Financial Education: Cryptos, NFTs, and Meme Stocks (transcript) (Patreon)

The rest of these financial questions are all about cryptocurrencies and meme stocks.

Evan writes; Dear Sam

Bitcoin, Ethereum, and Dogecoin. What makes them different?

Dear Evan,

Bitcoin was the first cryptocurrency and successful blockchain. Unfortunately, that means though we recognize it as the first truly digital currency that went from valueless to tremendous value, we miss a more significant landmark: a technological solution to a security problem no one thought could ever be solved. 

Though Bitcoin now is seen as a new type of capitalism, Bitcoin relied a lot on the work of David Graeber and anarchist decentralization. There's an old saying, "You can kill an anarchist, but you can't kill anarchism." The reason you can't kill anarchism is because it's decentralized.

How can you apply this to information? You can hack one computer, but you can't hack all the computers. You also can't steal information that you already have. So unlike how most businesses run, on secrecy, Bitcoin's answer was to keep no secrets, then decentralize it. The code was available for anyone to use and copy. The host for the Bitcoin blockchain was anyone with a computer. Rather than a centralized host, it was decentralized collective hosting hosted by users. Bitcoin miners that you hear so much about aren't the hosts; instead, they're the digital programmers who update the file but don't host it. It's like me letting you edit my Google doc.

Initially, mining too was open to anyone with a computer. Over time, only those with gaming computers were able to mine. As gaming computers, specifically graphics cards got faster, the requirements for mining increased. That doesn't mean you necessarily need the fastest computer; it just means the fastest computers will get more of the Bitcoin rewards.

Bitcoin piggybacked on the already existing technology and market for gaming. However, Bitcoin's creator saw no way to prevent gatekeeping with mining, which is why they separated hosting from mining.

The hosts are known as nodes, and you can run a node even on an inexpensive smartphone. Whenever there's been conflict between the miners and hosts, the hosts have won because there are more of them. This is because hosting has less barrier to entry than mining. This is all by design.

So how do we get other cryptocurrencies? I mentioned how Bitcoin is a public technology with no owner and no copyrights. Litecoin came about from someone copying Bitcoin's code and renaming it. That's okay to do because no one owns a patent to Bitcoin. It has no intellectual property. You might not be able to buy a bitcoin, but you can, however, have its code and make your own.

It's like not being able to buy an expensive computer program, but the company lets you have the code for free with no strings attached.

It would be like Coca-Cola giving everyone their formula. Then you wouldn't be making a facsimile or something similar but the real thing because it's the same thing Coca-Cola makes. You could even call it Coca-Cola if you want. Litecoin gave itself a new name only out of respect to Bitcoin.

Still, there have been issues where identical cryptocurrencies have attempted to use the same name. But rather than being decided in court, since these are public goods, it's determined by the court of public opinion. Users don't want to have two cryptos with the same name, so they decide to call one of them something else, and it sticks. Much like how it works in grade school when two people have the same name.

Lately, cryptocurrency creators won't use the same name to avoid the hassle rather than because of any legal ramifications.

What is Dogecoin? A copy of Litecoin, which is a copy of Bitcoin. Ultimately, they're both copies of Bitcoin with some modifications. Bitcoin's code is available to the public so that people can use it.

Ethereum is also a copy of Bitcoin, just as all blockchains are a copy of Bitcoin. What makes Ethereum unique is not only does it allow you to copy their modified code, but it also has within its code a way for you to adapt it. Ethereum is customizable.

Much like a blockchain version of the Droid operating system, you can use it to create your own operating system or develop your own app. This is what gave programmers the ability to make non-fungible tokens, otherwise known as NFTs.

H writes, Hey Sam

Cryptocurrency: yay or nay?

Dear H,

I previously talked about where crypto stacks up against global conglomerates and weapons manufacturers. Not ethically worse, but riskier as far as losing your principal.

This aligns with my previous example of how the US and its allies paint lesser powers as worse threats. I'm not saying cryptocurrencies are good but are they worse than the companies that fund and profit off of wars, genocide, enslavement, and colonialism? No. But you wouldn't know that.

Capitalist imperialism and gambling are not the same. In fact, the gambling industry exists because of capitalism. You can avoid gambling, but you can't avoid capitalist imperialism. Both are harmful, yes, but so are COVID and the flu. Should you equate the two as being the same? No. Does comparing the two have seismic ramifications? Yes.

Socialists and liberals can understand there are differences in risk, scale, severity, and harm when it comes to diseases. It doesn't take them much effort to recognize COVID-19 and the flu are both harmful but not the same. In fact, the comparison is unfair and misleading. This is why anti-vaxxers do it. And we've seen the devastation caused by this false comparison.

Where many liberals and socialists fall short or act in the same bad faith as anti-vaxxers is when applying false comparisons to other sociopolitical realities.

COVID-19 is not the same as the flu in the same way a country that has bases and direct influence across the globe is not the same as a country that doesn't. Equating the two is just as manipulative as anti-vaxxers equating COVID with the flu. Just as manipulative as comparing the racialized world with the bar for white society. This assumes capitalism is a free and fair marketplace where everyone is equally competitive and on equal footing. This delusion is consistent if you're a capitalist but self-defeating when you're not.

False comparisons such as these devastate the world.

Now, should you buy a cryptocurrency? And notice here, even to buy crypto, you have to use the US dollar, which goes back to scale and hegemony, and who's really in charge of everything. Even in thinking about Bitcoin's price and market cap, it's from the gravity of the US dollar.

Before asking, what should I invest in?—you first have to ask: do I have money to invest with? Did I take care of my debts? Do I have emergency savings? Did I maximize my retirement? What about minor's accounts?

Crypto falls into non-retirement investing. How much do you want in crypto versus stocks and ETFs?

So far, you should have noticed a pattern emerging. What makes many investment accounts attractive isn't the promise of growth but mitigating risk. In contrast, crypto's selling point is that it won't bother mitigating risk. It only cares about growth.

Much like robo-advisors, it's about your personality. Crypto is only for certain personality types. Do you have that personality? Because buying crypto is no guarantee that you'll make money. Since you can't know if you'll make money or not, then what would make this the right decision? If you happen to be someone who likes the idea of owning crypto. Not necessarily that you like gambling but that you like being different. You'll already notice this among the people you know in crypto.

What made crypto so popular among small investors was that it always had fractional investing and no minimums. You can actually invest one dollar.

Make an informed decision. If you have money available for crypto investing, be honest with yourself about your personality. Being different means being independent. That means you're okay not only with the risk of losing your money but of getting hacked, locking yourself out of your own account, or making permanent mistakes. 

I can't say if you're someone who always needs help or has lots of questions when starting something new that you shouldn't do crypto. What I can tell you is crypto doesn't have any help or assistance. You're on your own.

This isn't literally true, there are services and FAQs and online support, but it will be nothing compared to what you usually get in real life. You also won't find experts among friends. Furthermore, real-life is awful at helping, and this is even worse. Everything you do in crypto is permanent. A crypto can even permanently vanish, and you will have no one to turn to.

People lose millions of dollars of crypto every year. Not stolen or out of business, just lost. With money or other assets, you might try to hide it, but you can't lose a stock or a house. You can lose crypto. 

Though risk also exists in the stock market, stock investors are much more prepared. In contrast, many crypto investors are not just new to crypto but new to investing period. This raises another critical question: should your first foray into investing be crypto? Let me put it another way, should your first time swimming be at the deep end of the pool?

Furthermore, are you good at figuring out new apps or social media platforms? Imagine trying to figure out a new platform where everything you do is permanent. Do you like that? Better yet, can you handle the consequences? If Twitter scares you because it's public and permanent, that's nothing compared to crypto.

This is a good gauge of whether crypto is appropriate or not. Unfortunately, it's not only easy to lose crypto; if it's gets stolen, the chances of you getting it back is slim. On top of the risk and permanence, if you can't handle the security demands, it probably isn't appropriate for you.

These are the personalities driving crypto price fluctuations. People unsuited for crypto panic buying or selling, and those who like the chaos.

Some advise only to spend what you can afford to lose, but I don't find this helpful as most crypto investors can't afford to lose any amount of money. As much as we paint crypto investors to be mysterious billionaires, most of the people we know interested in crypto are not rich. In fact, they may be those people living paycheck-to-paycheck. Perhaps the litmus should be, only invest in crypto if you have money you can afford to lose.

Angel writes; Dear Sam

What is an NFT?

Dear Angel,

So I already outlined what Bitcoin is, which is vital to understanding Ethereum. From Ethereum, NFTs were a no-brainer. Since you could develop both apps and currency with Ethereum, you could also make one-of-a-kind digital goods.

NFTs existed before Ethereum, but it was only after Ethereum that creating NFTs became streamlined.

I liken NFTs to the Met Gala. The Gala started in 1948, but it only became well-known in the last 10 years, coinciding with the rise of social media stars and influencers. Most of us don't know what the Met Gala is about, but we're aware of it because celebrities, artists, and influencers go to it.

Similarly, celebrities and artists brought NFTs new attention. The lockdown and more people spending time on social media also helped to spur its interest.

NFTs did not invent fungibility because no one can invent fungibility. It just means interchangeable. You exchange rice by the pound, and a pound of rice is a pound of rice.

Money is fungible, stocks and other securities are fungible. A car company coming out with a fleet of new cars that are exactly the same are fungible. Identical shirts at stores are fungible. If I take my kid to preschool, they can't give me another kid when I pick him up because my kid is not fungible. He is unique in all the world.

If I borrow your car, I can't bring back a different car because your car is non-fungible. I can't take a piece of art from a museum and replace it with a replica because that artwork is non-fungible. This is why two houses on the same street don't sell for the same price because those houses are non-fungible. But if you lend me 10 dollars in singles, I don't have to pay you back in singles. I don't even have to pay you back in cash. I can send you the money electronically via a mobile payment service. Because money is fungible.

You get the picture.

However, once we had internet and digital goods, non-fungibility became hard to maintain. This is why Getty Images and nearly all content creators use watermarks. This is why some sites won't let you download their pictures. This is why there are licensing services for images and sounds.

Going back to the first questions about ethics and capitalism, people might feel icky about investing but even committed socialists will defend the copyrights of digital artists. But this is just protecting digital property, so why is this treated differently? Because here, socialists recognize the artist is subsumed in capitalism, and they are forced to copyright their goods for the sake of income.

Intellectual property is a capitalist endeavor, but what choice does the artist have? As for our own inability to one day work, we are subsumed in capitalism, so what choice do we have for income than retirement?

Doesn't investing make you a capitalist? Yes, but so does being an independent artist. However, this doesn't make you a successful capitalist, nor one that isn't exploited. When you are subsumed, it's all messy, and there are no clear binaries. Just because you are a capitalist in one vector doesn't mean you aren't an exploited worker in another.

There are union workers who have multiple properties and immense retirement accounts. You can also have a therapist with a private practice who works pro bono and sliding scale. It's not an easy comparison. I think because artists are romanticized, it's easier to recognize their subsumption than for non-artists.

For digital artwork or music, licensing doesn't stop a piece of work from being replicated. Instead, it just absolves license holders from lawsuits. But using lawyers is expensive and time-consuming, and finding out whether someone has a license or not is tedious.

As Bitcoin made digital information public, transparent, and permanent, NFTs made ownership of non-fungible assets public. Now you can instantly know who owns an NFT, creating a real-time market. For example, house prices change slowly because it takes a long time to buy or sell a house. The same was true for artwork. Now you can buy and sell digital artwork in seconds, which accelerates price action.

Suppose you could buy and sell individual houses on the stock market. What would happen to the price? It could skyrocket and crash just as fast. But if all the homes on your street kept selling for higher prices, it would also drive the price of your home up even though these homes are non-fungible. This is what's happening with NFTs. Just as dilapidated houses in LA were selling for over a million during the housing bubble, we're seeing exorbitant prices for seemingly low-effort NFTs. Since NFTs like houses are unique, the whole market goes up or down together.

NFTs turned digital art into the stock market without nearly the same regulations.

People bring up the novelty of NFTs as the flaw when that's the selling point. Whether crypto or NFTs, supporters want to show the world that monetary value is arbitrary. 

Detractors will point to NFTs and crypto and say the price is make-believe, while crypto supporters are saying the whole capitalist system is arbitrary. Otherwise, how could NFTs exist under capitalism unless capitalism not only allows it but promotes it?

It's mocking capitalism with capitalism, which is why you might see various political alignments involved in the crypto world. Just as various different political leanings will engage in trolling.

Crypto is capitalism without the imperialism. Which is why individual capitalists like it more than countries.

John writes; Yo Sam

Please explain to me what happened with GameStop.

Dear John,

So remember what I said about gamified trading platforms, no trading fees, and fractional investing? GameStop was the culmination of all those changes.

It's hard to imagine, but years ago, you had to pay every time you wanted to buy or sell a stock. Years before that, you didn't just have to pay, but you had to call someone if you wanted to place a trade. All of these hurdles created a barrier to trading. Now you can trade in seconds with no trading fees. You also don't need to buy a whole stock; you can buy fractions. This brought more volatility to the entire stock market. There is now no such thing as too much trading and no stock that is too expensive. Also, don't forget about trading bots.

Another feature of these platforms is leverage trades. You can borrow money to buy stocks. You can also execute options contracts for even more leverage. That means someone with 10 dollars can now affect a stock price as if they had 1000 dollars.

It didn't take long for people online to collude and pump the price of particular stocks. A lot of this took place through message boards, chatrooms, social networks, and memes. Once you've built enough momentum, bots come in and increase the momentum. These are the "meme stocks."

But all pumps are followed by dumps, both caused by the same group. The first ones in are the first ones out. The people who cause the pump wait for an exit price. Maybe a stock was one dollar, then they decide 100 is when they get out.

As they get out, other people who got in early follow suit because they've also made a lot of money. You don't cause a pump planning to stay in forever. You only did it to make money, and now you can make money. If you're the last one out, you lose money. Furthermore, you can't hold on forever because you have leverage to pay back.

But you can't dump your shares unless someone buys your shares. Selling a share at $100 means someone bought your share at $100. But as the early group gets out, they drive the price down. That means new people coming in are immediately down on their investment.

For example, I sell you my shares at $100 apiece. Moments later, you notice the price has gone down to $90. The person who bought it at $90 notices the price is now $80. It's the difference between buying on the way up, the pump, versus buying on the way down, the dump. The last ones in will give all their money to the first ones out. 

It's self-fulfilling. I sell because I don't want someone else to sell first, which would drop the price. But selling first causes the drop, which then causes a chain reaction of people wanting to get out before someone else gets out ahead of them.

As absurd as NFTs sound, consider stocks. Stocks are fungible. This means they're interchangeable and identical. All that's unique is the price and time in which they were bought. You and I can own the same exact stock, but while you're up 100x, I can be down my whole retirement.

Whereas with NFTs, no one can have the same NFT. NFTs are scarce and unique. Gamestop, there are millions of shares with millions of different outcomes.

If you think crypto and NFTs are silly, this is even more true for the whole financial and monetary market. Except the stakes aren't high for crypto, whereas our very lives hang in the balance with the financial monetary system.

PR writes; Dear Sam

At around what price point should I sell my crypto, and what would be the best method for tax purposes?

Dear PR,

For tax purposes, holding it for longer than a year means you pay less in capital gains. That only matters if you've made money. At around what price you should sell your crypto is entirely up to you.

I am assuming you knew all the risks before getting into it, or if you're at the point where you're wondering when to sell, then by now, you've become aware of the risks. The general rule is to sell higher than you bought. I've already covered the dangers of pump and dumps.

A concept I do want to mention that people forget about is that selling is not absolute. This doesn't just apply to crypto but to all your investments and savings. It doesn't ever have to be: keep it all or fully liquidate. Remember my previous warning about the dangers of false binaries?

You can always sell a portion. Most retirees sell their investments in installments. You can apply this to any of your fungible assets.

Also, just because you've sold a portion of something doesn't mean you can't repurchase it in the future.

Selling everything is neither a good move nor a bad move; it's just a permanent one.

Okay, that was the final question. I'm done.

I had to take a lot of breaks because working on this caused me anger, depression, disgust, and various other emotions.

The questions weren't what upset me. On the contrary, I was glad to answer them. What upset me was knowing that our entire economic system is rooted in white supremacy, misogyny, imperialism, colonization, and genocide. That it's both corrupt and inescapable. And that it still relies on these systems of oppression to reinforce, replicate, and evolve our economic system.

But despite that, I do feel good about what I've done. I think I did something pretty useful and important.

I'm hoping this series was not only educational but also challenged pre-existing beliefs and defaults. I hope it made you think about where those beliefs came from.

The world is complex, and it's not just about strongmen and dictators. It's also about paperwork and numbers, and the strongmen and military protecting them.

Because there is no one person in charge of this system. There is no great dictator, just lots of accountants. And accountants are fungible. Like a hydra, removing their heads still leaves the system intact.

Since we are subsumed, consciously or unconsciously, we all play a part in keeping this system going. It uses us as batteries to power itself.

It's like a wildfire that we all fan with our breath, some more than others. And behind us, machine-generated wind. No one person or group fully controls it or can even predict it. And while we burn and the rich roast marshmallows, there's a chance they'll burn with us as well. Because we live in a giant bubble called Earth. Even if you escape the fire, how can any of us escape the smoke?

Unless something changes.

If and when that happens, I'll be sure to follow up. But for now, it's been bleak, and it still looks bleak. Unless you're one of the ones roasting marshmallows, then it's all shits and giggles. So, fuck them, and please support Southpaw.

Thanks for listening.