Are cryptocurrencies and nonfungible tokens (NFTs) fads or bubbles? Or are they here to stay? In this Fool Live interview, recorded on March 18, The Fintech Zoom’s chief investment officer Andy Cross sits down for a chat with author and former Fool Jim Surowiecki about Bitcoin (CRYPTO:BTC), other cryptocurrencies, and NFTs, among other crypto-related topics. You don’t want to miss this one!
Andy Cross: Hi, Fools. I’m Andy Cross, the Chief Investment Officer, and I’m really thrilled and excited to reconnect with Jim Surowiecki, a friend of the Fool, a former Fool, and the author of The Wisdom of Crowds, and a prolific writer across lots of different platforms, including Medium, have written for The New Yorker and for Slate and lots of other places. I’m excited to have Jim join us today to talk a little bit about Bitcoin, crypto assets and all things that may touch onto the crypto landscape. Jim, welcome to the Fool again.
Jim Surowiecki: Yeah, thanks for having me on. I appreciate it.
Cross: Jim, Wisdom of the Crowds. Here’s your book.
Surowiecki: Oh, hardcover.
Cross: Hardcover written a few years ago, not signed. Unfortunately, I have to get you to sign it somewhere. But written now, 2004, I think, is when it was four to five, so lots of change since then. We’ve had a lot of people talk today, a lot of great guests like yourself, very knowledgeable about lots of different things including this space. But I want you to put on your Wisdom of Crowds hat a little bit and put that lens in there and explain the wisdom of crowds philosophy briefly then apply that. Does that apply to Bitcoin? Why and why not? Or is it more like the madness of crowds that you are seeing with Bitcoin nowadays?
Surowiecki: Yeah, it’s a great question. The Wisdom of Crowds, the concept behind it is pretty straightforward. That is that under the right conditions, large groups of people, actually sometimes even small groups, groups of people can often arrive at incredibly good decisions or solve problems in incredibly efficient ways, ways that are often better than and make decisions that are often better than even the smartest person in the group. The simple example of this is, if you ask a group of people to guess how many jelly beans are in a jar or the example I used at the beginning of the book is a group of people who are asked to guess how much an ox weighed. The group’s average guess is typically exceptionally good, and it typically is better than about 95% of the people in the group. If you do it multiple times, it actually pretty much is almost impossible for anyone to beat the group. Now, that applies in a lot of different situations. One of the places where it obviously is relevant is thinking about investing. It’s one of the reasons why it is difficult but not impossible to outperform the market in investing. We know it’s a very hard thing to do. You need to be disciplined. You need to have a kind of recognition of what you know that everybody else doesn’t. Obviously, the Fool is predicated on the idea that you can do that, but it’s hard to do. That’s the basic concept of the Wisdom of Crowds. But one of the things that’s important about it is that for that to work, people need to be, relatively speaking, independent of each other, so they need to be thinking on their own, and they need to be relying on their own information or intuitions or whatever. It’s not that they need to be especially smart, and that is, say, each member of the group. It’s not even that each member of the group needs to have a lot of great information, but you don’t want people taking a lot of cues from each other. Let me put it differently. When that happens, when people are really paying a lot of attention to what everybody else is doing, that’s when it becomes much easier for it to become the madness of crowds. That’s what happens most classically in stock market bubble or real estate bubble where everyone is basically just saying, “I’m going to buy this because everybody else is buying it, and I think I’ll be able to sell it to someone else down the road,” instead of looking at the underlying value of the assets.
Cross: Jim, in some way, you’re potentially influenced by someone else’s behavior, unlike the ping pong ball guess if I’m just totally independent by myself.
Surowiecki: It’s not that it needs to be perfect, right? It’s not that the lack of influence needs to be perfect. In almost any environment, people in a group are hearing what other people are saying or whatever it is. But the problem is when the influence of other people becomes dominant, when it’s really driving most people’s decisions. That’s when you really end up with trouble. It’s a problem because many of us are herd of animals in some ways. We take our cues from other people, especially in situations of uncertainty. It’s very easy to think like, “Well, what’s everyone else doing? It’s maybe safer to stick there,” so you want to try to encourage people to think for themselves.
Cross: What do you see with Bitcoin these days that might or might not apply for your wisdom of crowds philosophy?
Cross: A decade ago. That’s a decade ago now, Jim.
Surowiecki: Literally and emblematic of my investment career. Generally, I did not buy even any. I could have invested a tiny, tiny, tiny amount of money, and I would have been very, very well off right now, and I did not. Because even in 2011, it seemed to me like there was a bubble aspect to what was going on. Preface that. Just take everything I say in that regard with a grain of salt. I think the fascinating thing about Bitcoin is that there is no obvious fundamental value to it. It’s very different from investing in stocks where the underlying free cash flow that these companies are generating now or will generate in the future constitutes that kind of bedrock fundamental value, that the market’s judgment is always, I would argue in one way or another, circling around. Sometimes it gets way out of whack. Sometimes it actually undervalues it. That’s how you can make money the way you all have. But the assumption is that it’s always circling around. With Bitcoin, the dynamic is very different. Bitcoin is much more, at this point I think, like a digital gold. It’s not even really a currency. One of the things that is interesting about Bitcoin is that when it began, the dream of Bitcoin was that it was going to become a digital currency that was going to potentially be able to replace or at least compete with traditional fiat, for instance, like the dollar. I think that dream is pretty much dead. I think it really is much more of a digital asset. The problem when evaluating digital assets or assets like gold or collectibles is another example, is that it’s hard to figure out what true value is because true value actually depends on what other people are willing to pay for it on some level. The thing I would say about Bitcoin at this point is that I think it does have a decade in which more and more people have been willing to put their money into it and see it as a store of value. Probably means that it’s a mistake to just write it off as the entire thing is a bubble. I think that, at this point, it has a certain amount of collective weight behind it, so I totally agree with that. I think the problem with Bitcoin from an investing point of view, to be honest, is I just have no idea how you decide what it’s worth. One of the challenges when it comes to deciding when to get into Bitcoin or get out of Bitcoin is that it’s very hard to figure out what fundamental value is, and I would say the exact same thing about it. But in the case of Bitcoin, I do think there clearly are periods where it is very bubblelicious. There are periods where it is clearly the price is being driven up because Elon [Musk] tweets about it or everyone just suddenly starts to pay attention to it. I’m sure you’ve thought about it a ton of times. Bitcoin was the best performing asset of the 2010s, but at the same time, if you look at the volatility, the rises and falls are extraordinary.
Surowiecki: I think if you’re going to be a Bitcoin person, you have to have diamond hands, to quote that Reddit phrase. But I also think, I will be very wary of buying at the end of any period, or in the middle of any period where there’s a lot of publicity about bitcoin. Because I think that’s a moment where you’re getting a lot of frothy buying. I think that’s one of the things you should look out for.
Cross: Yeah, and our analyst, Bernd Schmid, talked a little bit about that in his interview, talking about the different cycles they had talked about, which is really fascinating. If you look forward three or five years and you write Wisdom of Crowds 2… Do you think bitcoin and/or crypto currencies or crypto assets because you’ve written recently about the difference between how bitcoin started as a cryptocurrency, as you mentioned, Satoshi’s original whitepaper was really focused on, part of it was on how it can be a currency and now it’s really converted more to assets, in some form of asset, like you said, digital gold. If you were going to write three or five years forward Wisdom of Crowds 2, Do you think bitcoin has a spot there?
Surowiecki: I’m not sure I would frame it in terms of the wisdom of crowds exactly. I think what’s interesting to me about bitcoin and other crypto currencies, but also even like to a lesser degree, it’s different. But I think that there are connections between something like what’s been happening with GameStop (((NYSE:GM)E)) over the last, what is it now, a month and a half? It’s gone on much longer than I thought it would.
Cross: A few months.
Surowiecki: But part of what’s interesting about bitcoin is that there’s an element of collective will to it. In other words, if you think about the stock market, the way the stock market typically functions, and let’s leave GameStop out because I think GameStop is an unusual example, is that you have lots of different people all over the world who are making independent decisions about whether or not to buy the stock. Now, they may be looking at what other people are willing to do, they’re talking to each other, they’re listening to CNBC. But everyone’s like, “I think it’s worth X.” Or “I don’t think it’s worth X.” Or whatever it is. Then they all arrive at that. Bitcoin, obviously, has an element of that. But Bitcoin also, there’s an element of a collective decision that this thing is going to be worth something. Bitcoin actually has, you can call them true believers, but actually has people who are evangelists. The idea is like, “We’re going to make this into a strong digital asset.” Since people working together to turn this thing from when it was just like dream that Satoshi had come up with, and that over thise past decade have made it into something actual and real. I think it is a fascinating example of collective action, and one that I think would have been very hard to anticipate a decade ago. I think, in terms of the currency thing, I’ve written about this a lot, and David and I talked about it a few weeks ago, I think there are elements to the way Bitcoin functions that make it very hard to function as a currency, so I don’t ever really think it’s going to be that. Ethereum (CRYPTO:ETH) is obviously being used quite a bit, say, for instance with NFTs, is actually pretty essential to that. But I’m also a guy who doesn’t have any problem with the dollar or fiat currency. I think they function fine for most people. I don’t see there’s really a use case for replacing them in most situations.
Cross: I think, Nic Carter had talked about this, and not necessarily against fiat currency, or it’s not just only one or the other. I guess, I should say, what would it take for Jim Surowiecki, who’s been a skeptic, to be more of a believer in the usability of Bitcoin as a currency, knowing all you know and all you’ve learned over the last decade of writing about Bitcoin?
Surowiecki: I find it hard to imagine any scenario in which I would think Bitcoin itself would. Because I think the fact that Bitcoin supply is limited, which is, of course, the thing that people like about it, people who like it as a hedge against inflation.
Cross: They like it as an asset because it’s restricted to 21 million.
Surowiecki: Exactly. But it’s one of the reasons why people even like the idea of it as a currency because it’s the same reason why there are people who still think we should be on the gold standard. Because they think, “Well, that means that the value of it can’t be deflated away.” That’s great for an asset, I think it’s terrible as a currency. For me, currencies are about use. You want it to be used and the problem with a limited supply is there’s always this incentive to just hoard it. Because if you know there are going to be no more of them, why would you necessarily want to spend it, unless it really isn’t worth that much, in which case, you say, “OK, now we can use it.” I think the way Bitcoin is constructed, the paradox is that the very things that make it appealing to a lot of people, I think, are the things that make it hard to function as a currency. I mean, some of the technical stuff, I assume, they can probably find ways around in terms of like….
Cross: Energy usage, you mean like that thing?
Surowiecki: The fact that limited number of how few transactions that they can handle, and how long it takes to… That stuff, I think, they’re probably, I know people are already working to try to solve those. But having said that, it’s not clear to me that any of those limitations necessarily apply to other crypto currencies. The problem you have is that when it comes to, say, limited supplies, if you don’t have limited supply when it comes to crypto, then it’s like, wait a second, how do I know how many coins are there? You just have unlimited or you have the equivalent of the Central Bank with a cryptocurrency, then it is a little like, “How do I decide whether or not if this is really going to hold any value at all?” It’s a challenge, I think, in that regard. The other thing I think you’re going to see is, I think it will be shocking if Central Banks don’t really, essentially, move into digital currencies. Having said that, one of the reasons why I’m skeptical of the long-term use case is that maybe partly as a result of crypto, it’s so much easier to transfer ordinary money now than it used to be. I’m just thinking about something like Zelle. It’s a trivial thing. But as recently as five or 10 years ago, if you wanted to send money to someone digitally effectively, it cost. It cost you money, it took time. You oftentimes had to call the bank to check. It’s so much easier. So I think in that regard, you’ve actually seen traditional banks take on a lot of these characteristics.
Cross: Jim, you write a lot about just the business world and the financial world, and you mentioned NFTs, nonfungible tokens a little bit earlier. Let’s just maybe pivot a little bit toward that direction, putting on again your forecast hat or your futuristic hat, does the concept of an NFT and the blockchain, that concept broaden out from Bitcoin and just currencies. As a watcher and an observer of financial behavior and business behavior, does that excite you a little bit more?
Surowiecki: I’ve always been interested in the blockchain. I think the blockchain, obviously, has certain aspects of it that lend itself to, basically, greater efficiency, greater security, all the things that people have talked about. It may be that there are other mechanisms to do it, but I do think that companies are going to use it more and more in terms of supply chains and things like that. When it comes to NFTs, so if you want to talk about a bubble, NFTs are a bubble, like that [laughs] is clearly a bubble.
Cross: First, could you just give us a 30-second Jim Surowiecki’s definition of a bubble, so we know that we’re in one?
Surowiecki: I think the price of many, many NFTs is primarily being driven by speculative behavior in anticipation of price increases rather than a rational calculation of value. Now, obviously, when it comes to collectibles, which is in a lot of ways what most of the high-profile NFTs are, it is hard to know what fundamental value is. But I think, the thing that’s fascinating about NFTs is, you can clearly see media interest and public frenzy driving up prices.
Cross: Yeah, maybe give a few examples, Jim.
Surowiecki: So the most obvious example is this piece of digital art by Beeple which sold for $69 million, supposedly, at a Christie’s auction, what, last week was it? I guess, it was last week.
Surowiecki: The more ubiquitous form of it is, let’s say, N(BA) Top Shot, which is a place where you can go and buy, they’re effectively digital trading cards that feature highlights from various N(BA) players. It’s been up for less than a year, and the amount, I think they’ve had days where they’ve transacted $200 million of these things in one day. I think NFTs are fascinating and strange, but the thing that’s oddest to me about NFTs, and let’s take N(BA) Top Shot, for example. The way N(BA) Top Shot works is they basically make these highlights and they have a certain number of them, a certain number of that highlights. In some cases the numbers are low, like there is a famous one that is the first block shot I think of Zion Williamson, and there were 50 of those made. There’s some kind of scarcity value, some unique value whatever. You can buy them on this site, you can sell them. You can also buy packs that have these moments, most of which are pretty useless like in any baseball card collection. But the thing that’s amazing to me is that, I wrote about this yesterday, I will give you one concrete example. There is a highlight of a New York Knicks player named RJ Barrett, who’s in his second year. The highlight is his first basket in the N(BA) which happened last October. It’s a layup, it’s just a fine euro step layup, it’s nothing big. There were almost 2,900 of those issued. So there’s 2,900 of them that exist, and the cheapest one for sale, there are 85 of them for sale or they were there yesterday on the Top Shot spot and the cheapest one cost $1,900. I’m like, this is just RJ Barrett, and there are 2,800 of them, and the cheapest one is $1,900? I think what’s fascinating to me about the NFT market, at least Top Shot, and I think it applies in other ones, some elements of the digital art market as well, is that in most collectible markets, it took a long time for speculators to get into those markets. If you think about baseball cards. People didn’t get interested in investing in baseball cards until probably the ’80s really. So that’s part of the reason or comic books is the same way. That’s why the old ones are so valuable because no one thought of paying high prices for them and a lot of them were just destroyed or wrecked. With NFTs, speculators have been in on that almost from the start. If you buy the wisdom of crowds on any level, that obviously is going to make prices more efficient. If you can buy that RJ Barrett thing for five bucks, which is what a lot of these guys did, I think back in September. Then that’s one thing. If you have to pay $1,900 for it, your upside is just so much smaller. You don’t want to buy Amazon, and maybe Amazon is not a good example, but you want to buy assets at low prices. You don’t want to get in after everyone else has already done it. So that I think is a really complicated thing about the NFT market. The one thing I would say is, it’s totally possible that as NFTs become more well known, you’re going to see money flood in, and I’d say as the market expands abroad, I think right now you’re not allowed to buy NFTs say from Top Shot, from China, that may be wrong, but let’s say, as the market expands, you can totally see price spikes. I would not be surprised to see that. But I do think long-term it’s hard to make money in that market. But I’m a skeptic.
Cross: I like playing the game. My daughters are young, so they’re six and nine, and I’m wondering will the six-year-old have to have a driver’s license and will she learn how to drive a car, [inaudible] to buy a manual or automation. I play it forward and start thinking about digital currencies and crypto assets and NFTs and just what is their world is going to be like. So again, put on your futuristic hat for me a little bit. Do you foresee a time in the next 20-30 years where they are much more not just interested, but actual in reality, they are making transactions with digital currencies.
Surowiecki: I can imagine them doing that. I can imagine people using Ethereum or other currencies. My general sense is that when it comes to everyday transactions and transactions that don’t try to circumvent the government in one form or another. I continue to believe that the dollar is going to be, or the yen or whatever, will continue to be essentially the currency of choice. I think the ease of transactions is only going to go up with traditional currencies. I don’t think it’s going to fall, and I think crypto is obviously helping push that forward. I do think that the blockchain will probably become more and more of a part of people’s lives. So things like NFTs, I could imagine them becoming fairly common ways for people to either sell art or sell other kinds of digital objects that they want to, just because, you have the value of the security, you have some clear statement of ownership and the like. But I do have a hard time imagining a scenario in which, say, fiat currencie lose the kind of usefulness they have right now, at least certainly for 20 or 30 years I can’t quite imagine.
Cross: How about regulation, Jim? We’ve seen there really is not an ETF, for example, to invest specifically in Bitcoin. There’s the Grayscale Trust (OTC:GBTC). What do you see from the regulatory side or what do you foresee from the regulatory side? I think we’ve seen some recent news about maybe the Office of the Controller. We’ve seen obviously a lot of companies, PayPal offering the ability to use Bitcoin, and obviously, lots of companies that are including The Fintech Zoom, have been buying Bitcoin for their balance sheet. How about from the regulatory front, any thoughts or interest there?
Surowiecki: To me a company to look is a company like Coinbase. One of the things that’s obviously fascinating about or challenging about Crypto for a lot of people, including myself is the hassle involved to get it, to buy it, and then if you want to be able to transact, it’s a little tricky. It’s not a huge hassle, but relative to buying stock it’s obviously much more complicated and the like. So the paradox is that that’s why places like Coinbase and others like it have emerged and evaluations are just out of sight. Because people like centralized places where they know they can transact and where it’s easy. The paradox is that to some degree, I think subverts the idea of decentralized finance, and actually creates locations where regulators can focus their attention. So that I think going forward, I have no good prediction about it, but I do think going forward that is going to be very interesting to see. I think regulators have generally, with the exception of tax authorities, taken a pretty hands-off approach to this stuff. I think that’s good. I don’t think there’s any reason why, in general, I think regulators should encourage innovation and allow people to experiment and not stress too much about people potentially losing money or whatever. Some of that is just the consequence of people making individual choices. But I do think the fact that you’re likely to end up with places that are very big, essentially, centralized trading places does make it more likely, and because it makes it easier for regulators to say, OK, so you have all these accounts, so OK, so we can actually go in and seeing whether or not these people are actually paying their taxes. That I think it would be shocking, especially as Bitcoin becomes more and more valuable that you don’t see more intrusion along those lines.
Cross: Yeah, it’s interesting. The cold storage versus the centralized storage and where I can trade and access and which ones we talked about. Some people talked about this earlier today and how much I can download to my own drive and hold it myself which is riling a lot of people taking those who own gold bricks in their basement versus those who might own some gold ETF for gold miners or lots of different ways.
Surowiecki: Yeah. I think it’s just fascinating because you see this collision as crypto becomes more mainstream, it’s inevitably the impulse or the need for making it more accessible, easier to use all of those things rather than being something you need to be really tech savvy to use. That’s inevitable, and one consequence of that is that your decentralized places are going to become more influential. I think that’s inevitable.
Cross: Jim, I also don’t own Bitcoin and I know it’s been just this wonderful long-term volatile performing asset. But let’s just say my last question here before we wrap up our interview and thank you so much for your time, but if Bitcoin gets to $500,000 it’s maybe $60,000 today or so. Would that surprise you? What would’ve we, as any skeptic or doubters may have gotten wrong, or did we not get it wrong, and that’s just the nature of markets?
Surowiecki: Yeah, it’s a great question. It would very much surprise me, but like I said, it very much surprises me that Bitcoin is at $57,000 there or is it up to $60, whatever. It’s up almost 100% this year already. It would very much surprise me. I certainly have a hard time imagining it getting that high anytime soon, and I think if it worked, you would have a lot of ups and downs. I think I would say I was wrong about the idea of it being a sustainable asset. I don’t think I was wrong about the currency, and in fact, most of my writing about Bitcoin has always been around this question a bit as a currency and why it was not really well designed to do that and why it wasn’t functioning.
Cross: The volatility of it makes it very hard to do.
Surowiecki: Volatility of it that, the impulse to hoard, the transaction issues and the rest. I think the thing I got wrong was, I assume that Bitcoin‘s value as an asset was going to be in some way tied to its use value. In other words, if Bitcoin was not useful as a currency or was not being used widely as a currency, then ultimately its value as an asset would therefore be somewhat ephemeral. Because people will be like, why do I want to buy Bitcoin as opposed to X, Y, or Z, one of these other things? I think what has happened, I don’t think we have a good explanation of why it happened, but what I think has happened is that people have effectively collectively decided this is our gold basically, and we are willing to put our money into this because we think other people will continue to respect it has value. It’s possible that will blow up at some point, but there probably is a point at which the fact that everyone says it’s so makes it so. There probably is some point at which that happened, and I can imagine it going back down to $10,000 or whatever, but it’s not entirely obvious exactly what would do that.
Surowiecki: We know what would do that. If there was massive hacking and if that somehow were to happen, I don’t think it will, but if it were, I think that would obviously changed the dynamic. People suddenly were like, “Woah, wait a minute, I don’t actually have this thing.” But in the absence of that, I don’t know. That’s why it’s strange to think about in terms of bubbles, because with bubbles the one thing I would say is, and this is I think one of the interesting things about it is that; the paradox of stock market bubbles is that the fact that there is a fundamental value, I think, to companies, actually makes it easier in the end for the bubble to pop. The great example would be Cisco (NASDAQ:CSCO). When Cisco got to, I came at which market capital it, was like $600 billion or something in 2000. That maybe overstated but somewhere like that. You could do the math, and it was like there was no way Cisco was ever going to be able to get to a $600 billion present value in generating free cash flow going forward. It was almost like literally impossible. There’s always that something bringing it back to earth. The paradoxes in Bitcoin‘s case, there is nothing bringing it back to earth. In a weird way, that makes it harder to think of it as a bubble. It doesn’t make the ups and downs, it’s easy to say, “OK, it’s up to $57 because it’s whatever, maybe we’ll go back to $30.” I don’t know. It feels like it’s arrived on some level.
Cross: Yeah. Well, Jim, thanks so much for sharing your thoughts and we’ll have to leave it there. Maybe we can come back and revisit in 10 years or when my daughter’s driving.
Surowiecki: [inaudible] at 90 or whatever which is probably next week.
Cross: Well, thanks so much for joining us on the Bitcoin theme day here at the Fintech Zoom. Jim, appreciate your thoughts.
Surowiecki: Thanks for having me on, I appreciate it.
This article represents the opinion of the writer, who may disagree with the “official” recommendation position of a Fintech Zoom premium advisory service. We’re motley! Questioning an investing thesis — even one of our own — helps us all think critically about investing and make decisions that help us become smarter, happier, and richer.