to be stronger in 5 years, not shadows of their former selves based on short term pumps. Once you do, you’ll wonder why you ever played any of the other games at all….
By the time I’m 72, I hope I’ll have cause to look back on this post and smile. Maybe I wasn’t 18 years late. I hope I was just 36 years early.