June 3, 2021

Follow-up to the Brian Brooks and Bitcoin post

       Last month, I wrote about how former O'Melveny partner Brian Brooks had used his government position to boost the cryptocurrency industry. I then cautioned that despite Mr. Brooks's statements, crypto was burdened with five long-term risks: (a) governments do not want a competing currency, (b) crypto prices are too volatile for it to be a reliable store of value, (c) high transaction and energy costs, (d) one of crypto's key selling points -- privacy, crime and money laundering -- will be gone once governments decode its owners' identities, and (e) crypto isn't really an amazing innovation because it's just a ledger, something that's been around for ages. In the ensuing month, crypto prices coincidentally fell by about 40%, leading to a nationally televised interview of Mr. Brooks.

       In the May 19th interview, Bloomberg's Romaine Bostick asked Mr. Brooks about the crash. Mr. Brooks had previously described Bitcoin as a hedge against inflation. But on that day, Bitcoin was down by 41.6% from its April 15 all-time high, suggesting it's not really a great hedge. So Mr. Bostick was wondering what Mr. Brooks had to say about all this. 

       Mr. Brooks responded that the "Dow Jones" was also falling in "a straight line down." And he asked why reporters were covering the crypto crash, but "not reporting on that [Dow Jones] story." He went on to say that the dollar had "been debased to the tune of about 40% over the last year" leading to "historically insane inflation levels." Again, he asked why reporters were covering the crypto crash, but not the dollar's fall. 

       Someone watching this interview might conclude that Bitcoin investors suffered the same loss as Dow Jones investors, or that the dollar had lost 40% of its value over the past year.

       Here are some facts. At the time of the interview, the Dow Jones was down only 2.5% off of its May 7 all-time high. In addition, for the dollar to debase by 40% in a year, there would have to be 67% inflation in that year. The most recent statistics suggest 4% annual inflation.1

       If you're wondering why Mr. Brooks would say such things on national television, remember the money involved. His goal as CEO of Binance.US might be to make the same fortune -- nine, ten or eleven figures -- that other crypto exchange CEOs make (by running what looks more like a casino than a trading exchange, with possibly some money-laundering thrown in.) That amount of wealth can be a big motivator.

       [Addendum: Another of the five concerns manifested in an astonishing manner on June 7. On that day, the FBI announced that it had the password for the Bitcoin wallet used by the Colonial Pipeline extortionists. It's not clear how the FBI attained that password (called a "private key.") Normally passwords are hacked using "brute force" computing power, i.e. trying every possible combination of numbers and letters until one works. But that should be practically impossible with a Bitcoin wallet password. Regardless, the FBI got it somehow and recovered the extorted funds.]

       [Second addendum: Brian Brooks left his position as CEO of Binance.US on August 6. Apparently some investors refused to invest in Binance.US unless Changpeng "CZ" Zhao disconnected himself from the company. Mr. Zhao is the CEO of Binance.US's parent, Binance, and he is also a 90% owner of Binance.US. When those investors pulled out, Mr. Brooks resigned. In reading between the lines, I'm guessing that Mr. Brooks was trying to use third party investors to wrest ownership of Binance.US from Mr. Zhao, and that maneuver did not end well for him. To give you a sense of why you should never trust anything Mr. Brooks says, please read this article from just a week before his resignation, where he emphatically lays out his plans for the future of the company.]

       [Third addendum: Mr. Brooks is apparently trying to make his fortune at another crypto company. He became the CEO of Bitfury on November 5.] 

1 Here are the numbers if you're curious: On May 7 at 4:00PM EST, the Dow Jones was at 34,778, and by May 19 at 4:00PM EST, it fell to 33,896; 33,896 / 34,778 - 1 = -2.5%. The April 15 4:00PM EST price of Bitcoin was $63,314 and its May 19 4:00PM EST price was $37,002; 37,002 / 63,314 - 1 = -41.6%. To explain the 67% inflation number, assume you could buy a cup of sugar for a dollar a year ago. If the dollar is debased by 40%, you can only buy 60% or three-fifths of a cup of sugar with a dollar. So if you want to buy a full cup of sugar, you now have to pay $1.67, meaning prices rose by 67% over the year