The Case Against Crypto
Bitcoin reminds me of what Oscar Wilde said about fox hunting. He said it was the pursuit of the uneatable by the unspeakable.
– Charlie Munger
I’ve long been extremely skeptical of crypto1, regardless of all the hype surrounding it, and me being surrounded by many people who are very passionate about it. Seems there’s no shortage of believers in crypto and blockchain in the tech circles, and no shortage of people who are drawn to “get rich quick” schemes. I’ve been meaning to write a bit of thoughts on the subject for a while now, but Martin O’Leary saved me some work by writing a fantastic article that perfectly reflects my own sentiment. In a nutshell:
While cryptocurrencies were originally intended to act as a frictionless digital payment system, the difficulty of use, lack of scalability, and the volatile nature of the market has made this impossible. In practice most cryptocurrency use falls into two categories: illegal activity (money laundering, ransomware, markets in drugs, weapons, etc) and speculation, with speculation forming the majority of the market. The sector is largely unregulated, meaning that fraud is rife, and the market is filled with get-rich-quick schemes and scams.
Martin also makes some great points on the “value creation” myth:
As speculative instruments, cryptocurrencies do not in themselves create value. Any money that one person makes from buying low and selling high must come from someone else who bought high and sold low – there are as many losers as winners. While those that have bought into cryptocurrencies may believe themselves to be rich on paper, this is often a mirage. The lack of transparency and regulation means that many cryptocurrencies have artificially inflated valuations, and it would be impossible for most “investors” to cash out without triggering a crash, as happened in early 2018, when the price of cryptocurrencies dropped by ~80%.
As usual people focus on the stories of the (few) winners and totally forget about the countless others who lost money while trading crypto. There’s always a counter-party to your trades, nothing exists in a vacuum.
Crypto “pump and dump” schemes explained:
One popular way of making money through cryptocurrency is to start a new currency, while retaining a large chunk of it for yourself. As a result, there are now thousands of competing cryptocurrencies in operation, with relatively little technical difference between them. In order to succeed, currency founders must convince people that their currency is new and different, and crucially, that the buyer understands this while other less savvy investors do not. Wild claims, fanciful economic ideas and rampant technobabble are the order of the day. This is a field that thrives on mystique, and particularly preys on participants fear of missing out on the next big thing.
I honestly have no idea who are the type of people who buy into all the “shitcoins” that get released every other week. I’m pretty sure, though, that the people behind them are the only people who are guaranteed to make some money out of them.
I’ll also add here that the non-stop creation of new cryptocurrencies really undermines the original promise of Bitcoin that the supply cannot be influenced by external parties (which in turn would make it a great store of value). Yeah, the supply of Bitcoin is stable, but the total supply of cryptocurrencies on the market keeps growing at a breakneck pace and massively undermines the “store of value” promise. To explain this in very simple terms - in the realm of crypto every person these days can act as a central bank printing new money, as long as there are enough fools to back it with their fiat money.
And what about the latest fad, the so called “non-fungible tokens” (NFTs)? The article has a very simple and accurate description of them:
The second kind of cryptocurrency application is the attempt to bring other fields into this world of speculative finance. Non-fungible tokens (NFTs) are an example of this approach. Instead of recording transactions which purely involve currency, the blockchain is used to record the ownership of a “token” – effectively a cryptocurrency with one indivisible coin. The token is tagged with metadata, typically a link to a piece of media. This is presented as an ownership record for the media, often with no legal basis, and can be traded much like any other cryptocurrency.
Paying a shitload of money for something that you can’t even legally claim to own is so absurd, that I can’t believe so many people are falling for this. There’s absolutely no way this is going to end up badly for the “savy NFT collectors/speculators”, right?
I can heartily recommend to everyone to read the entire article. It’s pure gold, unlike Bitcoin and friends. I’m hoping that we’re close to the peak of the crypto mania and that people will come back to their senses eventually.2 While we’re still in the bubble, however, we’re morally bound to educate and to warn people about the dangerous nature of crypto “investments”. Not to mention the massive carbon footprint of most crypto currencies. Crypto is bad news. Stay away from it!
P.S. I highly recommend the following articles on the same topic as well: