Crypto, Art, Stocks and Power in 2021

My day job is to lead a team of people who analyse and invest in financial market assets on behalf of clients. It’s mostly stocks and bonds.

Portfolio managers tend to seek to identify assets that will command higher prices some time in the future and/or deliver a predictable set of future cash flows. We talk about ‘valuation’ in the strictly financial sense quite a lot. Keynes, writing about financial valuation, likened it to a contest in which to win, contestants needed to guess which photo most other contestants would identify as the most beautiful (rather than applying their own individual tastes). I think this is right, but sort of brushes over the epistemological nature of the contest as lived.

Portfolio managers focus of earnings, inflation, non-farm payrolls, Fibonacci retracements, or whatever else that rocks their boat when assessing financial value. In so doing, they are asserting some internal model as to how the world should think about valuing assets.

Every time the internal model works (eg, stock jumps when earnings surge/ beat) another little positive reinforcement loop is completed. Confidence rises that the internal model as to how portfolio managers think things should be is a close approximation to how things are.

But every now and then a thing comes along to remind us how all financial valuations actually work. This year three things came along: NFTs, cryptocurrencies, and meme stocks.

I have zero professional experience of the art market. Beeple’s mega-Christies sale got the world’s attention. It brought attention not only to digital art but also NFT’s more generally and got folks asking how such valuations might be possible. For me this question carries an easy (if perhaps banal) answer.

The price paid, like that of any artwork, indicated not its extraordinary artistic worth but rather that (usually) at least two people of substantial financial means reckoned that the art in question is worth more to them individually than some chunk of their financial wealth. Art’s financial value is plutocratically determined. One person thinks a painting is worth $1m? Nada. Two people with plenty of financial muscle think it’s worth $1m? It’s worth $1m.

Is the easy answer to NFT/ fine art valuation an easy answer to cryptocurrency valuation? I think so.

Bitcoin/ Dogecoin/ etc have been around for a while. But 2021 saw their collective financial value boom to around c$2.4tn. I don’t encounter people getting mad that a Duchamp Readymade might be inappropriately valued in the context of it’s likely future cash flows: we all know its future cash flows don’t exist.1 But plenty are enraged by substantial financial valuation being attached to either crypto in general or a particular piece of contemporary art.2 And I think people get cross for largely similar reasons.3

While folks scratch around to try to consider valuation frameworks for cryptocurrencies along the lines used to value currencies or commodities, I am more persuaded that the appropriate valuation framework to apply to them is – like NFTs – that of contemporary art.

What about Meme stock valuations? Just like art and crypto their valuations too are also plutocratically determined. The performance of stocks like GameStop and AMC generated the same challenges to the financial world’s established epistemology of financial value as those posed by crypto. The reason why it felt different was that it was done on home turf.

In asset management the idea of active management in a state of market inefficiency is based on the notion that by scraping together good insights, information and analysis it is possible to generate super-normal risk-adjusted returns. I buy into this in a big way. But it is predicated on the notion that others are employing broadly the same mental model around what should command financial value. After all, if you’re looking for super-normal risk-adjusted returns, there’s no point (as a small investor in public markets) identifying awesome firms that will deliver strong and above consensus results if they are going to be subject to a multi-year or multi-decade valuation death spiral (because no-one else reckons that strong and above consensus earnings should translate into higher financial value). Firms that satisfy the model tend to be ascribed a higher financial valuation, while those that don’t may find themselves less able to attract financing upon which their business may depend.

For all the hate out there amongst conventional folk for Chamath Palihapitiya – sometimes characterised as a mega-rich tech bro with political ambitions, punting what is for him spare change into the GME trade in a bid to buy a constituency – I thought that this interview with him by CNBC’s Scott Wapner addressed the issue more clearly than I have seen elsewhere (emphasis mine):

Palihapitiya: …the fact that they shouldn’t be allowed to exist because all of a sudden like because we decide that they should be obliterated into the ground

Wapner: No, they should be allowed to exist. They should be allowed to exist at whatever price their stock should be value at based on what their earnings are and this stock was like seventeen eighteen dollars not that long ago.

Palihapitiya: Who says that? Who says that? Do you want to make the same argument about Tesla? It’s gone 10x in a few months. You don’t know what it’s worth – let’s be honest okay?

Wapner: You don’t think that Tesla’s growth prospects…?

Palihapitiya: Scott – I have my own model for the company. I’m allowed to underwrite however I want to own it. Everybody who bought that stock is also underwriting how they want to own it. And the point is – just because you’re wrong, doesn’t mean you get to change the rules. Especially when when you were wrong you got bailed out the last time. That’s not fair.

The conventional philosophy of security valuation informs a lot of real world decisions as to how resources are allocated. In demonstrating that the financial valuations of firms (just like cryptocurrencies and contemporary art) are plutocratically determined, the Redditters reminded us that those with financial power get to determine financial value.

The strong relationship between financial valuations and fundamentals exist only to the extent that fundamentalists are the ones holding financial power.

1 I mean, sure you could put together a business plan to acquire a top notch art collection, build a private museum, employ staff, charge entry, and make oodles of money. But I’m unconvinced that such plans underpin the art market.

2 It’s not just the financial valuation that gets people cross of course. People also get cross about the facilitation of criminality that is perceived to be engendered, scope for mis-selling they pose to the unsuspecting given an almost total absence of regulation, and jaw-dropping environmental damage attached to proof of work. Labelling these as differences will likely be contested.

3. I think that the reasons that people get cross about the financial value attached to contemporary art falls into five broad categories:

  • Resource allocation: when people who have the resources to drop millions on art do so rather than something else (eg, solving world hunger);
  • FOMO: when people pay large for someone else’s art, and completely overlook their own artwork (category reserved for artists, although also maybe also dealers and collectors who don’t own the stuff commanding the sky high prices);
  • My money! When public money is spent on something that someone doesn’t like (Carl Andre’s Equivalent VIII – ‘those bricks in the Tate’ – is still probably the most famous example);
  • Culture Wars: owing to the exclusionary and condescending culture that grows up in the industry that springs from these high prices.
  • Money & Value ontology: when monetary value – which so often is deployed as a proxy for actual value – has been assigned to something that someone sees as valueless (and this proxying is, to be fair, the conceit which underpins the allocation of scarce resources in a market economy).

It appears to me that these are analogous to the reasons people get cross about crypto asset financial valuations.

Money, Tax and The Left

Jo Michell has written a good piece in Tribune countering arguments from some on the Left around the necessity of taxation.

It’s a short piece that you should read, but I understood it as going a bit like this:

  • Case 1: If there is lots of economic slack in an economy (think loads of folks unemployed sitting at home wasting their skills and producing nothing), government can spend newly printed cash to boost the economy and there are frankly few immediate downside consequences.
  • Case 2: If there is not much economic slack (eg everyone has a job), printing loads of cash to spend on new projects will mean bidding folks away from their private sector jobs (which were presumably economically productive and need to be filled) and also puts more cash into the system than is wanted, so those with cash balances play a game of hot potato (trying to rid themselves of cash balances and transferring them to one another in exchange for goods, services, financial assets like shares, real assets like houses, or indeed foreign currencies – resulting in higher prices for some or all of these).
  • The problems in Case 2 can be addressed with taxation. This reduces aggregate cash balances and “the wasteful consumption of the wealthy” to make resources available for “socially-useful spending”. And actually, taxation can be deployed in Case 1 too.

Jo’s beef looks to be with the MMT crowd, who I think he reckons have dragged elements within The Left away from understanding taxes as useful (given that the magic money tree really does exist). Jo was pretty careful not to go all inflationista in his piece, but it’s plenty obvious that monetary stability – or what Keynes referred to as confidence in the currency – is at the heart of his argument.

But I do wonder whether some folks on the Left may have taken to MMT either because:

  1. they have different views around the strength of institutions in the political economy (eg, print now and we’ll have no trouble whacking taxes and/ or interest rates up at a later date if we need to). I have my doubts. Or;
  2. they see lower confidence in the currency as a *desirable outcome*.

There are lots (and lots) of problems with capitalism as an organising system, but I would not describe myself as anti-capitalist and as such see a reduction in confidence in money as an undesirable outcome.* If I were an anti-capitalist Leftist then Keynes’ famous argument (citing Lenin) that the best way to destroy the Capitalist System is to debauch the currency makes debauching the currency sound pretty interesting!

I’d always understood this Keynes/ Lenin argument to be that you need money to make capitalism function, and so destroying money as a store of value, unit of account, and ultimately as a medium of exchange through hyperinflation collapses the economic system. Pretty straightforward. If this is what attracts some on the Left to MMT I don’t think Jo’s arguments for creative use of the taxation system will shift them.

But it was interesting today to read chapter 6 of The Economic Consequences of The Peace from which Keynes/ Lenin’s phrase is taken. I’m now less sure that my straightforward understanding of Keynes/ Lenin’s argument was right.

Keynes elaborates that inflation destroysI Capitalism by:

I find this fascinating. These are four points that I would recognise as being pretty zeitgeisty, although not points I would have immediately associated with inflation. I don’t know whether they really are the Four Horsemen for the Capitalist system, but they seem to be gaining ground despite the absence of inflation.

With regard to the use of the tax system, I’m with Jo here, and have been for some time. Monetary financing needn’t spell disaster and may indeed be required to prevent deflationary spirals. But tax serves a purpose – in fact many. What sort of taxes should the Left focus on? Wealth taxes!


* I reckon that many/ most of the problems associated with capitalism can be offset or corrected by a liberal democratic State designing and revising a rules-based framework, with discretion to compensate for inequitable outcomes and the power to offset market failures of many descriptions. This makes me, I think, a social democrat. This may be naive, but I would prefer to channel energy into improving the rules/ governance rather than dismantling the construct.

How equal could UK property wealth be, given the current physical stock?

When trying to estimate inequality in Britain, it sort of depends what you’re looking at.

While UK income inequality rose significantly in the 1980s, it has stayed pretty steady since the early 1990s. Wealth inequality is greater by an order of magnitude, and wealth in the UK means private pension wealth (42% of household wealth) and property (35% wealth), with physical and financial wealth making up the other 24%. I have blogged before about wealth taxes, which I think are a good idea in principle. They may even feature as a key issue in the US Presidential election, depending on who gets the Democratic nomination. But it seems likely that the topic of wealth taxation will be off the agenda for some time in the UK.

The ONS calculates splits UK wealth inequality (with a Gini coefficient^ of 0.63) into net financial wealth (0.91), private pension wealth (0.72), and net property wealth (0.66). I’m guessing that with each of these having a higher Gini than the Gini for total wealth, some households have more pension but less property, some less property and more financial wealth etc.

Gini coefficients for UK wealth and income


The biggest driver of private pension wealth is whether you are in a pension scheme at all. Only 53% of individuals (aged 16-State Pension age) are in an active scheme, and this is after the +10% bump up that came from auto-enrollment .

If you are in a scheme, the biggest driver of your pension wealth is whether you are in a Defined Benefit scheme or a Defined Contribution scheme. I wrote a thread on the latest data here , and leave you with this cool ONS chart from the threads that shows pension wealth by age and scheme type. This is a big deal, and I would expect it to become an increasingly big deal.

db dc

But, as Arlo Guthrie said, that’s not what I’m here to tell you about. I’m here to talk about property inequality. Or rather, I want to know what level of wealth inequality is embedded in the physical stock of UK property wealth.

The seed of this question grew in the run-up to the General Election. Basically. if you’re going to apply wealth taxes to property (as an asset that can’t flee the country), then given my assumption that wealth inequality is way higher than income inequality (see first chart above), doesn’t this mean that people with top-quartile incomes aren’t going to be able to afford to live in their homes? (Yes, I know, tiny violin time.)

In order to make some headway I asked @resi_analyst for advice, and he kindly pointed me to annual transaction data files. With around 4-5% of residential properties changing hands each year it is maybe not a stretch to infer that they are a reasonable sample of the UK residential stock. I like this a lot more than looking at the (excellent) ONS Wealth & Assets Survey data because the WAS is a survey, while transactions represent a much bigger dataset.

And this is what I found, looking at easily-available from the last six years. The chart is log-scaled and shows the proportion of properties sold by price-point. So in the first 10 months of 2019 the median residential property transaction value was £235k. A quarter of properties changed hands for £355k or more, and 1% of properties changed hands for £1.26m or more. The stuff in the very top one percent is a bit whacky, and is driven by a very small number of super-high property transactions.

UK residential transactions by percentile price point, 2013-Oct 2019


This top-tail is interesting, but very small. I could imagine some of these being split up into flats (although a fair few are Belgravia flats already), and as such the structure of inequality in the property stock could be amended pretty easily. This would all require building work to do and my question is around the physical stock as it stands today.

If we remove the top-priced property from the distribution and examine only the bottom 99% on transaction values, things look a bit different (still requiring a log-scale, mind).


I applied a bit of VBA code kindly left hereto then calculate the Gini coefficients of the transaction values.

I was quite surprised by what I found.

Firstly, in contrast to the net property wealth data from the ONS, the level of inequality embedded in the value of physical private residential stock is actually not too far away from the level of income inequality in the UK. Taking out the top and bottom percentile of transactions (of course) makes this even more the case:


Secondly, if we were to take transaction values as a good proxy for the value of the stock, we have seen an increasing convergence between income inequality (dark blue line) and the embedded inequality attached to the physical stock of UK residential property (red line). Moreover, this isn’t a function of those whacky idiosyncrasies at the very top of the distribution of property transactions. We can see this to be true by looking at the Gini coefficient of the 1-99%ile of transaction values (light blue line).


The data exists to calculate this going back to 1995, but sadly the ONS data file is too monstrous for me to deal with in simple Excel.

Why is my estimate of the stock of private property stock value inequality so different from the net property wealth measure of inequality from the ONS?

  • Firstly, the whole point of my inquiry was to see how equal property wealth could be, given the current physical stock of property that is in place today. This is very different to measuring the current level of inequality that resides in property assets.
  • Secondly, the ONS net property wealth is calculated by netting mortgage debts off against the value of residential property owned. So If I buy a house for £235k with a mortgage of £200k, my net property wealth is £35k. That’s what net means. I care about the £235k while the ONS cares about the £35k.
  • Third, there are only 20m private sector residential dwellings (out of a total 24.2m dwellings), and I am looking at value-inequality within this dataset. The ONS reckons that there are 27.6m households. It’s not immediately clear to me how households are defined, as they appear to be defined in a way that is detached from homes. Regardless of this quirk, we know that there are a *lot* of households who don’t own.
  • Lastly, there are lots of wild assumptions in my data: that transactions are a decent proxy for the evolution of stock values; that things observed in England & Wales are true for the UK as a whole; that excluding BTL and offshore purchases doesn’t screw things up. Each of these could be wrong.


Maybe I shouldn’t have been so surprised. Somewhere between ‘a lot’ and ‘almost all of’ the value of a residential property is tied up in its locational value, and this locational value is significantly a function of the proximity to cash flows that flow from employment. If high paying employers set up in a given locality it’s going to boost the locational value of the area. Simples.


^ To quote George Banham of the Resolution Foundation, the Gini coefficient measures inequality on a scale from 0 to 1, where 0 is perfect equality and 1 is perfect inequality (a situation where one person has all the wealth).