Market Fundamentalism

on Friday, March 4, 2022

In episode #2 of the series, Rufus Pollock and Stephen Diehl explore a common incentive for investing in crypto: the belief - held by day traders and quantitative hedge funds alike - that crypto can make those who trade it a lot of money. Particular focus in this episode is placed on the 'market fundamentalist' position.

Episode notes

November 2022 update

We are adding a brief update to this piece to note the spectacular collapse of one of the world's largest crypto exchanges, FTX, in late 2022. This provides compelling further evidence for the dangers of unregulated markets. Find out more via our deep dive on the FTX collapse, and its tragic vindication of our analysis.


The trader or market fundamentalist view likely represents a majority of interest and activity in crypto. The ideology encompasses the viewpoint that crypto is about making money i.e. that crypto investing and trading can make those who engage in it a lot of money. More deeply it is the view that the unfettered and unregulated nature of crypto-markets is a good thing and represents a "freer" and better form of financial markets.

Rufus and Stephen 'steel man' the market fundamentalism position, exploring four key claims:

  1. Unregulated markets allow companies to do what they're supposed to do: maximize returns to shareholders.
  2. Markets are comparable to evolution; they have no moral quality.
  3. Crypto trading is a public good
  4. There is no non-public disclosure about the risks of these assets, everyone is going in with their eyes open that this is the wild west.

Rufus and Stephen end their conversation with an analysis of the market fundamentalist position and the associated claims.

What type of asset is a crypto token? How do we value it? Is there a comparable asset?

Who is Trading Crypto?

  • The day trader in the pub, WallStreetBets demographic.

    "I’ll either be rich, or wrong." This is how Sam, a 29-year-old cryptocurrency enthusiast I interviewed on this week’s Money Clinic podcast, summarized his strategy for investing the last £2,000 of his savings in a hugely volatile and unregulated asset class. Claiming that he's not a natural risk taker, Sam has never set foot inside a casino or put money on a horse. "To me, that seems stupid, like you’re throwing money away." He has never considered investing in stocks and shares. Being self-employed, he's never paid into a pension or thought about setting up a self-invested personal pension (Sipp). "No one’s ever given me that kind of information," he says. So why is he prepared to risk his spare cash betting on crypto? Sam found out his younger brother had turned a £3,000 investment into £30,000 within four years — money he now intends to use as a property deposit. "I was very surprised and it made me feel a bit stupid . . . why aren’t I doing this?"*

    • cf low bets in general: tiny but possible asymmetric returns. A regressive tax or distributed lottery.
  • Quants and Hedge funds

Why is the crypto-can-make-me-money position so interesting to examine?

  • Likely represents a majority of interest and activity in crypto (and even DAOs) from the day trader in the pub up to the Wall Street trader
  • Generally not brought up explicitly as much in the crypto / web3 discussion (for obvious reasons: it is not a substantive or attractive position to espouse publicly)
  • The political imaginaries aren’t there - "I just want to make money", "Greed is good"
    • Consequences and externalities be damned
    • Hyper-capitalist
    • At the extreme: "Life is nothing but a competition to be the criminal rather than the victim."
  • However, may actually account for a good portion of the interest and even political/social support for this area
  • Legitimizing segment especially for regulators ("hey even Goldman Sachs or JP Morgan are involved, this must be a legitimate area / industry")

Steel-manning the market fundamentalist position

  • Unregulated markets allow companies to do what they're supposed to do: maximize returns to shareholders.
    • Friedman Doctrine applied to unregulated markets. Optimize for shareholder value.
      • Now we get to redefine shareholder to mean token holder, without any regulatory baggage from traditional markets.
      • Line must go up at any cost.
    • Crypto products are risk assets that have no fundamentals, but that’s not necessarily a problem because you can make money on trading them.
  • Markets are comparable to evolution; they have no moral quality.
    • Markets are a mechanism comparable to evolution: they select for fitness and success
    • If I'm allowed to trade products that are massively asymmetric and disadvantageous to retail traders (individual, non-professional market participants) then I can and I will => it will eliminate those inefficient players (it punishes unfitness and rewards fitness)
    • Even if I know it’s a greater fool asset, if I have access to non-public information and more capital I can (and should) use it and exit before the other fools.
      • Some people legitimately did make money trading on bubbles: South Sea Bubble, Dotcom Bubble, Tulip Mania
      • These booms and busts are a natural part of market cycles
  • Crypto-trading is a public good
    • Tokens are an investment product that exists to secure compute cycles for people to run computation on a globally distributed state machine using the market to create game theoretic incentive to run other’s computations as a “public good”. That state machine has an operating cost and that creates artificial demand for people who need to buy it, at any cost, to run computation on the chain.
    • We can treat crypto tokens as a synthetic hedge against the entire class of assets with fundamental value. They're a place to park money in times of loose monetary policy to chase yield when there's nothing else left to buy, because other funds circularly trade this thesis. So it may be self-fulfilling.
    • I’m just participating in price discovery of a new asset class.
  • There is no non-public disclosure about the risks of these assets. Everyone is going in with their eyes open that this is the wild west.
    • If the market allows market manipulation (pump and dumps, insider trading, wash trading) this is public knowledge and it is reflected in the price formation of the assets.
    • Institutional investors should be able to leverage their AUM to take high-risk positions just like they are in other private markets. If retail wants to participate with the “sharks” then it’s on them to understand the risks not on the people they’re trading against. The fiduciary mandate of hedge funds is to take positions on behalf of their LPs in beta uncorrelated positions.


  • Everything that has been illegal for 80 years is suddenly allowed. Exchanges are basically like bucket shops from the 1920s. Everything is allowed:
    • Wash trading
    • Front running
    • Painting the tape
    • Insider trading
    • Arbitrarily halting trading
    • Price manipulation and order book tampering
    • Pump and dumps
    • Canceling orders arbitrarily
    • Refusing cash withdrawels
    • Offering 125x leverage on options
    • Clearing house and in-house prop trading are in the same room
    • Exchanges have their own proprietary trading arm
    • Trading against their own clients
  • Markets work best when we have abundant public information and minimize fraud and collusion in price formation. There is a reason we separated different parts of brokers, market makers, clearing houses and traders.
  • We have no idea how much leverage is baked into the entire market, induced by products like unbaked stablecoins which can seemingly produce limitless amounts of unsecured debt products on demand.
  • What does that lead to?
    • Inequality (money flows to the sharks)
    • Distrust and cynicism
      • Both wider in society: I’m out for myself, other people are just out for themselves. Dishonesty and exploitation are a normal part of (capitalist) society
      • Subversive opportunism
      • When it goes wrong the state and its institutions and leaders are blamed, further corroding trust in our collective capabilities when we most need them (climate change etc.)
      • In markets - assuming that markets esp financial markets have some value then undermining faith in them is problematic. Cf the 1920s/1930s which led to much of the market regulations we have today
        • You may think this is a good if you are anarchist-nihilist
    • Just because you can trade something doesn't mean it’s good for the world (opium trade, slave trade, asbestos)
    • Moral hazard - public is incentivized to take on disproportionate risk expecting a bailout
    • A deformation of character: we become enslaved to the idea of getting rich quick (cf Salgado). Capitalist alienation
  • Terribly pathological form of capitalism that doesn't result in price formation on collective enterprise, goods or services. Funds are betting on financial fantasy castles in the sky detached from any day-to-day reality of human life.
    • What is the purpose of public markets then?
  • A captive market for fictiyious commodities that is controlled by opaque unregulated market making and an economic cartel.
    • This is great if you're inside the cartel. Not so great if you aren’t.
    • Wealth transfer from public to insiders is all but guaranteed by the information asymmetry.

Deep dives and notes

Concepts covered



  1. Janeway, William H. Doing capitalism in the innovation economy: Markets, speculation and the state. Cambridge University Press, 2012.
  2. Fama, Eugene F. "Efficient capital markets: A review of theory and empirical work." The journal of Finance 25, no. 2 (1970): 383-417.
  3. Akerlof, George A. "The market for “lemons”: Quality uncertainty and the market mechanism." In Uncertainty in economics, pp. 235-251. Academic Press, 1978.
  4. Hart, Oliver, and Bengt Holmström. "The theory of contracts." In Advances in economic theory: Fifth world congress, vol. 1. 1987.
  5. Fama, Eugene F., and Kenneth R. French. "Size, value, and momentum in international stock returns." Journal of financial economics 105, no. 3 (2012): 457-472.
  6. Jarrow, Robert A. "Market manipulation, bubbles, corners, and short squeezes." Journal of financial and Quantitative Analysis 27, no. 3 (1992): 311-336.
  7. Friedman, Milton. "The social responsibility of business is to increase its profits." In Corporate ethics and corporate governance, pp. 173-178. Springer, Berlin, Heidelberg, 2007.
  8. Lefevre, Edwin. 2004. Reminiscences of a Stock Operator. Vol. 175. John Wiley & Sons.
  9. Dhawan, Anirudh, and Talis J. Putnins. 2020. ‘A New Wolf in Town? Pump-and-Dump Manipulation in Cryptocurrency Markets’. SSRN Electronic Journal.
  10. Hamrick, JT, Farhang Rouhi, Arghya Mukherjee, Amir Feder, Neil Gandal, Tyler Moore, and Marie Vasek. 2018a. ‘An Examination of the Cryptocurrency Pump and Dump Ecosystem’.
  11. ———. 2018b. ‘The Economics of Cryptocurrency Pump and Dump Schemes’.
  12. Kamps, Josh, and Bennett Kleinberg. 2018. ‘To the Moon: Defining and Detecting Cryptocurrency Pump-and-Dumps’. Crime Science 7 (1): 18.
  13. Lefevre, Edwin. 2004. Reminiscences of a Stock Operator. Vol. 175. John Wiley & Sons.
  14. Li, Tao, Donghwa Shin, and Baolian Wang. 2019. ‘Cryptocurrency Pump-and-Dump Schemes’. Available at SSRN 3267041.
  15. Xu, Jiahua, and Benjamin Livshits. 2019. ‘The Anatomy of a Cryptocurrency Pump-and-Dump Scheme’. In 28th USENIX Security Symposium, 1609–25.
  16. Krugman, Paul. 2018. ‘Transaction Costs and Tethers: Why I’m a Crypto Skeptic’. The New York Times 21.
  17. Castor, Amy. 2021. ‘The Curious Case of Tether: A Complete Timeline of Events’.
  18. Griffin, John M, and Amin Shams. 2020. ‘Is Bitcoin Really Untethered?’ The Journal of Finance 75 (4): 1913–64.