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Daniel Krawisz

Originally published 16 January 2020 At

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People are trained by their rewards. A portfolio is a reward system. Hence there is a relationship between portfolio and behavior. In particular, money rewards tribalism. A portfolio of money is more rewarding if the users of that money preferentially befriend one another over users of different monies. Thus, money naturally evokes tribalism in humans, a naturally tribalist species. In the cryptocurrency market, tribalism can be observed.[^1] In this article, I explain how money rewards tribalism.

Why is Money Useful?

Before answering, I will note that I believe that many people in the cryptocurrency market would not be able to answer this question adequately. That means that the buyers in the crypto market have not chosen how they will be rewarded. They will be trained by their portfolios without knowing who they will become.

Money is an enabler of cooperation. People who use it can specialize more.[^2] How does it work? When profit-seekers assess a means of addressing some unmet need, they look at who already has money to assess potential revenue and they look at other profit-seekers to assess cost. The profit-seeker wants to find the best match of unmet need with his own superior abilities. That creates the highest profit. The money that a profit-seeker recognizes as his unit of account determines who he compares himself to and which unmet needs he rates as most severe. Profit-seekers in different monies specialize relative to different groups of people.

A form of money with many profit-seekers who have been specializing relative to one another for a long time is more valuable than a form of money with fewer profit-seekers who are less specialized. A more specialized economy will be able to serve more specialized needs and serve them better.

It is not magic that money can be valuable even though it is physically inert or, in the case of Bitcoin, mere representation. Money may be a shared illusion, but it enables everyone who shares the illusion to derive value from one another. Its physical form does not encompass its value. The value of money is the other people.

Ingroup Dynamics

I have shown that people learn more economically relevant information from people who use the same money. Therefore, people are better off being more friendly to others who use the same money. Memes which promote preferential friendliness among them make their money more useful. More stuff would become available in exchange for the money. It would be rational to have more of that money. People who realize that the money is better bid it up. Thus, people who use the money will tend to associate an in-group dynamic with reward.

This is sustainable because they are genuinely better off. They are invested in one another. All they have done is taught each other to act in their own interest. Natural human tribalism is not the best possible behavior for profit-seekers. However, tribalism is easy for humans to transmit to one another and it is better than nothing. Users of a money who do not know they are invested in one another have a bad money that is less likely to be useful. Promoting tribalism is an easy way to improve it from that state.

Investors are responsible for choosing good investments. An investor in a cryptocoin needs to ask "Do I want to become part of this tribe?" Unfortunately, few have realized that they were joining a tribe when they did. They have ended up in tribes that cannot produce and are full of incompetant people. They have been trained in behaviors that are only good for attracting more incompetant people who do not know what money is.

Negative-Sum Interaction

In Austrian economics, money is defined as the most liquid good in the economy.[^3] There cannot be two monies according to this definition. However, there can be more than one good which is in competition to arrive at the top position. I will call these proto-monies. If there are more than one proto-money, then there are two tribes. It may be that the same people exist in each tribe but the two tribes are still different because people can have different amounts. That changes how they all have to specialize relative to one another.

In a system of two proto-monies, people not only must determine the optimal total amount of savings, but the optimal proportion that each proto-money has of the total. This is more difficult and risky than when there is just one money. One money is good to buy everything; therefore savings is future productivity out of the whole economy. If there are two proto-monies, then neither is future productivity out of the whole economy unless one fails. For the time being, they are both worse than what a universal money would be. For one thing, the total size of both economies together would be expected to be smaller than a single economy with one money. Therefore, even at optimum allocation, people would not be able to buy as much with two monies. For another, it is possible to run out of one form of savings and not be able to substitute the other. That would not be a problem with one money. Thus, the interaction between proto-monies is negative-sum.

Any tribesman who switches from one money to another will find himself having to optimize against a different group of people that would be expected to have their own in-group dynamic. It is like joining a new tribe. Investing in the proto-monies is a question of which tribe to be in. How much in one or the other?

The question is absurd and it is a bad sign if it needs to be asked. People need more than one tribe if they are playing football. They do not need more than one money. Universal money is more useful than many monies. People can benefit one another by bringing themselves closer to universal money. They can do this by growing one economy more than the other. That will reduce the negative interaction. Any initial imbalance between the proto-monies will be accentuated. It is very bad to make the wrong choice about what money to use! Rational actors don't want to have to make that choice because they realize that it is risky to get it wrong. The proliferation of altcoins is evidence of people in the market not genuinely thinking about their choices.

Outgroup Dynamics

If you have coin X and someone else has coin Y, you want something bad to happen to him. In your favorite outcome, coin Y has gone to zero. You also don't want his information because it's less economically relevant. Users of two proto-monies do not benefit one another other than through barter. They benefit at the expense of one another. Their coins compete for the same position.

Users of the same proto-money are friends and users of different proto-monies are enemies. At least until one of them repents his sin and changes to the other money. People in a coin can all benefit one another by promoting an outgroup dynamic among themselves with people of other coins. Again, this will happen whether we like it or not without necessarily any deliberate action on the part of anyone. It will happen naturally.

An outgroup dynamic is more subject to abuse than an ingroup dynamic. In order to succeed, everyone who does not have the new money yet needs to be treated like a potential customer. They cannot really be enemies. If they use a different money, they are like employees of a competing company. However they need to be treated nice in order to be coaxed away from their money. Someone who doesn't understand what is happening can be manipulated into avoiding his "enemies" so much that he loses track of the outside world.

Finding Reality

How do we solve the problem of cryptotribalism? We do not. Instead, let us think more carefully about what we are investing in when we buy these coins. In the past, altcoins were created and attracted interest. Unfortunately, few understood the problem.[^4] Now we are living with the consequences. One of those consequences is tribalism. If people had not wanted tribalism, they should not have created and invested in altcoins. Now they are in a zero-sum contest with the other coins that they did not know about when they invested.

Someone who knows why money is useful will ask, "which tribe do I want to join?" when they think about buying a new money. Someone who does not can be manipulated into joining a tribe without knowing that this is what they're doing. As a result, they can end up joining a tribe that abuses them. Many tribes in the crypto space are abusive. They cannot become world money and the only way they can survive is by tricking investors into believing that success is something other than becoming world money. The only way to become wealthy off of abusive coins is to get in early and leave early without tipping the other investors off.

Cryptocurrencies are social experiments that can involve large numbers of people. In the cryptocurrency market, mania has enticed many people to invest in coins without thinking about the consequences. The result was large groups of people behaving in accordance with the rules of their coin who had no idea what the rules would cause them to do to each other. People who invest in a manic way do not know when it is rational to sell. Therefore, they can be induced to become more and more loyal to their own coin as a result of the way their portfolio trains them without ever thinking about selling. People who learn uncritically are trapped in a Skinner box that rewards them for pumping the coin without paying attention to whether the economy is improving.

Everyone could be working together for Bitcoin's success but instead there are many different coins that cannot work together. The eventual outcome is that there will be one winner and many losers. That will be bad for many people, but it can’t be avoided. All coins except one losing out completely is a consequence of having more than one coin.

Profit-seeking is finding reality.[^5] When there is more than one money, there is more than one definition of profit. Profit-seekers in one money benefit one another with their superior knowledge of the economy. Let's find some reality now and recognize that we do not want to be split up into different tribes. We are stronger if profit-seek together. Unfortunately this reality means that most of the crypto market will contract to nothing. Next time understand what money is.


[^1] See Untold Stories with Charlie Shrem, Shapeshift Founder Erik Voorhees on Bitcoin Tribalism. Both Shem and Voorhees agree that tribalism is very evident in the crypto space. They do not understand why tribalism is inevitable.

[^2] See Ludwig von Mises, Economic Calculation in the Socialist Commonwealth.

[^3] See Murray Rothbard, Man, Economy, and State, Chapter 11.

[^4] See Daniel Krawisz, The Problem with Altcoins.

[^5] See Ayn Rand, Atlas Shrugged.