Around 2008, an ambitious startup decided to dig a tunnel from Chicago to New York. It would be an arduous and expensive task, with a final price tag of $300 million. But the tunnel would move spectacularly valuable payloads at unprecedented speeds, and customers would pay handsomely for the privilege.
The tunnel was not, however, for a new highway, or a high-speed rail line, or a gas pipe. It would not move goods or people or raw materials. In fact, a tall person would have a hard time standing up in it.
Instead, the tunnel was intended to move just one thing: money.
Completed in 2010, Spread Networks’ new tunnel was home to a fiber-optic cable that sent trading orders from Chicago to New York a whole 3 milliseconds ahead of the next-fastest pathway. Marginal as it might seem, those 3 milliseconds would give the new cable’s users a crucial edge against their competition. The customers were then-trendy “high-frequency trading” investment firms, whose algorithmic strategies often reacted to the same set of signals. A 3 millisecond advantage meant getting better price tags on trading positions, again and again and again. At least in theory, it was a license to print money.
Ten years later, we’re entering a different era of monetary speed. By leveraging the internet and innovative blockchain technology, cryptocurrencies can move money around the world faster than legacy banking and payments systems, while also giving control directly to users instead of middlemen. That will have a huge number of implications for commerce, for globalization – and most of all, for investment.
What We Talk About When We Talk About Speed
You may have noticed a slight inaccuracy above: Spread Networks’ fiber-optic cable wasn’t really “moving money” between Chicago and New York. Instead, it was transmitting orders, and the traders using it presumably had trusted relationships, credit lines or other means to guarantee that they had the money to back those orders up.
This two-tier system is how the vast majority of money transmission works now. Think about the act of handing someone a paper check (for those outside of the retrograde U.S.A., let me Google that for you. Are you handing them “money”? Not at all. You’re handing them a promise to deliver money from your bank account. When they deposit it, their bank and your bank trade a fairly complex series of messages to confirm the money is available.
The money doesn’t actually move from one bank’s ledger to the other’s until that back-and-forth resolves to everyone’s satisfaction. That can be a good while after the check is deposited, much less after you gave it to your friend. An international transfer involves a still higher level of negotiation and confirmation before a transaction is well and truly “settled.”
The first wave of “fast money” services, whether PayPal or Mastercard or Venmo, hasn’t really upended that model. Instead, the services largely move money “faster” by either creating a self-contained walled garden that adjusts only an internal ledger or accepting a certain amount of the risk to paper over the delay between transmission and settlement. (I suspect this is why you can pay an added fee to send money “faster” with PayPal, for instance. You’re not actually paying for faster processing – you’re paying an insurance premium on increased settlement risk.)
So when we talk about cryptocurrencies being “faster,” we’re not quite talking about the kind of speed that Spread Networks was chasing with its fiber-optic cable. Bitcoin can’t somehow magically send data faster than Mastercard can. Instead, the “speed” of crypto is at the settlement stage: Instead of a complicated tete-a-tete between banks that may or may not actually trust each other, Bitcoin and other cryptos combine transmission and settlement.
That is why cryptocurrency is referred to as “digital cash.” When you send it, it moves directly into the possession and control of the recipient – there is no distinction between transmission and settlement. On Bitcoin, this takes 10 minutes and costs less than $3.
Despite the back-end differences, the speed of cryptocurrency offers some of the same agility that high-frequency traders sought from Spread Networks. As our Michael Casey has discussed, the interoperability of different crypto systems is also becoming faster, amounting to a universally interoperable fast payments system. That’s possible because, unlike PayPal, crypto networks are open access – anyone can plug a service into them, build their own front-end, whatever.
It’s hard to envision exactly how this is going to have a huge impact on retail payments. PayPal and the like work perfectly fast enough for ordering Christmas gifts, though crypto’s borderlessness opens up some meaningful new possibilities around the edges. One possible exception is the credit card business model, which basically depends on soaking the poorest users in exchange for convenience. If consumer-friendly crypto services deliver similar convenience without the debt bondage, there could be a shakeup.
The implications for cross-border remittances are more obvious, but not terribly interesting. Using the old rails, a service like Western Union charges craaaaaaazy fees to deliver money to a select number of countries. On the fundamentals of lower fees and better service, crypto wins that battle, though there are still big shortfalls in awareness, complexity and user experience. Give it a few more years, though, and there’s no reason for Western Union’s remittance service to continue to exist.
Welcome to Thunderdome: The Scary Future of Fast Investment
The distinction between a credit card or PayPal payment and a crypto payment, then, isn’t that big if you’re talking about shopping. In remittances, the crypto advantage is pretty much a straightforward upgrade without too many weird nuances.
But there is one realm where the change is going to be deep and strange and have a lot of unexpected consequences. The one thing you can do with crypto that you can’t do with a Mastercard or PayPal or Western Union is send and settle a sizable investment halfway around the world to a stranger in 10 minutes. The end-to-end speed of cryptocurrency opens up an entirely new rhythm to collective financial projects, and it is going to be truly wild.
We’ve seen dramatic illustrations of this new breed of “fast investment” in recent months. Constitution DAO, for instance, raised $40 million in about a week to buy a rare copy of the U.S. Constitution. That’s not exactly a traditional investment, but consider that as recently as a few years ago, the announcement of a new $40 million venture capital fund was enough to generate mainstream headlines. Sometimes it still is!
Under a traditional model, that $40 million is hard-won, involving a lot of sweaty meetings and elaborate PowerPoint presentations. But here comes a gang of newly rich goofballs and they do it with some Nicholas Cage memes and duct tape without leaving their basements. The same is happening for more traditionally oriented crypto venture capital efforts, whether decentralized or more traditional.
Both in traditional and crypto VC, it’s a common talking point that speed in investing that money matters more than ever. If you want the returns from a hot startup or founder, you have to get in the room first and shove a wad of money down their pants. This will become even more pronounced as the money-raising process gets faster, and it will apply doubly to VC projects set up as decentralized autonomous organizations, or DAOs..
This is where we start to get to the real downsides, though. The increased speed of both raising and allocating capital seems poised to put pressure on the kind of careful decision-making that has long characterized investing of all sorts. The postwar Western financial system has arguably been defined by the rise of the analyst, a kind of mathematical trench warrior of capitalism. The job of the analyst is to examine boring things like inventories and profit margins and what a company is actually doing, or the potential market for a proposed startup.
The analyst lives in some windowless back office of a bank or a hedge fund. Closer to the light sit the rainmakers who bring new money into a bank or fund, and the brokers who buy and sell assets. Both the gathering and deployment of capital under these models are slow, thoughtful processes, if nothing else because of structural and technological constraints. The analyst, you might argue, is an artifact of slow money.
As money gets faster, and especially in the kind of loose monetary environment we’re in now, the analyst is increasingly left in the dust. In his place, decisions both by investors and allocators (VCs) will increasingly be based on what you might call “money vibes.” The power of memes and social media discourse in driving investment on Robinhood or in crypto has been widely observed, but they’ve been largely treated as oddities or punchlines, even in the financial press. The truth is, they’re just getting started, and they’re going to define the way things work in the high-speed future of crypto-enabled capital agglomeration.
For a small elite of the most knowledgeable investors and allocators, that is going to be great. Fast judgment doesn’t inherently mean bad judgment, and more than a few investments that have been carefully vetted by the analyst manage to go belly up before the ink is dry.
“If you really know what’s going on, you don’t even have to know what’s going on to know what’s going on,” as the pseudonymous Adam Smith put it in investing classic “The Money Game.” “All you need is a hell of an apperceptive mass [and] an IQ of 150 … and you can ignore the headlines, because you anticipated them months ago.”
That won’t change as money accelerates. The big winners will still be the same types: plugged-in, intuitive, confident and good judges of character.
But in an accelerated investment environment, the losers might look a lot different. What if the National Treasure memes that helped make Constitution DAO happen were instead memes about how “We’re going to start a Metaverse Venture Capital DAO!” One seductive meme about a sector (or just catchphrase) that’s super hot RIGHT NOW would attract a lot of small amateur investors, especially if it took just a few mouse clicks. These folks don’t necessarily know the difference between the best allocator in the business and the 20th best. They don’t know all that much about the nuances of markets. They don’t have the emotional self-control that makes a great investor.
So more often than not, in a fast money environment, they will get rekt. Investment becomes a rapid-fire series of hype and collapse, and the losers get to lose that much faster.
We’ve recently seen a kind of low-tech preview of this, by the way, courtesy of something called a special purpose acquisition company, or SPAC. SPACs use the stock market as something like a faster VC fundraising pipeline, albeit with a focus on acquisitions rather than on early funding. SPACs focused on trendy sectors like electric cars, but they’ve wound up as mostly iffy investments that benefitted charismatic organizers like Chamath Palihapitiyah and Bill Ackman more than their actual participants.
One possible consequence of this higher-speed environment would be, ironically, a greater role for personal reputation and connections. The best investment vehicles will continue to be based on personal connections and the intuitions of those truly in the know, while promoted tweets raise meme money from the suckers.
At least in principle, that is why the U.S. Securities and Exchange Commission limits hedge fund and VC investing to so-called “accredited investors.” But both technological innovation and a rising chorus of criticism suggests that the dam can’t hold for much longer. (Notably, the biggest critics of accredited investor rules tend to run VC or hedge funds. Go figure.)
The same issue is even more dire for nations like China that want to keep residents’ capital within their borders, even if that’s not where the best investments are. Far more than any concern about the energy use of proof-of-work mining or the risks of speculation and scams, it’s easy to see China’s crypto crackdown this year as an attempt to pre-empt an environment where capital flight is just a few clicks away. We’re sure to see similar moves, or even more draconian measures, as other lackluster economies realize what they’re up against.
And fair enough: Capital flight is a real threat to even well-run developing economies. But crypto investing could wind up being a double-edged sword in those cases, because compelling investments in obscure corners of the world could also potentially attract capital more easily. That rhymes with the path to economic globalization and integration over the last 30 years, which has created more wealth and big winners in the developing world, but also more volatility and risk for those at the bottom of the economic ladder.
Speed turned out to be a mixed bag for the high-frequency traders, too. They’re still important players and make up a large percentage of asset trades by volume, but returns from the strategy have declined over the past decade. Privately held Spread Networks, the builder of that Chicago to New York fiber-optic tunnel, doesn’t seem to have profited from speed, either: The link was slated to be sold in 2017 for $125 million, a serious haircut against the money spent on it.