ETH is Ultra-confusing Money
In Econ 101 we learn that what makes something money is the performance of three functions: unit of account, medium of exchange, and store of value.
The first two are easy to understand: Money is the measure of what things cost and the thing you use to pay for them.
The third function is less intuitive — and the cause of much muddled thinking about what makes for good money.
Crypto enthusiasts, for example, argue that the US dollar is poor money because it's a poor store of value: A dollar today buys you 99% less stuff than it did 100 years ago.
But that's thinking about money as if it's a productive asset — something to buy and hold rather than something to spend, borrow, and pay bills with.
For example: Nike shares are a good store of value because Nike will almost certainly sell more Air Jordans in the future, for more money, than they do now.
But the shares would make for lousy money: They could trade down 20% on a bad quarterly report, and then you'd struggle to pay your mortgage because your mortgage is not denominated in Nike shares.
We want to know we can make our mortgage payments, so we want our money to be a store of value over the short term: Our money's purchasing power doesn't need to go up — it can even go down a little — but it does need to be predictable.
In fact, it's better if it doesn't go up: The economy needs you to spend and invest your money, not hoard it.
And you don't want your mortgage to be worth more in real terms when you pay it off than when you took it out — that would be painful.
So, this is where the idea of ETH as ultrasound money gets confusing: If it's ultrasound, it's not very good money!
Many ETH bulls argue it can be both: Part of the ultrasound meme is that ETH is simultaneously money and a productive asset.
But that's not how finance works: It's impossible for something to be a good store of value in both the short and long term.
Only Bernie Madoff would promise long-term value without short-term volatility. And we know how that ended.
In the long term then, ETH can only be one or the other — money or asset — and it's not clear which direction it's going in.
The direction it should be going in, however, seems more clear: toward money.
Plan B: better than Plan A
The most cited bull case for ETH is that it indexes the growth of crypto: Ethereum is a platform for the Layer 2 and 3 blockchains where most crypto activities are expected to eventually happen.
And ETH is an asset that will take a cut of every one of those future transactions.
Formulated more cynically: Ethereum is a slow database that hopes to forever take a cut of the profits from all of the fast databases that choose to build on top of it.
That seems like a precarious business model, prone to disruption in an industry where the basic infrastructure is still not entirely settled.
By contrast, achieving money status seems like a much more achievable ambition, particularly as money does not have to be ultrasound.
As a pseudo-business, Ethereum could lose out to new and better blockchain technology and still function perfectly well — if not better — as money.
If ETH turns out to have no long-term utility, plan B could be to make it proof-of-stake Bitcoin.
That would not be a bad thing to be seeing as BTC has a market cap of $585 billion — still more than twice as big as ETH's.
And that's not a ceiling, either: Could ether be better money than bitcoin?
I think possibly, yes. But let's leave that for another newsletter, maybe tomorrow's.
Either way, if Ethereum were to fail as a pseudo-company, it could still succeed well enough as money to make it a successful investment.
That's not financial advice, of course. But to state the obvious, the TAM (total-addressable market) for money is far greater than the TAM for any single company.
The platypus asset class
Like Boris Johson, ETH bulls are cake-ist: They want to collect Etherum fees as dividends paid on ETH and use ETH to lend, borrow, and save, too.
And right now, that's pretty much what's happening: ETH is a rare platypus-like hybrid of utility money and productive asset.
Expecting it to succeed in both those roles, however, is to expect it to re-write the laws of finance.
Which maybe it will!
But it makes for a confusing investment case: If you've bought into ETH on the meme of ultrasound money, you may think you've backed it as, well, money.
But the meme is misnamed: It's Ethereum's profit-making, corporation-like attributes that make it ultrasound — and being ultrasound makes it bad money.
Fortunately, there is a much bigger prize to be had than being a profit-making pseudo-corporation — we just have to be a little less confused about what we want it to be.
I think we should want it to be money.
But not the ultrasound kind.
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