This analysis was first published in SvD Näringsliv, in Swedish, on December 29th, 2021.
The criticism of cryptocurrencies as speculative products without any underlying value often misses the point. What’s interesting about the asset class isn’t only its price — it’s the power structures it reveals, and that it could flip upside down.
Are you a fox or a hedgehog?
That’s the question the Canadian professor Philip Tetlock poses in his book “Superforecasting: The Art and Science of Prediction”. The book uses animals as metaphors for the traits needed to succeed in this difficult craft.
People classified as hedgehogs are, in this context, very good at one single thing. Think experts or ideologues who see the world through their chosen lens. Being a fox, by contrast, means being more agnostic, without a fixed worldview. Foxes know a little about a lot and are more interested in being right now than in having been right from the start.
When Tetlock studied this, he found that people classified as foxes were far more accurate in their predictions. They were also better at judging the probability of them. If you want to be good at forecasting the future, then, it’s best not to be too deep in your own trench — or your own establishment, if you prefer.
That line of thinking is worth keeping in mind when looking at where the new economy is headed. One hotly debated piece of it is cryptocurrencies, which many critics argue have nothing to do with ordinary people or the real economy. They’re treated instead as speculative products without any underlying fundamentals. The topic should therefore be handled with caution, some argue.
Those views are of course both legitimate and worth considering. But if, like Tetlock’s fox, you want to examine the claims more agnostically, you can see similar speculative tendencies in traditional stock trading too. Tesla’s market cap is, at the time of writing, over $960 billion — more than ten times that of General Motors, even though Tesla delivered just under half as many cars in the most recent quarter. Kinnevik-backed Teladoc, which operates in digital health care, has lost over 68 percent just this year. And that’s on established exchanges, in ordinary shares. Failing to see that there’s a high level of speculation spread across the entire market quickly becomes a rather one-eyed analysis.
There are also other big differences between stock trading and cryptocurrency, more of the philosophical kind. At its core, it’s a polarization between a centralized and a decentralized structure. Exchanges act as central marketplaces where buyers and sellers meet. Cryptocurrencies can be traded in a decentralized way — peer to peer, without any intermediary. That may sound trivial, but the small change has the potential to alter every power relationship inside the financial system. What role does an exchange or a bank play if every trade can happen without them?
The clearest collision between these two worldviews can be seen in China. Ahead of the 2022 Winter Olympics in Beijing, Chinese authorities have encouraged the use of the digital renminbi — a kind of Chinese e-krona. At first glance it resembles other cryptocurrencies, since it’s fully digital and handled accordingly. But the anonymous and decentralized component is, in this particular case, entirely stripped out. Jeremy Fleming, head of the British intelligence agency GCHQ, told the Financial Times that digital currencies had a lot of potential, but “if wrongly implemented, it gives a hostile state the ability to surveil transactions”. You can hardly get more centralized than a state watching every single purchase.
That China is acting this way is hardly surprising. A top-down, authoritarian system can never benefit from decentralization, which is why it has the most to gain from clamping down. China has several times this year signaled its displeasure with cryptocurrencies and crypto trading — likely for similar reasons.
Even though cryptocurrencies are young and to a large extent speculative products, it’s worth viewing the criticism through a power lens. Behind the joke names, the occasional extreme volatility, and the sometimes outright embezzlement sits a radical idea about tearing down and rebuilding the financial system. It’s too early to say whether that will succeed. But it’s very clear who would have the most to lose if it did.