Bulb-Lite Moment

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The bitcoin and the bulb were never about bubbles. They’re barometers of belief, and they’re pointing to change, says K D Adamson.

 

At 1pm on 17th September 2017 in Tottenham, North London, a man called John Nolan burst into flames in the middle of the street and died. According to witnesses Nolan was completely alone and no one else was nearby.

Firefighters who attended the scene later confirmed that they found no accelerants on Nolan’s body and they could identify no source of ignition for the intense blaze.

Despite weeks of investigation the authorities have failed to find any explanation for the sudden conflagration which consumed John Nolan. Which means he looks set to join a very elite club indeed, those whose death certificates cite an extremely unusual—and very controversial—cause of death. Spontaneous Human Combustion.

Broadly defined as a living person whose body suddenly bursts into flames without any source of external ignition, there have only ever been 200 reported cases of Spontaneous Human Combustion (SHC).

Whilst many of those do appear to be dubious SHC has been cited as an official cause of death as recently as 2011. It was the conclusion reached by West Galway, Ireland coroner Dr Ciaran McLoughlin, having investigated the gruesome death of Michael Faherty, whose body was found burned beyond recognition in an otherwise undamaged room.

The problem is that even with our advanced twenty-first century understanding of science and pathology, and powerful forensic analysis, the cause of the phenomenon remains unknown. But increasingly compelling evidence appears to exist that SHC is—as my 18 year old daughter would say—a thing.

Dr McLoughlin was understandably reluctant to give his opinion that SHC was the only legitimate explanation for Faherty’s death.

Spontaneous Human Combustion is for conspiracy theorists, ghost hunters, mediums and other fraudsters. It’s the kind of thing that swivel-eyed fantasists who congregate around on-line, fake-news message boards believe in. Like they believe that aliens are stashed in Area 51, the moon landings were staged and the earth is really ruled by a Reptilian Elite. And giving this kind of Internet-generated idiot-fodder any kind of legitimacy just encourages more people to believe the hype and hysteria.

In an age of misinformation and fake news the lack of a physical explanation for SHC is a primary reason that sensible people dismiss it. We like stuff that we can measure, weigh, see, hold and prod. And when we can’t do that, we get suspicious.

For the last few centuries value has been tightly associated with physical, tangible things. That’s why the original basis of our financial systems and money was nice big, heavy, shiny bars of gold. But the truth is what makes the financial system real isn’t gold, and it never was.

If you live in the UK and happen to have a banknote in your wallet you’ll see that it has on it a phrase which has been on every banknote since 1853—the words “I promise to pay the bearer on demand.” That’s all your banknote is. A promise. Because although we like and value physical, tangible assets, money is really just a collective act of imagination. Money is about belief, and by extension so are markets. And belief is astonishingly powerful.

Bloomberg has just announced it’s adding three crypto-currencies—Ripple, Ethereum and Litecoin—to its terminal service. It’s a service which is used by major banks and investment houses worldwide and the three newbies will join the daddy of cryptocurrencies, bitcoin. The fact that these other cryptocurrencies are now being quoted by Bloomberg might not seem that important, but it is.

“The addition amounts to a validation of sorts for the digital currencies,” writes Fortune. And that validation is really significant. Because no matter how reluctantly they’ve done it—just like Dr McLoughlin and his death certificate—Bloomberg sticking this stuff on its terminal, the Cboe and the CME trading bitcoin futures, and now TD Ameritrade—the largest futures operation of any brokerage—preparing to allow bitcoin trading on its platform from Monday, are making this whole crypto-currency thing more and more legitimate.

In the past year bitcoin has really caught fire, but it’s still being characterised as a fat fraud no better than spontaneous human combustion.

For those of you who have managed to miss the phenomenon that is bitcoin here’s the key stat you need to know. Bitcoin has increased over 1000 per cent in value since the beginning of this year. There have been significant winners, and losers too—amongst them the singer Lily Allen who is reportedly regretting turning down a gig which offered to pay her 200,000 bitcoins. Had she accepted she would now be worth over £1bn.

In the past year bitcoin has really caught fire, but it’s still being characterised as a fat fraud no better than spontaneous human combustion. Whilst the authorities in North London were desperately trying to find a good reason not to classify John Nolan’s fiery death as SHC this September, Jamie Dimon, CEO of JP Morgan, was busy pouring cold water on Bitcoin. The crypto-currency “is a fraud” and will eventually “blow up” according to Dimon, and he’s not alone in that view.

His comments followed similar from Warren Buffet who called it a “mirage” and Jordan Belfort, the real-life Wolf of Wall Street—whose market manipulation and fraud crimes in the 1990s were turned into a movie—who called it a “huge scam”. And, to be fair, I guess he should know.

Even as it went parabolic, hitting US$16,000 and surpassing the market cap of his own J P Morgan, Dimon was still adamant that bitcoin was bunkum, telling an investor conference in New York that if any of his traders were found trading bitcoin he would “fire them in a second”, and that bitcoin was “worse than tulip bulbs.”

Dimon isn’t the first to reference the so-called Tulipmania which gripped the Dutch in the 17th century and is generally considered to be the first speculative bubble. During the Dutch Golden Age the new, fashionable tulip became a luxury item with the rarest, the Bizarres—strewn with multi-coloured, flame-like streaks—commanding huge prices. Values climbed to extraordinary levels before dramatically collapsing in 1637.

Bitcoin though, according to the former president of the Dutch Central Bank, Nout Wellink is, “worse than the tulip mania.” Speaking to students at the University of Amsterdam Wellink warned, “At least then you got a tulip [at the end], now you get nothing.”

So is the bite of the bitcoin bug so contagious that its infectious mania is reaching epidemic proportions? And what do you actually get when you buy a bitcoin anyway?

Bitcoin isn’t a fiat currency and it isn’t gold, but it shares characteristics with both. The fact that bitcoin isn’t backed by anything, and isn’t tethered to hard assets is often cited as evidence that it’s just a bubble. But, as that banknote in your wallet tells you, no currencies in the modern financial system are these days.

You can’t swap your pound for a fixed amount of gold any longer. All modern currencies are fiat—unbacked by gold or any other hard asset—their value is by fiat decree alone with the issuing government simply stating that the currency has worth.

In that respect bitcoin is no worse than a fiat currency, but in reality it has a big advantage. These days a government or central bank isn’t constrained in the amount of currency it can issue, and as recent years have demonstrated, can hugely increase the supply of money if it so chooses.

By contrast, although bitcoin isn’t tethered to a hard asset, it’s supply is limited. New bitcoins are created via a complex process known as ‘mining’, where computers are rewarded with a bitcoin for processing mathematical equations through specialised software. The total number of bitcoins in circulation currently stands at 16.7 million, which will continue to rise until they reach 21 million—the total supply set by the currency’s rules. It’s anticipated by some experts that the entire supply of bitcoins won’t be in circulation until around 2140.

Bitcoin has become far more than a bubble, it’s become a barometer of people’s faith in the system. And for a system which depends in its entirety on faith and trust that should be a big red flag.

Bitcoin isn’t issued by a government, and it has a fixed ceiling on the number which can ever exist, which therefore insulates you against the danger of a government going to war on a whim, printing the money to pay for it and pulverising the value of your savings. In that way bitcoin can be readily compared to gold—what you buy when you want to protect yourself by moving your capital out of the fiat money system and into a real asset.

To date it’s the similarity to gold which appears to have driven the growth of interest in bitcoin, as people use it to get their money out of fiat currencies. What bitcoin has become then is far more than a bubble, or a crypto-currency—it’s become a barometer of people’s faith in the system. And for a system which depends in its entirety on faith and trust that should be a big red flag.

What investors are doing in their droves is choosing to put their faith not in the global financial system run by central banks, or a physical asset like gold, but in a global, decentralised, distributed, digital ledger which automates trust and disintermediates middle-men, and which in the space of twelve months has a bigger market cap than a too-big-to-fail bank like JP Morgan. No wonder Dimon and his ilk are laying out their brown trousers.

But it isn’t just the bankers who are preparing to watch their industry go up in flames. When it comes to trousers, brown looks like being the new black across a great swathe of established markets, because it isn’t bitcoin but the technology which underlies it which is the real story. And that technology is the blockchain.

For a great overview of the blockchain I highly recommend Deanna MacDonald’s article “Token Gesture” in our Q2 issue. I don’t propose to dive into it again here, suffice to say that the blockchain is really made up of two things—tokens and blockchains.

Tokens can represent any kind of digital or physical asset, and blockchains provide a trusted digital record of their ownership and other characteristics. Put very simplistically the bitcoin is really a token—the thing that allows the user to participate in the network. Blockchains enable a group of people who do not know or trust each other to organise themselves around the purpose of a specific blockchain.

They are bound not by a legal entity or a formal contract, and they need not rely on a trusted intermediary, but rather cryptographic tokens and fully transparent rules written into the software. Blockchains and tokens allow the physical to take on digital characteristics, and endows the digital with physical characteristics like continuity.

So, far from a tax on stupidity, cryptocurrencies are the first acrid smell of smoke in the nostrils of the global economic system which took shape as feudalism ended and which has been the store of value for at least the past ten or so generations.

The early capitalist structures of the Renaissance—created to facilitate the expansion of shipping and global trade—laid the foundations for the current economic paradigm. Together with emerging technologies and changing demographics—courtesy of an unwelcome visitor known as the Black Death—they combined to deliver a new kind of economy where the entrepreneurial dynamism of competitive markets drives productivity up and marginal costs down.

The majority of economists agree that the most basic condition for economic efficiency is that price equals marginal cost. But what happens when technology enables the marginal cost of production to fall to zero? That’s the reality of the new digital or DX economy we’re already moving into. Once you’ve produced an ebook the marginal cost of production falls to zero, same as with software or music.

“If information goods are to be distributed at their marginal costs of production—zero—they cannot be created and produced by entrepreneurial firms that use revenues obtained from sales to consumers to cover their [fixed set-up] costs. If information goods are to be created and produced…[companies] must be able to anticipate selling their products at a profit to someone.”

That’s the view of Lawrence Summers, former US Secretary of the treasury and J Bradford DeLong, professor of economics at University of California, Berkeley, and it encapsulates the reality that very few are openly stating. Namely, that the long-term viability of the existing economic regime is shrouded in uncertainty.

It is the search for more efficiency and productivity which is driving most incumbent organisations towards digital transformation, finding ways to reduce cost and increase profit. But as Summers and DeLong outline so articulately, the logical outcome of really successful digital operation could ultimately fatally undermine the ability of a company to actually make any profit.

What’s even more alarming is that we don’t have much time to come up with an alternative. Today more than 50 per cent of the world’s traded services have been digitised as business races to hoover up the money unlocked by digital transformation, and new, lean start-ups target inefficiencies and other people’s margin.

Perhaps one of the most significant findings I’ve seen this year came from McKinsey Global Institute (MGI) whose econometric research discovered that data flows now exert a larger impact on economic growth than traditional goods flows. Since the financial crash cross-border flows of physical goods and finance have lost momentum, whereas digital flows have mushroomed.

Pause a second and reflect on what MGI is really telling you here. It is saying that the global physical trade flows which we have spent literally centuries building up—and of which shipping is an absolutely integral and foundational part—have been eclipsed in their economic impact by digital trade flows which fifteen years ago were pretty much negligible.

And we’ve barely started. Because the technologies which are underpinning this massive shift are moving exponentially, meaning that a new technology which has one per cent of the market today could have all of it within 7-8 years.

We are right now sitting at an existential triple-junction, watching as the resulting tectonic shifts reshape the global economic landscape.

Right now business is hardwired to manage scarcity and use scale to drive down marginal cost. Nowhere is that more evident than the shipping industry where counter-cyclical investment in tonnage and big scale plays—particularly in the container market—are the backbone of the industry.

Shipping’s value resides in big, chunky slabs of physical steel that owners can name, launch and have pictures of on their walls. And they like it that way. It comes back to that bitcoin argument about its intrinsic value, the fundamental value of something which shipping people still believe resides in the tangible and physical.

But the reality is that ships aren’t gold. As with all assets their value is broadly ordinarily calculated by summing the discounted future income generated by the asset to obtain the present value. With a future changing so quickly and technology rendering so much obsolete, shipping’s asset prices could be heading for serious volatility.

In a world transitioning out of an economic paradigm which has dominated for centuries, the decisions which companies make now, and the speed with which they do so, could be critical. It starts with asking different questions. Not the ones your MBA encouraged you to answer, and not the advice your mentor gave you twenty years ago, or—I’m afraid to say—the guidance that your board is probably giving you right now.

In a scenario where profit could be under existential pressure, the first new question should be ‘how do you refocus from creating profit to creating value?’

To have a chance of answering that question adequately you really need to get some sense of the seismic forces that are creating the future. Three tectonic plates are moving in tandem; a range of global megatrends—like demographic changes, resource scarcity and climate change—are meeting exponentially growing breakthrough technologies, and changing generational mindsets, beliefs and expectations. We are right now sitting at an existential triple junction, watching as the resulting tectonic shifts reshape the global economic landscape.

The last time we sat at a similar triple junction was during the Renaissance, when demographic changes brought about by the devastation of the Black Death, advances in technology and new mindsets drove a paradigm shift.

Markets began to enclose what had previously largely been held and managed in common, and since then the ‘collective commons’ has been subsumed and relegated to something we now loosely refer to as the ‘Third Sector’. But as profit dries up the answer to where we look for value may lie in a new iteration of that pre-capitalist order.

“Markets are beginning to give way to networks, ownership is becoming less important than access, the pursuit of self-interest is being tempered by the pull of collaborative interest, and the traditional dream of rags to riches is being supplanted  by a new dream of a sustainable quality of life.”

You will probably have heard of the collaborative commons by now—also characterised as the sharing economy. It offers a very logical scenario for how we may organise economic activity in future. But as Jeremy Rifkin points out, it’s starting to flex its muscles now.

“The Collaborative Commons is already profoundly impacting economic life,” he writes in his book The Zero Marginal Cost Society. “Markets are beginning to give way to networks, ownership is becoming less important than access, the pursuit of self-interest is being tempered by the pull of collaborative interest, and the traditional dream of rags to riches is being supplanted by a new dream of a sustainable quality of life.”

Now I have a strong suspicion that these kinds of desires aren’t that new, but what is new is the megatrends giving us the context to make them relevant, and technology giving us the capability to deliver on them.

Rifkin argues that it is the Internet of Things (IoT) which is the underpinning technology foundation for this paradigm shift to the collaborative commons. I agree it’s key, but when it comes to a distributed, collaborative, peer-to-peer, laterally scaling global network it seems blindingly obvious that the killer here is blockchain.

That’s why the success of bitcoin is so significant, and why whether or not it eventually loses value or not, is to some extent an irrelevance.

Blockchain is going mainstream and its blocks will be the foundation upon which a new economic paradigm is built. We are moving from scale to network, profit to value. That doesn’t mean that there will be no profit at all anywhere in future, but it will be generated in very different ways.

For evidence of how that might develop listen to Olaf Carlson- Wee, founder of Polychain Capital, a new hedge fund which is investing in blockchain and tokens and which counts both Andreessen Horowitz and Union Square Ventures as backers.

“As a modern Internet user, you’re part of endless networks— Twitter, Facebook, LinkedIn, Etsy, Ebay, Tumblr,” Carlson-Wee told Laura Shin at Forbes. “But the value of those networks is extracted by a profit-seeking central entity, even though the value is generated by the users themselves. On Twitter you see other people’s tweets, you don’t see things that Twitter the company wrote. So in this new model, where people actually own the network, that value goes back to the people who own the network, and all the value generated by Twitter goes back to the users of Twitter relative to their contribution. So if you’re a very early user of Facebook, it’s almost like you get 1,000 shares and if you’re a later user you get 100 shares as the network grows.”

There is no middle-man in these peer-to-peer networks, so investment means purchasing the tokens. “The hope here is to own small portion of networks that become the future infrastructure of the Internet and potentially compete or disrupt many of the centralised web services that dominate the Internet today,” says Carlson-Wee.

Now imagine that instead of generating GIFs of cats, you’re generating energy from solar roof tiles which use the Internet of Things to connect to a smart network, or you’re producing the design file for a neck-massager which can be 3D printed locally to your customer, or by your customer.

It seems clear that blockchain could underpin the future infrastructure of the Internet, and future infrastructure full stop. The General Purpose Technology Platform which Frank Diana at TCS envisages ecosystems running on in the future could easily be blockchain, or something very similar.

But blockchain still has one really massive hurdle to clear, and that’s scalability. Although it’s difficult to be precise on the figures it’s estimated that the bitcoin network right now is sucking more power in a year than the country of Denmark, plus massive amounts of processing power. As we stand today that’s unsustainable, but it’s where I think the Internet of Things gets really interesting.

Here’s IBM talking a few years ago about the potential for the IoT and the collaborative commons. “By identifying and matching supply and demand for physical assets and services in real time the IoT will create new marketplaces. These complex, real-time digital marketplaces will enable new peer-to-peer economic models and foster sharing economies. Devices will be able to compete in real-time, be reviewed and recommended by consensus, resulting in highly efficient digital marketplaces.”

To date we’ve focussed on the data shipping and maritime could leverage—and rightly so—but it’s time for a closer look at how we could turn physical assets into the digital network infrastructure of the future too.

IBM calls it the ‘Economy of Things’—enabling each endpoint in the vast global network to be a point of value creation. Radically transparent operations enable smart networks to make hyper-rational decisions, directing energy where it’s needed, eliminating waste.

Add in the exponentially growing power of artificial intelligence and you have intelligent ‘Things’ going into business for themselves. Washing machines to computer servers could be renting out energy and processing capacity to the blockchain and using the profits to upgrade themselves.

Stop for a second and consider the global merchant fleet not as boxships or tankers or bulkers, but as a massive collection of endpoints as part of the Internet of Things, each one capable of intelligently generating revenues as part of the new Economy of Things, supporting the blockchain infrastructure on which everything depends.

To date we’ve all focussed on the data shipping and maritime could leverage—and rightly so—but it’s time for a closer look at how we could turn physical assets into the digital network infrastructure of the future too.

It’s likely to be these new companies—free from historical and ideological baggage—which will be in a position to start addressing the creative destruction externalities inherent in the rapid technological change we’re experiencing.

If this plays out then it isn’t just profit which could take a battering of course. Smart contracts automatically executing without human intervention and increasing automation of just about everything will begin to remove humans from a lot of loops.

Companies and their structures will inevitably change. As networks, platforms and ecosystems see industries begin to sunset the traditional divisions between public, profit and non-profit companies will become less relevant too.

In the short term we could see the rise of what I’m calling the 4th Sector—’for benefit’ companies which blend aspects of the others. It’s likely to be these new companies—free from historical and ideological baggage—which will be in a position to start addressing the creative destruction externalities inherent in the rapid technological change we’re experiencing.

We’re already seeing early examples of this thinking, like the Ethereum Commons Co-op led by Rhys Lindmark. The Co-op seeks to leverage the crowd and the Ethereum blockchain platform to create bottom-up funded public goods—or commons—on the technology front, whilst actively shaping a new societal ideology and building new value-sets to cope with the massive transition.

I know it all sounds a bit inconceivable, but here’s the thing. We’ve done it before. The human beliefs and experience prior to the Renaissance were profoundly different, but we still went on to construct massively complex societies, technologies and value-structures.

I believe that’s how we need to view what’s happening now, because in every way that matters this is a new epoch we’re closing in on—the second Renaissance, what I call the e-naissance, the birth of the exponential age. What’s different this time though is the sheer speed of the change. The Renaissance took centuries, the e-naissance will create greater change, and it’s likely to do it in mere decades.

In the final analysis this all comes down to belief and the perception of value. And that’s where the Tulipmania in the Netherlands is really relevant.

At its height 40 tulip bulbs were sold for 100,000 florins, when the average skilled labourer could earn 150-350 florins a year. When the market suddenly collapsed in 1637 it’s thought the trigger was a routine bulb auction in Haarlem which suddenly failed to attract any buyers at all. The lack of ready buyers eroded the belief that the bulbs could be traded, and by extension belief in their value. And belief is contagious.

Ironically enough though it was another contagion entirely which was probably responsible for the crash. At the time Haarlem was in the grip of a terrifying outbreak of bubonic plague—the Black Death. That’s the most likely reason that no one showed up for the bulb auction.

Trade was the engine of the plague. It was delivered by ships and merchants and the relentless devastation it wrought—which eventually claimed the lives of around 60 per cent of the European population—was seen as a direct result of the perversion of the moral order which global trade had brought.

The tell-tale red welts under the plague victim’s skin were known as ‘God’s Tokens’—signifying your participation in a network of corruption which valued worldly, earthly goods above the spiritual, and which God had marked for punishment.

Tulipmania and the morality tale it became represents an inflection point in the perception of value. Prior to the explosion of trade driven by the Renaissance value lay in the spiritual—and those who had made a good living out of that belief saw the collapse of the tulip price as an opportunity to reassert its primacy.

As the historian Anne Goldgar writes, “The shock of Tulipmania was considerable, a whole network of values was thrown into doubt.” And yet neither grotesque, painful death, nor financial ruin was sufficient to re-establish the spiritual and metaphysical as the key store of value.

The bulb and the bitcoin signify something bigger than a bubble. Both represent an inflection point in the perception of value

If Tulipmania proved anything it was that the market economy had permanently shifted our belief system and, by extension, our values. That shift to valuing tangible goods brought by ships from across the seas, above the intangible, metaphysical and spiritual, now feels like a natural order, but it isn’t. It’s just another set of beliefs.

Earlier this month Thomas Peterffy of Interactive Brokers published a letter in the Wall Street Journal. “I think that people believe that more and more people will be believers in bitcoin,” he wrote.” It’s only a matter of belief; it’s practically a religion.”

The currency in your pocket is an article of faith, no different than the religion that drove people to believe that the plague was a punishment from God, a token of his disapproval of the pursuit of worldly, physical tulips rather than the heavenly flower.

So the bulb and the bitcoin signify something bigger than a bubble. Both represent an inflection point in the perception of value—the moment at which a belief and value system is seen to change. If Tulipmania was a light bulb moment for the market economy, bitcoin is its bulb-lite. The point where value passes fully into its next, digital incarnation and leaves the physical behind.

By coincidence the late 1630s also marked the first description of Spontaneous Human Combustion. It appeared in Historiarum Anatomicarum Rariorum, a compendium of strange medical phenomena by Danish physician Thomas Bartholin.

It contains the case of a knight called Polonus Vorstius, who suddenly began belching fire in his Milan home and then burst into flames and died in front of his horrified parents.

Whether you believe that Polonus spontaneously combusted, or that the current economic paradigm might be similarly reduced to ashes, matters. Because the future isn’t somewhere we go, it’s something we create. And it is your individual and collective belief as an industry which will build that future.

I hope that this magazine has helped you to challenge and explore those beliefs over the past four years. I’ve had the great pleasure of meeting many of you who read it and who have been vocal supporters, so as this is the final issue I’d like to take this opportunity to say a very big thank you, and also a fond goodbye.

Individuals now have more opportunity to influence the future than they have ever had. That’s why when I speak I always close by urging people to ‘be the future’. It feels like the right way to end this final article.

I do so with a sense of real optimism, because when it comes to the future of this industry there’s something in which I have always absolutely believed.

And that’s you.

 

Images courtesy © Getty Images

This article appeared in the Q4 2017 issue of Futurenautics.

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