Tuesday, September 19, 2017

The most important thing in Capitalism is Capital !

I wanted to do this article because of a spirited discussion with a highly respected VC in Singapore. In this discussion, I argued that capital is the most important thing in Capitalism. He reasoned that value creation is more important. It's not easy to carry out this debate because value and capital are not fully distinct from each other. There are ways to support and refute the statement depending on our definitions as to what value and capital is.

So instead, I propose an auxiliary argument which may have a more satisfying resolution : Which is better, engineering to create wealth or reallocation of capital to create wealth ? Another words, engineering or finance ?

If the argument were to simply ask the chicken or the egg question, then engineering wins hands down, product creation comes first or there will be no capital to allocate. If the argument focuses on who ultimately makes more money, then the fund managers and capitalists who allocate capital would generally win based on salary surveys.

I'm going to present a novel argument to make my case for finance and capital - a possible answer can be found via cryptocurrencies.

There's always been two ways to get more Bitcoins and Ethereum.

One way is through mining. You set up a rig involving graphics cards and you run some kind of daemon to mine for more coins. As the odds of solving the puzzle to get a coin reward is hard to come by, miners typically join a mining pool to guarantee an amount of coins mined per unit time. This is really similar to a development based engineering career. When you join a startup, you join a company to solve an important problem hoping for a reward that can be shared with fellow engineers.

The other way is through buying coins in an exchange. Various exchanges like Kraken exist for you to simply buy coins with money. When you do this, you are taking calculated bets on value of cryptocurrency. Analogically, you have chosen a career in finance and have chosen the role of a capital reallocator.

I've done a mixture of both strategies and noticed  that for some strange, inexplicable reason that it is, generally speaking, more profitable to buy cryptocurrency than to mine them due to electricity fees and dealing with obsolete hardware. So much so, that you can save on hardware and electricity and just buy the coin direct from the exchange. Successful miners might have been able to sustain themselves by selling mining contracts to other people who are trying to punt on contracts, or monetising their tremendous geographical advantage like having a data center in Iceland.

Does this analogy of the relative merits between mining and buying of cryptocurrency reflect an aspect of humanity that permanently plays down the value of engineering new solutions versus simply taking a bet once a new solution is created ?

I think it is.

With the exception of a few solid engineers who solve major problems and got a "coin reward" from society. The bulk of high income earners in Society are almost always capitalists who invest in companies and buy real estate. Even if you argue that Bill Gates did create some software when he was just starting out, I would think that Microsoft's success was largely due to the support Bill got from his dad who was a lawyer and was able to shape copyright law to give Microsoft the bulk of its profits.

What is the moral of the story ?

I spent 14 years in IT and there is certainly fun being in a fast changing industry. A lot of engineers are passionate about coding because they are introverts and like playing with toys as part of their working lives.

But these engineers need to remember one thing.

While work is rewarding, fun and puts you in the state of flow, you are not really being rewarded based on what you deserve per unit of intelligence and effort. You are just not getting the "coin rewards" you deserve based on the rigs and electricity you are installing in your home.

Why not accumulate some capital and play with that to even the odds against your peers ?

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