Speculative Bubbles, Technobabble And Bitcoin

Despite academics’ wishes, Bitcoin cannot be reduced down to a mysterious jargon-laden tulip mania.

This is an opinion editorial by Maximilian Brichta, a doctoral student at the University of Southern California currently working on his dissertation, “Vernacular Economics: On The Participatory Culture And Politics of Bitcoin”

It’s hardly a surprise that bitcoin gets maligned as a “bubble,” a Ponzi scheme, a fad, a greater fool’s theory racket or the tulip phenomenon of the 21st century. Coming off the heels of the 2008 Global Financial Crisis and the bursting of the dot-com bubble nearly a decade prior, it’s healthy to be skeptical of novel financial products. Bitcoin is commonly filed in the same category of bunk investments that have spun out of control. It’s a fair question to ask: How is bitcoin similar or different from prior speculative booms? In each case, there are constellations of narratives around the new asset class that generate ecstatic attention from investors.

There is a strand of scholarship that seeks to make sense of these narratives, but largely fails because they do not take the technical foundations of Bitcoin’s incentive structure seriously. They also mostly ignore the most active participants and texts that lie at the core of Bitcoin culture. In this essay I take a look at two such analyses, demonstrate some of the weaknesses in each of their arguments, and work toward a set of guidelines for nuanced investigations of Bitcoin narratives.

In Robert Shiller’s book “Narrative Economics,” he uses Bitcoin as a case study to illustrate how sticky economic stories arise within contemporary culture. “The Bitcoin narrative,” he suggests, “involves stories about inspired cosmopolitan young people, contrasting with the uninspired bureaucrats; a story of riches, inequality, advanced information technology, and involving mysterious impenetrable jargon.” Like Jon Baldwin, whose article “In Digital We Trust” I evaluated in part one of this essay series, his main avenue of critique is the “technobabble” or hype that characterizes Bitcoin discourse.

The issue is that neither of these authors give much consideration to how the technical features of the code shape these narratives. These features might include the proof-of-work consensus mechanism, the difficulty adjustment algorithm and the supply distribution schedule that produce Bitcoin’s incentive structure and shape its market rhythms. On the few occasions that Shiller does consider the role of its technical aspects in his analysis, he only does so to demonstrate how little “Bitcoin enthusiasts” seem to actually know about the technology:

“I will make no attempt here to explain the technology of Bitcoin, except to note that it is the result of decades of research. Few people who trade Bitcoins understand this technology. When I encounter Bitcoin enthusiasts, I often ask them to explain some of its underlying concepts and theories, such as the Merkle tree or Elliptic Curve Digital Signature Algorithm, or to describe Bitcoin as an equilibrium of a congestion-queuing game with limited throughput. Typically the response is a blank stare. So, at very least, the theory is not central to the narrative, except for the basic understanding that some very smart mathematicians or computer scientists came up with the idea.”

There are multiple weaknesses in this line of argument. Foremost, this assessment is based on anecdotal evidence of “Bitcoin enthusiasts” he’s encountered. Throughout the book, it never becomes clear who these “enthusiasts” are, where he encountered them, or what sort of knowledge or personal investment they have in Bitcoin.

Second of all, he prompts his anecdotal subjects to explain complex cryptographic features that are fundamental to Bitcoin’s protocol, yet rarely play prominent roles in Bitcoin discourse, even within some of the most dedicated circles of Bitcoiners. It is a curious choice of technical features given that he appears to borrow these terms from an article focused on the “Economic Analysis of the Bitcoin Payment System.” This article primarily focuses on the way Bitcoin’s protocol adjusts its rewards to incentivize participation. These features are fundamental to understand when considering narratives around the plausibility of Bitcoin’s perpetuity and projected ability to remain in a state of price discovery. In other words, he deflects the key technical features that affect Bitcoin’s narratives and selects features that are likely to stump his research subjects.

In my experience of almost daily immersion in Bitcoin's digital ecology, the primary technical features that drive its narratives are the proof-of-work consensus mechanism and difficulty adjustment algorithm. These protocol features are central to understanding Bitcoin mining and the reward schedule of newly created coins. A basic grasp of this process helps explain the basic incentive structure that motivates people to mine and accumulate Bitcoins. In simple terms: miners earn Bitcoin in proportion to the computational energy they supply to the network. More computer power contributed to the network means higher difficulty for mining coins. If miners perceive their rewards will appreciate, the incentive persists. Every four years, the size of the rewards is cut in half. Therefore, there are consistent adjustments in the difficulty and rewards to sustain interest in the process of mining. This serves as the underlying material process for assuring Bitcoin’s continued operation and for converting energy into digital assets. The provable scarcity of the asset and the sustainable incentive structure for participation is a centerpiece to the narrative of bitcoin’s possibility of appreciating into perpetuity.

Had Shiller searched “proof-of-work” or “halving” rather than “digital signature algorithm” in his ProQuest News and Newspaper query, I anticipate he may have discovered a relative heap of results compared to the handful that turned up. Although, it is also noteworthy to mention that Shiller queries mainstream news and newspapers — unlikely outlets to find content where you might find originally sourced content from Bitcoiners. I would suggest that actual “Bitcoin enthusiasts” would more likely be found on Twitter and reading publications like Bitcoin Magazine rather than mainstream newspapers. On top of that, his footnotes only reference two news articles from Bitcoin.com, four mainstream news articles, one academic article, and the Bitcoin white paper. In short: Shiller seemingly ignores the forums you’d likely find Bitcoiners congregating on the web, despite the fact that his book highlights the importance of social media’s role in narrative virality. His analysis lacks grounding, or at least makes the mistake of confusing mainstream news sources as a primary body of texts in which Bitcoin narratives form and proliferate.

Another instance of Shiller’s loosely grounded generalizations appears in his assertion that “There are brilliant computer scientists who are fascinated by cryptocurrencies but who won’t say whether the captivating ideas that generate public excitement are ultimately right or wrong.” Who are these brilliant scientists he speaks of and what does it mean for them to apparently avoid commenting on the validity of the hyped narrative around Bitcoin? Again, readers are left guessing who Shiller’s shadowy research subjects are and what texts he’s referring to as grounds for these claims.

Later in the book, Shiller suggests that the younger generation’s superior ability to understand Bitcoin while older generations struggle with it also has narrative appeal:

“Maybe part of the appeal is that understanding Bitcoin requires some effort and talent. There is an air of mystery around Bitcoin, just as there is conventional money. Few people understand how paper money gets its value and sustains it either… The idea that savvy young people understand Bitcoin, but that old fogies never will, appeals to many.”

Perhaps there is some of this generational appeal to Bitcoin narratives, but Shiller merely speculates that it exists. If Shiller were to explore the discourse of actual Bitcoiners, which he never demonstrates that he does, he might have found thousands of pages of books and articles and countless hours of videos and podcasts that take deep dives into Bitcoin’s philosophy, economics and social theory. Indeed, there is an air of mystery around Bitcoin. But there is also a robust body of knowledge that Bitcoiners have contributed to relentlessly for a decade and have shaped the stories that Shiller largely writes off as misguided. And if the stories are deemed pure hype, a logical conclusion is that Bitcoin lacks real value.

Baldwin and Shiller seem to agree that Bitcoin represents a speculative bubble with no underlying material value. In investing parlance, it lacks “fundamentals,” at least in the traditional sense of production reports, revenue streams and earning per stakeholder shares. Whereas Baldwin denounces Bitcoin as a Ponzi scheme that “must constantly be talked up” to appreciate, Shiller does not explicitly make this charge. However, he does consider how disparate, often mutating stories around Bitcoin continue to sustain its perceived value by contagiously leaping from person to person.

His narrative framework seeks nuanced explanations as to why people would believe it has value at all. Some of the key factors in these stories are fear of missing out; celebrity endorsements; mysteries about the value of conventional money; the mystery of Satoshi’s identity (or identities); the notion that Bitcoin is “the future”; economic empowerment; and its potential function as “membership token in the world economy.” He argues that these narrative constellations make Bitcoin’s value self-referential: “people are interested in Bitcoin precisely because so many other people are interested in it. They are interested in new stories about Bitcoin because they believe that other people will be interested in them too”. In short, he contends that Bitcoin’s value traces the potency and virality of its narratives at any given time. The narratives of Bitcoin’s success become self-fulfilling prophecies.

The assumption baked into this conclusion is that Bitcoin doesn’t have any real social value. An important question that seems to be left of both Shiller and Baldwin’s analyses is: To whom does Bitcoin have value for from a use case standpoint? Both authors are so focused on the narratives that they believe are untethered from reality that neither of them look beyond the use cases such as Silk Road for how people are using Bitcoin and what user demands are driving Bitcoin development. Bitcoiners, who develop, and theorize about the network are largely abstracted out of their analyses. Academic studies of Bitcoin would benefit greatly from taking a concrete look at Bitcoin culture and assessing where the narrative sync up with reality and which narrative elements are mere hype.

For example, in his article “Magical Capitalism, Gambler Subjects: South Korea’s Bitcoin Investment Frenzy,” Seung Cho Lee offers an empirical account of Korean bitcoin investors during the 2017-2018 bull run. Unlike Baldwin and Shiller, Lee is refreshingly clear about who his subjects are and the cultural context they are participating within. During the 2018-2017 bitcoin bull run, Koreans made up roughly 21% of the global bitcoin investors. Lee observed two of the most popular Bitcoin social media forums, one in which the user profiles were anonymous and the other not. He characterizes these participants as “lay bitcoin investors” who appear to walk a thin line between investing and gambling.

The one caveat to this analytic clarity appears in his first footnote where he writes “I will use bitcoin as a sort of synecdoche for all the cryptocurrencies discussed throughout this article”. As a general rule, I would argue it is analytically stronger to make a clear distinction here between bitcoin and altcoins. The different consensus mechanisms and capacities of these blockchains inspire differing and sometimes contradictory visions for the future of crypto and money. For instance, Bitcoin maximalists exclusively advocate for bitcoin and view all other cryptocurrencies as unviable, or worse, scams. The cryptocurrency space at large is characterized by intense tribalism. It is also noteworthy to point out this bitcoin buying frenzy coincided with the initial coin offering (ICO) boom, in which billions of dollars rushed into hundreds of new altcoins. That said, it is reasonable to believe the lay investors represented here may not have made many critical distinctions between coins they invested in.

He frames this frenzy as taking place against a post-developmental, neoliberal cultural backdrop. South Korea had gone through a pivotal economic transformation marked by growing wealth inequality, low wages, precarious employment and riskier investing fueled by loosely regulated consumer credit. Lee describes a scene of disenchanted youth with high hopes to strike economic success in booming capital markets. The advent of online exchanges, mobile investing apps and global crypto markets opened the possibility for mass retail investment in these “magical” markets. “The magic of financial capitalism,” Lee argues, “is deeply rooted in a mechanism that functions through self-referential valuation and self-fulfilling performativity.” Within these markets, participants perform a repertoire of rituals that justify their economic behaviors and collectivize their hopes and fears, all while calling into question the rationality of market fluctuations. As Baldwin and Shiller also argued, this creates mimetic spirals of valuation narratives that are seemingly untethered to material realities. Nevertheless, these markets offer enchanting possibilities of success during a time when disciplined labor no longer seemed to offer as much promise for material success as it had in past generations.

What stands out about this cultural context is the economic scene that Lee describes. He argues that the post-developmental era began with a South Korean financial crisis followed by a government bailout by the IMF and a deteriorated labor market. While Lee is focusing on lay investors with seemingly absent political investment in Bitcoin, it is striking to highlight that Bitcoin was introduced as a critique of the very conditions that contributed to South Korea’s economic condition. Bitcoin was positioned as a critique of failing banks and fragile monetary policy. It’s also notable to point out that the IMF has become one of the Bitcoin community’s top institutional enemies. His analysis suggests that bailed out banks and deregulated markets have created the conditions for Bitcoin to receive mass retail attention, even if its investors are unaware of the flawed monetary system that helped shape these post-developmental conditions. Bitcoin is therefore both a product of and response to poorly managed global economies by existing institutions.

Lee demonstrates how social media helps facilitate the ritualistic incantations of market participants. Lay Bitcoin investors openly questioned the rationality of the market and frequently circulated memetic expressions that helped them navigate the largely unexplainable market volatility. This is the distinguishing factor between the gambler and investor: for the gambler, “expertise consists in dealing with chance and uncertainty. Unlike the laborer, who builds an organic and continual relation with the world, the gambler embraces uncertainty and seeks to find the right moment to quickly seize opportunities”. This notion of expertise is crucial to emphasize. I would argue this includes network-specific conventions of intelligence and emotional control. Since Bitcoin is still a relatively new asset with novel metrics for its fundamentals, the social network becomes especially important for guidance on how to navigate the market. As Lee shows, this entails a repertoire of memetic behaviors that instill hope, confidence, and trust while quelling fear, uncertainty, and doubt. When it comes to prediction tools, technical analysis is heavily relied upon. Although, many participants within the market community openly cast doubt on the efficacy of technical indicators that are frequently invalidated by abrupt and exaggerated moves on the price charts. These conventions of participation make it possible for investors to form meaningful relationships to the market.

Similar to Baldwin and Shiller, Lee is burdened to make sense of Bitcoin’s value that is generally agreed to have no objective, intrinsic anchor. Like the previous authors, he concludes that ultimately bitcoin’s value is a matter of self-reference: “What determines the price of a financial commodity is thus people’s beliefs about what other people believe, or collective belief on collective belief.” Notably, Lee generalizes this principle to all financial markets. Yet, Bitcoin remains a prime example because it lacks clear fundamentals and is an altogether new financial product that is hard to make meaningful comparisons to. Due to its self-referential nature, any information that circulates about Bitcoin or events that may affect its price are interpreted through its community’s conventions for valuation. News is framed in such a way that it constantly fits the desired valuation narratives. He argues that “every piece of information and every statement about Bitcoin is supposed to be subject to this self-fulfilling valuation process in which the ‘constative’ meaning [its nature of being true or false] of a certain statement is deciphered based only on its ‘performative’ effect”. In this regard, the Bitcoin valuations can be based on faith in the potency of its narrative to continually inspire confidence in more market participants.

Out of the three authors, Lee offers the most compelling case for how Bitcoin’s narrative is shaped by its actual market participants. By situating actual investors within a cultural context, it becomes increasingly clear what motivations might be involved in financial risk taking, how this participation can function as enchantment, and how news about Bitcoin is filtered into ever-bullish narratives. While Shiller appears to look at newspapers for instances of these narratives, Lee argues that news information is poached, interpreted, and circulated between market participants. This is of course an information feedback loop itself. The community filters news and fortifies the bullish case for Bitcoin. This increases interest in the asset. The news reports on the fluctuations of this market because it proves to be a popular asset. However, Lee only offers a small set of examples regarding how different messages are performatively interpreted. Baldwin and Shiller’s focus on the political and techno-utopian discourse offer clues as to what interpretive conventions may be at play. In the following essay of this series, I will consider how aspects of each of these authors may inform a vernacular theory framework for studying the culture of Bitcoin’s most ardent supporters.

This is a guest post by Maximilian Brichta. Opinions expressed are entirely their own and do not necessarily reflect those of BTC Inc or Bitcoin Magazine.