The bubble may have burst.
NYT (“Cryptocurrencies Melt Down in a ‘Perfect Storm’ of Fear and Panic“):
The price of Bitcoin plunged to its lowest point since 2020. Coinbase, the large cryptocurrency exchange, tanked in value. A cryptocurrency that promoted itself as a stable means of exchange collapsed. And more than $300 billion was wiped out by a crash in cryptocurrency prices since Monday.
The crypto world went into a full meltdown this week in a sell-off that graphically illustrated the risks of the experimental and unregulated digital currencies. Even as celebrities such as Kim Kardashian and tech moguls like Elon Musk have talked up crypto, the accelerating declines of virtual currencies like Bitcoin and Ether show that, in some cases, two years of financial gains can disappear overnight.
The moment of panic amounted to the worst reset in cryptocurrencies since Bitcoin plummeted 80 percent in 2018. But this time, the falling prices have broader impact because more people and institutions hold the currencies. Critics said the collapse was long overdue, while some traders compared the alarm and fear to the start of the 2008 financial crisis.
“This is like the perfect storm,” said Dan Dolev, an analyst who covers crypto companies and financial technology at the Mizuho Group.
During the coronavirus pandemic, people have flooded into virtual currencies, with 16 percent of Americans now owning some, up from 1 percent in 2015, according to a Pew Research Center survey. Big banks like Northern Trust and Bank of America also streamed in, along with hedge funds, some using debt to further juice their crypto bets.
Early investors are still probably in a comfortable position. But the rapid declines this week have been especially acute for investors who bought cryptocurrencies when prices surged last year.
The fall in cryptocurrencies is part of a broader pullback from risky assets, spurred by rising interest rates, inflation and economic uncertainty caused by Russia’s invasion of Ukraine. Those factors have compounded a so-called pandemic hangover that began as life started returning to normal in the United States, hurting the stock prices of companies like Zoom and Netflix that thrived during lockdowns.
But crypto’s decline is more severe than the broader plunge in the stock market. While the S&P 500 is down 18 percent so far this year, Bitcoin’s price has dropped 40 percent in the same period. In the last five days alone, Bitcoin has tumbled 20 percent, compared to a 5 percent decline in the S&P 500.
WSJ (“How More Than $1 Trillion of Crypto Vanished in Just Six Months“):
Traders’ flight from risky investments has halved the price of bitcoin and other cryptocurrencies, wiping out more than $1 trillion worth of digital money since November.
Wild swings are fairly common with cryptocurrencies, but even seasoned investors were left reeling as bitcoin dropped 29% over a seven-day losing streak that just ended as a stablecoin—one part of the crypto world that touted its stability—unexpectedly crashed.
Investors are staring at an inflection point in the financial markets as interest rates rise and inflation rages, and they are responding by selling risky assets.
For crypto, it has been a volatile journey into the depths.
Last year cryptocurrencies were on fire and appeared to gain more legitimacy after years of being considered a fringe, speculative product. Tesla Inc. TSLA -0.82% said it bought $1.5 billion in bitcoin, pushing prices higher. Coinbase Global Inc. COIN 8.90% listed its shares in the first major bitcoin-focused public offering.
In November, bitcoin and ethereum, two of the most popular cryptocurrencies, reached all-time highs. Bitcoin’s value at 5 p.m. on Nov. 9 was $67,802.30; ethereum was worth $4,800. They are now down 58% and 60%, respectively, from those levels.
Cryptocurrencies were falling even before last week, victims of sky-high inflation. Bitcoin and other digital currencies have been talked about as inflation hedges. But the ripple effect has played out differently. Surging inflation is spurring the Federal Reserve to raise interest rates faster, which investors believe will cause a slowdown in economic growth. The result: Investors are unloading risky assets, including cryptocurrencies.
Also exacerbating the losses is that crypto trading, originally an individual-investor game, is now dominated by institutional investors such as hedge funds. Those who have sought diversification in crypto have been caught wrong-footed.
WSJ Editorial Board (“Warnings From the Crypto Crash“):
Well, the party was fun while it lasted. But now the liquidity tidal wave is crashing as it always does when credit conditions tighten. This week’s crypto-currency crash is the first body exposed on the beach, and let’s hope the damage doesn’t spread too far into the financial system and broader economy.
Some $200 billion in crypto assets have blown up in 24 hours, led by the collapse of the so-called stablecoin TerraUSD. The crypto universe used to be small and dominated by Bitcoin enthusiasts, but it has swelled as investors sought higher returns amid negative real interest rates.
Hundreds of crypto currencies have been minted in a flurry of speculation. Anyone can create a virtual currency, market it to investors and use the money as he pleases. While fiat currencies such as the dollar are backed by governments, crypto currencies are backed by faith in their developers. What could go wrong?
Investors found out this week. Stablecoins are supposed to hold a fixed peg and let investors seamlessly trade crypto assets. Some are backed by fiat money, though their inventors don’t always disclose what’s in their reserves. Other stablecoins like TerraUSD are underpinned by algorithms, sometimes linked to another crypto currency—in Terra’s case, the token Luna.
To drum up demand for its currency, Terra’s developers created a “decentralized lending” platform that offered interest rates of up to 20% on deposits. Terra was supposed to hold a $1 value. We were also told before the 2008 financial panic that prime money-market funds wouldn’t break the buck. Then one did.
Despite its supposedly fail-safe algorithm, Terra was backed by nothing more than market confidence. And we’ve learned time and again what happens when investors panic. As investors sold off crypto, Terra’s algorithm broke and its value plunged to 36 cents on Wednesday. What happens to Terra owners? Stay tuned.
One risk is that Terra’s rout causes investors to lose faith in other virtual currencies and creates a market contagion. Crypto currencies are often used as collateral for trading, and other popular tokens are getting pummeled this week. The stablecoin Tether, which is backed by opaque hard currency reserves, wavered from its dollar peg on Wednesday.
Crypto currencies have passionate supporters, and the best may find a permanent place in the financial marketplace. But more than a few will wash out in this liquidity purge. As we learned in 2008, problems on Wall Street can quickly spread to Main Street. The challenge for regulators is to protect the financial system from damage that won’t end with crypto. They’d better be preparing for the next casualties.
While I can’t claim to fully understand cryptocurrencies, I’ve always viewed them with suspicion. Their initial premise, at least as I understood it, was to create a medium of exchange that couldn’t be tracked by government. Which, while one can see the upside even for legitimate transactions, comes with rather obvious downside risks: to the extent it’s invisible to government, there’s no way for the legal system to protect investors from fraud. And, as they have proliferated and their values gone through boom and bust cycles, the whole thing just seemed obviously untethered to anything real, relying on the Greater Fool Theory of investing.
As confident as I am in the existence of fools, that just seemed like a really unwise—not to mention immoral—way to invest. Most of my retirement money is in the market because I’m confident that, in the long run, the American economy will rise. Investing in something that is pays off only if some sucker is left holding the bag is a whole different animal, entirely.
Replace the words “crypto” and “cryptocurrency” in this article with the words “bubble-gum cards”, and tell me this makes any kind of sense. Same can be said for NFTs.
This is just my own half-assed theory, but I suspect one of the things that contributed to the crash was the fact that several legitimate investment companies have started to show an interest in putting crypto-currency funds together. I don’t believe the crypto market can withstand even the most modest scrutiny from a legitimate entity. It seems to consist of 90% outright scammers, with the remaining 10% divided between criminals trying to get paid for drugs, stolen goods, etc and ransomware gangs.
One data point: Someone I know works for the SEC and under certain circumstances they have decided the crypto companies fall under their domain. From what she says, they are not at all impressed by the level of intelligence by the people they have interacted with. Specific and precise legal questions are answered with hysterical and childish screeds referencing random passages from the constitution and various conspiracy theories, challenging the SEC’s right to review them. They are used to getting challenged, but by people who actually understand the laws and the seriousness of having the SEC asking questions. As she was describing the responses, it reminded me of the looney libertarians of the Rand Paul era who were writing books and convincing people they had found loopholes in the constitution that meant no one had to pay taxes.
Who could have predicted that an asset that most people don’t understand, created (as the OP notes) outside of legal protections, would be seen as a bad place to put value during uncertain economic times?
Crypto currency is similar to believing that airplanes fly, not due to some provable concepts of physics and engineering, but due to the collective will of the passengers to wish the plane into the air.
A thought, Musk announced this AM that his acquisition of twitter is on hold for reasons… I wonder it the crushing of crypto is an unadmitted one.
I kind of understand the technology. I don’t understand the underlying value of crypto other than not being the one left standing when the chair is pulled away. At least stocks have some assets underlying them. Crypto does not as far as I can tell.
@MarkedMan: “From what she says, they are not at all impressed by the level of intelligence by the people they have interacted with.”
Cryptocurrencies have some potential uses, but most of those don’t require the whole infrastructure of cryptocurrencies to operate. Crypto has all this overhead that proponents like to say makes it both transparent and anonymous, but we really don’t demand that for most transactions, and when we do it’s usually for small stuff that cryptocurrencies are essentially useless for.
NFTs have legitimate use cases as something between stamps and property deeds, neither of which has particularly strong value in and of themselves except in extreme corner cases. But, like, I could see a major sporting event using NFTs to get rid of paper tickets and prevent forgery or scalping, because you literally can’t sell a ticket on the blockchain without someone knowing it exists and can be sold. But again, this is a limited use case because the cost of doing it is too high (economic, social, environmental) unless the tickets cost hundreds of dollars each.
Anyway, color me shocked. The crypto community has been blind to holes, pimping itself as an unregulated and therefore idealized market while ignoring, like, centuries of evidence that a lack of regulation is a sure way to tank a market operating with real humans. A classic spherical cow problem.
And yet you modestly say you don’t fully understand crypto.
@Han: That was, IIRC, Dr. Krugman’s explanation, “baseball cards”. As far as I can see it’s the embodiment of various tech bro glibertarians’ half-assed understanding of fiat currencies.
Another thing I don’t understand about Crypto is the expense side of it. Who is paying for the computing power, electricity, the labor, the entire administrative side of this operation? Is this just another gold rush with the people supplying the shovels and mining stocks making the real money?
Another speculative bubble goes *pop*.
Knock me down with a feather.
Back in the paleolithic, Ogg probably devised a really cool scheme for investing in obsidian chippings: “It’s a sure thing, bro. New litho-tech paradigm. Bet the cave on it.”
Just occurred to me: what would be really hilarious would be if a bunch of Russian oligarchs had moved a sizable chunk of offshore assets into crypto just before it went lawn-dart.
That was my first thought when the term Bitcoin first appeared some years ago.
Actually, I’m pretty sure a lot of people would tell you airplanes fly because they have jet engines. there’s this sense that if you put a jet engine, or a rocket more often, on any kind of vehicle, boat, train, car, etc., it will fly like the Concorde.
Planes fly because the shape of the wings causes air to move faster on the top, in accordance with Bernoulli’s principle, which creates an area of lower pressure as compared to the bottom. The imbalance pushes the plane up.
I should mention this si not the first report of the imminent demise of cryptocurrencies or NFTs.
Also, 1929 called. I asked if it would leave a message, but it just couldn’t stop laughing long enough to do so.
Beanie babies for the tech-bros.
Blockchain has certain uses, but the ever-increasing energy needs of computers doing wugga-wugga-wugga in order to “validate” means that any system running off of it has a finite limit.
(Hasn’t stopped a load of “engineering+ bitcoin” patent apps coming across my desk, however. Sigh.)
I find this an intriguing development. One of the pillars in the case for crypto is that no government can debase this currency. Coins are like gold in that they are “mined” by enterprising individuals. So it is meant to appeal to gold bugs, and be a hedge against government-created inflation.
We are now in a period of government-created inflation. The Fed and Congress both decided that inflation was better than massive unemployment and economic collapse. I think it was a good call. However, this should have been a great moment for crypto currencies. This should have made their case, much like gold soars during periods of inflation.
And now it has collapsed. I find this a curiosity.
I would be very surprised indeed if there haven’t been any number of Russians moving their assets into crypto. And now the price collapses? What’s going on there? These markets probably aren’t big enough to avoid being manipulated by an agency with truly deep pockets.
Another random thought: I wonder if the exit strategy for most of the crypto-cons was always going to be a meltdown? Think about it – at some point a significant number of suckers are going to want to take their money out. But what if the money wasn’t there anymore? If BitCoin was still worth 17 gazillion dollars and people wanted to take their $200 or $300K capital gains to put a downpayment on a house or something but they couldn’t complete the transaction, they would start asking angry questions. But if you go to sell your 57 cents worth of BitCoin and the transaction doesn’t go through, how hard are you really going to push?
What I think is telling is that Bitcoin was first advertised as an alternative currency, where you could use it to buy things. Whether that was possible or not, it at least had a claim to some real world value.
Now, most promoters of crypto have largely abandoned that claim and are now just openly advertising it as a speculative commodity and worse, one which is sold with the deliberate aura of mystery and promise of instant riches.
Right, that my go to analogy, crypto currency is a Dave Winfield rookie card 🙂
@Sleeping Dog: Rather more broader market. His bid was leveraging heavily borrowing on other assets, and everything is tanking. This AM was no surprise, last night I was wondering how long until he started caveating.
Give me enough money, and enough jet engines, and I can make anything fly.
Crypto is more like the Roadrunners’ coyote staying up as long as he doesn’t look down and realize he’s walked off the cliff.
@Jay L Gischer: The debasement issue is the limited number of potential coins baked into Bitcoin design. It is not per se a necessary design feature as such.
It in any case has been shown to be an arch pretence since while one can say Bitcoin is limited in itself, nothing has prevented a flood of new issuances of new coins, which in the end is more or less equivalent – although for structurally similar situations internal to the endless proliferation of such coins, one needs to look at 18th and 19th century private scripts (see US monetary history). While not identical, the boom bust cycle is showing rather similar patterns.
I am pretty sure you know this, but the Twitter takeover being on hold is for bland reasons, Musk is letting Twitter prepare for when takes over. There was an article in the NYT yesterday that outlined steps Twitter is taking to get the company ready for the buyout from Musk. They fired and are replacing a couple of important executives in the company, they have frozen hiring new employees at this time, and they are taking an even harder look at additional cost cutting measures they can put in place before it is officially Elon Musk’s Twitter.
Glad I am not working for Twitter right this moment, they will have a CEO soon that wants to let the odious Trump back on the platform, and he wants his Twitter employees to work something like 350% harder than they do now.
One of these days, I know I will wake up and everyone will be reporting on Trump’s latest middle of the night twitter tantrum/storm, at least that day is still a bit further off and will not happen tomorrow.
With a bit of regulation, Crypto could regain some of its luster and appeal to folks looking for other investment opportunities than the stock market, but right now it sounds like it is still the wild, wild west when it comes to jumping into the Crypto pool.
Indeed. It’s supposed to be a currency, something used to be able to buy things or obtains goods and services. Theoretically it was supposed to be treated as legit in its own right and could be used interchangeably with dollars, rubles, yen or whatever; vendor takes Bitcoin and you either convert it to the currency of your choice or use it as money in your own ledgers.
It wasn’t supposed to be treated like a stock or commodity, something you buy low and sell high. However, as soon as scammers and savvy manipulators realized people had zero idea how any of it worked, it pivoted to “look how much it’s worth now. Imagine how much it will be worth in a few weeks!!” That should have been a big honking clue to to anyone with brains that a “currency” you can’t spend without losing out on value or functionality isn’t what it seems.
I can’t explain people’s willingness to buy NFTs…. well, not in polite terms.
@Jay L Gischer:
One wonders how fast the NSA’s supercomputers could mine bitcoin.
@Jay L Gischer: I am asking this out of my ignorance. I lived through the 1970s inflation, and at that time gold was said to be asset that resisted inflation. Nixon eliminated the $35/ounce of gold peg of the dollar, and by 1979 an ounce of gold was $1200 as I recall. This was widely said to demonstrate gold as an anchor of real value. Currently, gold is $1800 or so with no increase in the past six months. What does all this mean? Is gold just some story we’ve all been told?
Overall, the idea of the blockchain seems so dumb. I don’t understand how it makes anything better. It just seems like a nerdy waste of time. And correct me if I’m wrong, but crypto seems just as much a liability for criminals as any kind of financial asset. These two Russian tiktok hackers got busted after sitting on a huge cypto wallet for years and they barely got any money out of it. It doesn’t seem like any government is mystified by where these wallets are. Maybe crypto is better for small-time low-profile crime?
I’ve taken some damage during this downturn/recession, but the difference is that the stocks and real estate I own are attached – albeit sometimes loosely – to reality. If the real estate market takes a downturn, well, I still have a house sitting on a defined piece of dirt. The stocks I own are in companies that provide actual services or even make things. (!) Most of those companies will recover by, you know, providing actual services and products.
I’m feeling pretty smug, TBH. I know fuck-all about economics but I know the smell of bullshit, and crypto was and is bullshit-based.
@Lounsbury: I have an acquaintance who thinks the days of private banks issuing their own private scrip was the Golden Age. I think we all are quite fortunate that he is an IT guy (and a very good one) rather than a banker, or chair of the Senate Finance Committee.
I have quite definitely seen the “cannot be debased” argument for crypto. As you point out, it gets debased by other people issuing other cryptocoins, which are in the end, the same thing.
Crypto and the blockchain have lots going for and against them. And, yes, there are lots of unscrupulous sorts, mindless fanatics, etc who proselytize.
I also think that it gets a fair amount of mindless grief. Some of this comes from people who fully acknowledge they don’t understand it. “I just don’t get it”…followed by a screed of how stupid it is.
If people are genuinely interested in learning, there are scores of brief/simple ‘splainers. They’re not hard to find. Or understand. Ignorance is a choice at this point.
Also, it’s way too easy to nutpick on this topic. I too roll my eyes at the charlatans and pitchers. And there are also very smart, thoughtful, and engaged people that one might seek out. And they too are not hard to find. Hell, Vitalik Buterin was just featured on the cover of Time!
@Slugger: My take has always been that when gold was “floated” back in the day, it became a speculative commodity like pork bellies, sugar, and petroleum. The futures’ markets exist to lend some stability to those who eventually want to buy the commodity, but I don’t see that the gold futures market works the same way. Still, I don’t invest in futures, so you might need to ask someone who does for a better line on how it all works.
@Jay L Gischer:
I think a lot of this sort of thing is the result of decades of Republican propaganda that government is the enemy. Tech Bros seem particularly prone to juvenile fantasies about libertarianism. Possibly because, despite their self-exalted brilliance, they’re expected to pay taxes.
@Mimai: there is nothing particularly going for bitcoin nor really blockchain, which is a solution looking for a problem (of which most proposed problems addressed exist largely in the fevered imagination of Libertarians with rather to much Uni student marijuana haze philosophy and rather to little understanding of currency, real world transactions and execution)
Supposed trustlessness is bollocks.
@Slugger: Gold has real value. It’s used in electronics. It also has an aesthetic value and is used in jewelry and other ornamental items. But as the basis for a currency? I’ve never understood that.
I bought some compound Ethereum years ago when it was cheap. Mostly just to play with to help my understanding of how it all worked. Not enough money to get worked up about if I lose it, but it sure was exciting when it was high! Guess I should’ve sold it when it was high, but I don’t think I was paying attention when I should’ve. It’s still worth 300% of what I put into it, though, so I think I’ll just be calm and ignore it again for a while. 😛
I’d refer you to Kathy’s theory of Value, but it’s mostly in my head with very little written down. Brief version: the value of a substance is related to the use humans have for that substance.
For instance, carbon, the element, is of great value to human survival, given that it’s the atom around which all organic molecules are synthesized, by either natural or artificial means. We use a great many carbon compounds, but little elemental carbon.
Gold has some industrial uses, for instance in electronic circuits. It’s been used, or is still used, for shielding some spacecraft and spacesuit components against radiation(it’s so malleable it can be translucent, and so dense it can stop some types of radiation).
It’s useful as ornamentation, as in jewelry, because it is rather inert and doesn’t tarnish easily, besides it’s shiny and yellow. Its malleability permits ornamental techniques like gilding used in furniture and other things.
It’s useful as currency because it is homogeneous, durable (see above), can be easily divided into standardized pieces, which can be stamped with a design and a seal of authority (that’s why ancient coins had a portrait of a ruler and/or a deity).
And it’s rather rare, so it’s price tends to be high.
Today, past the above uses and rarity, since it’s no longer used as a currency, it’s valuable because people believe it’s valuable and pay high prices for it. If we were able to synthesize elements via atomic fusion*, we could make gold by the ton and drive its price down.
*This is nearly certain, as we can make tritium and plutonium in large(ish) quantities in fission reactors designed for such a purpose. there’s reason to suppose we can do the same with fusion (if we ever get fusion reactor to work). With a caveat: elements heavier than iron will cost additional energy to make. that is, their synthesis would use up far more energy than it produces
@inhumans99: This is simply nonsense.
There is no reason in the transaction for Musk to put it on hold for any reason you evoke. Ons
There are potential reasons rooted in the way he is ostensibly funding, by borrowing against other market assets he has, effectively all of which have lost significant market value in an emerging bear market. Musk is equity thin and his other endeavours largely need cash, not throwing off cash. So he and probably many Co funders betting on a levered strategy face constraints, rather likely need to plump extra backing.
Anyone watching Muskarket action has suspected since day one…. looking at this via political lens is rather sterile.
@Mimai: Sure, there are smart people involved and some of them might not even be scammers. Even smart people can get seduced by “the next big thing”. For instance, I’ve been hearing about the wonders of “the blockchain” (I.e. the core technology behind crypto currencies) from the software community for over a decade now, with major investments in it by companies such as IBM (it was excruciating for a while as every large meeting with IBM for any purpose inevitably had a speaker about the gd blockchain). But to this day I have never received a meaningful answer to my simple request: “give me an example of a real world problem that could be solved by the blockchain”. And I’ve asked many dozens of people pitching blockchain. Most can’t even get beyond tech speak, but some tried an actual answer but those answers were garbage. More than one told me how great the world would be if all real world transactions were on the blockchain because then it would eliminate disputes. What disputes? Is there an epidemic of court cases or unsatisfied customers because two parties disagree over the mere fact of whether one bought something from the other? Because it seems to me that most disagreements of hinge not on whether something was purchased but rather whether it was delivered or whether it was what was expected. Blockchain ain’t gonna help there.
I missed the first time. So I’ll pose the same request to you: Give me an example of a real world problem that is best solved by the blockchain.
@Slugger: Kathy has correctly noted value is relative.
With respect however to the valuation range you note, first keep in mind those are nominal dollars.
Second the time frame, the current inflation spike has been sustained over only some months, or a year, not a multi year flailing with anemic Central Bank réactions as in the 1970s.
Third, the choices of instruments for inflation hedging now versus the 1970s is light years apart. The 1970s financial markets, heavily regulated with a fairly primitive set of choices for significant capital operators, left gold (still in majority experience a form of money/backing) a principal choice, so the demand pressure on gold eould mechanically accelerate faster, thus pricing as well. Now sophisticated operators have a wider range of hedges including a deep derivatives market. In principle that diffuses demand.
Gold will move on demand pressure but the trajectory will not be 1970s rerun
Just some observations based upon comments. (And by the way, I don’t own or advocate Bitcoin. Probably never will. But facts are facts.)
Concerning the valuation commentary: in 2012 Bitcoin was, priced in dollars, $10. It went berserk in 2018-2019. Peaked in the fall of 2021 at around $60,000, and today is about $30,000. $10 to $30,000. Not a bad return. Anyone predicting $10 again?
As far as being a speculative toy. Don’t forget, currencies are traded speculatively every day. They are huge markets.
And as far as those extolling the great dollar – a supposed “real” currency. In the period Bitcoin went from $10 to $30,000 the dollar’s value declined 30%. Since going off the gold standard its down 250%. Its a fiat currency. It can be debauched, as the government has.
In the latest period gold has risen 30%, the yen 13% vs the dollar. Its called inflation.
Its all fine and well to take pot shots at Bitcoin, but the dollar makes Bitcoin look like a sweet financial asset. Not much financial perspective around here, eh?
@Lounsbury: I have to admit I often find your comments needlessly harsh. In this case, though, you were needfully harsh in just the right amount. Maybe a little light, if anything.
@MarkedMan: Financial Times Alphaville has been delightful over the years poking at this. Although one might say it is not that blockchain can’t “solve” a problem, but it is structurally less efficient and unless one has large scale diversified participation in validation, the supposed security is a mirage (rather like the supposed anonymity is a mirage).
One has to have an essentially political ideological preference, its really effectively almost an inverted Bolshy position…
I also find it amusing that people laud the “untraceability” of their “anonymous transactions” all the while at the same time lauding how blockchain stores all transactions everywhere. Make up your minds, guys.
Also would like to point out that cryptocurrencies like Bitcoin require a very First World level of technology to be carried out. If we ever DO go MadMax, it’s not going to be the tech-bro geeks with bitcoin who are going to be at the top of the heap.
@Drew: Sorry, but while what you are saying may well be perfectly correct, it doesn’t mean what you think it means. I’ll just point out two flaws. First, sure, if you buy something on the first day of its existence then you can realize huge profits despite volatility. But you don’t judge a currency on its worth versus its historic low, you judge it on whether it is viable for day to day transactions. If you bought Haloid Xerox when it first issued stock, you would be rich even today. But if you bought it in the last thirty years? Not so much. And that brings up the second flaw, volatility. I just saw that the fourth largest cryptocurrency, Luna, was worth $54 on Monday and is worth less than $0.01 today. That’s not a currency, that’s a crapshoot. Even Bitcoin is down 20% in 7 days. My business can’t accept that as a payment. Our margins couldn’t withstand that kind of fluctuations. Hell we have to manage our USD to Euro differential with care and those fluctuations move at a snails pace compared to that.
All those bright young things that convinced their management in the past year or so to start accepting crypto probably won’t get fired because of it, since I doubt more than a handful of people bought a Taco Bell chimchurra with Etheryum. But you can bet that their future at the companies are over. To be suckered by a faddish scam is bad enough, but to have in turn suckered their bosses?
Gold is a fiat currency too, you know.
It is worth exactly as much as people value it.
The US dollar index, the standard measure of it’s value, today stands at 104.48
On 01/01/2012 it was 80.16
On 01/01/2013 it was 79.62
That doesn’t seem that bad.
The material purchasing power has declined; though 30% seems a little high; IIRC the total drop since 2000 is about 40%.
Considering the squawking since the 1990’s (at least) about “imminent hyperinflation any time soon now, eek!”, an annualised inflator of around 2% is within acceptable bounds for an advanced economy.
And certainly better than deflation.
As to bitcoin at $10, I wouldn’t care to bet heavily against it.
I would bet that a lot of other cryptos are heading for pennies on the dollar.
Cryptocurrency, NFTs, and blockchain have been cause for anxiety for many reasons. The environmental impact. The risk of many people, bought into the hype, losing a lot of their savings. Money laundering. Potential effects on the rest of the economy once this market tanked.
But the danger I don’t think gets enough attention is the mania, often sweeping up otherwise intelligent people. It’s a form of mass psychosis, and boy, do we need less of that phenomenon these days. Beyond the Ponzi scheme charlatans, there were also lots of people who were very eager to poke their fingers in your chest and declare how you were just denying that the future is here now, man, and you’re not just getting it. I know a few of these people, whom I used to respect a lot more.
Case in point: I belong to a Facebook group about science fiction. The admin posted something about NFTs, not related to SF at all. He seemed like an otherwise good guy, fellow SF fan, decent to people who posted on the group. In this thread, he behaved very differently. Lots of outlandish claims, such as some NFT artist was going to be recognized someday as the equivalent of a Van Gogh or a Warhol level talent. When I gently said that I wasn’t interested, can we get back to discussing SF, he laid into me with the same vehemence as he showed skeptics. I then said that he was not getting my point, which was my indifference to the topic, and he would do me a great favor by not responding further, unless he suffered from some sort of unhealthy evangelical compulsion. Sadly, he responded, accusing me of being as oblivious to the glorious future as someone who would say that he’s not interested in the Internet. I have other examples, including a friend of many years.
This is frightening. Our civilization seems very susceptible right now to manias that play on our all-too-human vulnerabilities: aggressive confirmation bias; the longing to be on the right side of history; a smug sense of superiority; the sunk cost fallacy; groupthink; and probably a dozen social and psychological tendencies I haven’t named. The wild-eyed MAGA believer does not strike me as very different from the wild-eyed crypto/NFT believer.
@MarkedMan: “Give me an example of a real world problem that is best solved by the blockchain.”
Hey, if I have a digital image and want to be able to believe it’s a unique asset despite its infinite reproducibility, blockchain is the only way to go!
@Drew: Gotta love a self-styled financial whiz who doesn’t know what a bubble is.
It’s a big pump-n-dump scheme. Something like 90% of Bitcoin is held by less than 100 people worldwide. The rest are largely panicky, defensive, desperate people, of varying intelligence, researching “investments” on both YouTube and OAN commercials, and commenting on every web feedback page trying to get people to buy cryptocurrencies because they bought high and want it to go higher. The only way that happens is if demand increases.
Ultimately it’s no different than buying Euros or Rand or Pounds, none of which are really an “investment”, rather cryptocurrencies are simply another way to hold cash. The fact that many people thought that flavor of cash was “cool” for a time, does not increase its inherent value.
@Drew: Perhaps you should be thanked for giving us the non bitcoin bro rendition of half understood “facts” and the rather typical popular inability to distinguish the difference between a currency as a unit of account (of an underlyingasset in compartive exchange value with other assets), currency as a store of value and an independent role as an asset in itself Subject to speculative demand independent from
Your post is a lovely display of the typical economic illiterate confusion between the three riles, also shared with various species of goldbug.
The blundering bluster about the dollar, the essential value of the dollar as a currency is precisely in the comparatively non volatility (note, compared to other mediums of exchange). The wild speculative swings of bitcoin are one of the principal indicators of its failure as a proper currency.
The comment by @MarkedMan is spot on, as bitcoin and the other blockchain coins display the behaviour of essentially purely or principally trading assets which are too internally snd relational instable to be économically efficient currency, as unit of account and exchange.
Of course the complexity of monetary markets is that three factors in tension are slways at play, where money as asset in itself confounds money as medium of exchange. But successful trading currencies as units of account do not display the volatility seen in the speculative Coins.
@JohnSF: One might say in a sense all currency is fiat as I the end although the popular imagination struggles to accept, currency has no natural reality, its purely human convention….
@MarkedMan: Well perhaps it is my world but really didn’t see that as harsh, merely direct.
@Michael Reynolds: I should mention my own personal deep irritation when some Crypto Bro makes it on a panel on Development Finance for example in Africa – as I was with just teo days ago- snd launches into some technobabble filled blithering on about how Cypto is “democratising access” as if this nonsense has the least real utility to a farmer with at Best an old Nokia phone….
Concerning crypto, I guess I’ll just be like Larry David, throw my hands up and say “Naaahhh”.
Yep but the difference is I can spend any of those currencies or exchange them for my preferred one with a reasonable degree of confidence. My transaction still ends up having worth even if it goes belly up. Sure, if I end up getting stuck with a ton of Kenyan shillings that I can’t unload for example, it’s still recognized money – it’s worth less than I want but still legit money. I can take it to a bank or currency exchange easily. Hell, it’s physical money too so I can use it as decoration if I want should the value get too low. I can give it to kids as “play money” or just hold on to it in a collection.
What exactly is a Bitcoin if nobody takes it? Worthless bits of code that don’t even exist. You know how some people claim fiat money only has value because we all agree it does? Crypto only has value it you can convince someone that something that they cannot see, touch or use effectively in any fashion is valuable enough to trade real cash money for. There’s a word we normally use for that – it rhymes with van.
@KM: It is important to note that the speculative trading between currencies is generally a smaller subset of the overall currency market. A useful subset in the same way that short-term traders in equities on listed exchanges is useful. They provide liquidity depth that eases exchange.
Currency demand for most currencies – excepting those where currency traders have detected or believe they have detected an important mis-valuation (see Turkish lira right now)- is typically driven by international trade and investment demands. Illustratively I have investments (operating companies, not merely stocks) in various African countries. The cash flows generated there are of course not in Euro, but domestic currency (usually), that unless I am reusing in-country for expenses, I need to convert into either dollar or euro (for my purposes my two operating currencies). These kinds of flows are generally the major demand drivers, not speculative: that is “real” users of the currencies (for reasons other than specuating on Currency-as-an-Asset-itself).
This is rather evidently not the case for the Coins. There is trivial economic use except for speculation of them as Speculative Asset themselves. This is classic Tulip case, where ongoing speculation becomes the main demand and value driver, rather than any underlying economic use case.
(It is also rather important to note that for Euro, for Dollar but also for Kenyan Shilling etc. most money nowadays is not physical. Most money is electronic account on a ledger. Physical money is a percent of total for almost all currencies now).
I got bored waiting for anyone to give a real world example of blockchain technology solving an actual problem and so did something I do every few years and googled that. TL:DR – nothing has changed. The “real world examples” given either don’t actually point to a real world example (i.e. an actual successful use of the blockchain for something other than NFT’s or Cryptocurrency) or point to companies or entities that are only studying blockchain solutions. Here’s an example from CNBC, a source that at least nominally is not in the business of selling blockchain, although the article does read like a blockchain press release, so it may be a pay-for-placement type of advertising. “5 real-world applications of blockchain technology”. Let’s take a quick look at the 5.
1) Using the blockchain to trace the trajectory of any product being shipped. This is misleading. The blockchain doesn’t actually physically track anything, so what they are talking about is having all players involved in shipping using a single source to collect shipment status. But there are already many instances of such systems. FedEx, UPS, USPS etc all have ones, as do most other shipping companies. And while it would be useful if there was a central repository they all used, that would only require agreement on which one they used. There is no need for a new system.
2) Voting systems – This one I could actually believe might be a realistic application of blockchain
3) Customer loyalty programs. Oh wait, it’s about offering cryptocurrency instead of discounts
4) Copyright protection – The most important thing about copyright protection is the entity that actually grants the copyright and its powers of enforcement. What they are really proposing is that there is one central grantor of copyright protection. Copyright protection without the power of enforcement is just wishful thinking. And in the conundrum of how to make a central copyright authority with the power of enforcement, the technology used to record copyrights isn’t the challenge.
5) Personal loans – I could loan someone here a thousand bucks and we could use an app based on blockchain technology to verify I had transferred the money to them, and that they had then kept up to date on the payments. But of course I would need to transfer from my bank and they would need to transfer from theirs. So it would only work provided every financial firm in the world participated. Again, the challenge there isn’t the technology used to record transactions.
Most important thing missing from this list of “real world applications”? Any actual real world application.
@MarkedMan: you should read and enjoy the delightful Isabelle Kaminski of FT on blockchain and bitcoin over the years of which commentary like Bitcoin continues to evolve into a worse version of current system as well has the observations on externality of functioning
I also do recommend Jemima Kelly’s useful note and quote
(although of course due to ledgers, such anonymity is not more of “too much of a pain in the ass to be visible” than really genuinely anonymous like physical cash)
Well, I would appreciate it if you would note that *I* could be described as a “tech bro”, but I bear basically none of the attitudes you ascribe to that category. I’m not unusual here in Silicon Valley, either. And the person I spoke of lived in the Washington DC area, I just knew him because of social media. I think the most salient factor is that he went to a very small parochial college and was very likely the smartest person there – which is a dangerous situation for a student to be in.
Money is a concept that is very slippery and hard to understand. I read a lot of economist blogs and they don’t all agree on every aspect.
Anyway, I would appreciate it if y’all would be a bit more cautious with your “diagnosis from afar”.
As to the “democratizing access” this is a very powerful narrative driving crypto.
AND, it doesn’t make a lot of sense to me. Crypto acts by “voting” of any entity on the blockchain. That’s “democratic” right? Except the voting is more along the lines of “one Bitcoin, one vote” than “one person, one vote”. But there’s “voting”, so it’s democratic?
Another driver to this narrative is that the markets are basically unregulated, which makes them very low-friction. The finance industry, by comparison, is highly regulated, to protect consumers, and the result is that new digital products can be slow to appear, and access isn’t as free.
And there’s structure in the finance industry that gives access to better assets to people with lots of assets on account, and people with a couple hundred or a couple thousand don’t really get to see these deals at all.
And of course the prospect of bitcoin mining gives the whole “I might strike it rich!” thing.
Yeah, you might, but then again, the giant mining companies will probably find any of the bitcoins you find before you do. I even suspect there’s a hack available to them where the hold back publication of newly discovered coins until someone else discovers them, and then use their voting power to make sure it’s their own discovery that’s validated by the blockchain.
That’s a thing that could happen as far as I can see.
Is it El Salvador that is in deep economic doo doo because they tied their currency to crypto?
I am shocked, shocked I tell you!
Because you’ll appreciate it (I think), I can’t help but mention that “real world” and “problem” and “best” and “solved” do not have universally accepted definitions.
Also, to clarify, I am not a crypto champion, nor do have any of my own skin in that game. Rather, my point was to acknowledge that crypto has been overpromised and also that there are too many [insert pejorative here] proselytizers.
And despite that, IMO, it is not something that ought be dismissed as self-evidently ridiculous. Nor should anyone who discusses its potential be summarily dismissed as a dimwitted lunatic and/or charlatan. And especially not by people who acknowledge their own ignorance.
I say all of that as context for my (non)answer to your question.
Re “real world”: For an increasingly number of people, the online/non-physical/etc world is indeed real. Hence, crypto makes sense as long as their online community imbues it with value.
Re “problem”: I’d frame it less as problems and more as applications. See above about real world. That said, I was (still am but to a lesser degree) hopeful about the international transfer possibilities. And these do not only exist for illicit activities. I’m thinking of people who live in (or used to live in) (or have family/friends who live in) authoritarian countries. They would benefit from a way to transfer money that is less vulnerable to malign capture. Yes, there is the last mile issue. And I would rather have that issue to “solve” than to not have that issue be relevant at all.
Re “best”: I won’t comment on that. I hope you’ll appreciate why.
Re “solved”: I think this sets an unrealistically high bar for a relatively new technology and/or currency. A dodge on my part? Perhaps. Perhaps not. You can judge my motives. Just not necessarily accurately.
Ps, Sorry if I was a source of your boredom. Feel free to harsh on me at your discretion. 😉
98% of the time they should be dismissed as a charlatan. I’m willing to accept a small error rate in the heuristic.
If you need a public, distributed ledger of ownership, blockchain might be worth looking at. But there aren’t that many cases of that. Deeds, perhaps, but then you have a ledger of ownership separate from the state power needed to enforce property rights with pros and cons to that.
And then crypto tries to obscure the public part… to make it better for crimes.
@Mimai: I appreciate the detailed answer. A few comments.
I think you are right when you caution not to throw the concept out just because the proselytizers are obnoxious. It’s why I conceded that the voting system could be an application.
That said, the fact that there are so many scammers and obnoxious proselytizers actually does hurt the chances of eventual breakthroughs. They taint the field and drive people away.
What you said about it having more relevance in a virtual community is an interesting way of looking at it and I hadn’t thought of that. I’ll have to mull that over for a while.
Finally, the IBM blockchain guys and similar efforts from otherwise traditional tech companies were explicitly saying that it could be used for non crypto real world issues. The logistics one being the one that came up most often. And that’s why when I say “real world” I explicitly mean non-crypto. NFT’s fall into the non-crypto category but as near as I can tell they have only two uses: as a fad for people with money to burn and as a dodge for criminals to pay each other for “actual” goods rather than what they are actually selling each other.
@Sleeping Dog: El Salvador is indeed the bitcoin case. Their doodooness to be fair rather runs broader and deeper than bitcoin, which can be considered merely a symptom of dysfunction.
@Mimai: That was a very long post to say nothing.
As Huw van Steenis noted back in 2018, the claims on utility in the aforementioned case do not sustain broadly on a total cost basis never mind the extreme volatility risk Really huwala does a better job.
This is simply handwaiving nonsense, and not a case for crypto in any way. It is perhaps highlighting a different currency world and usage area – purely virtual online currencies, but that has rather nothing of a case for crypto-qua-crypto unless one confuses virtual with crypto (or e-ledgers with crypto, but as I already noted most real world currency from the lowly dirham and dinar, to the power dollar and euro actually exists only in virtual form, as electronic entries in ledgers in financial institutions).
Generally speaking, blockchain based crypto is a less-efficient, less-economical means of executing electronic exchange that is more effectively – in time, in cost, in resource usage – executed via centralised systems or via trust systems (huwala for example).
It is essentially a werid libertarian inversion of Bolshevism, where political ideology trumps rational economic analysis, hidden behind a wall of convoluted jargon that hide its essential inefficiency.
Nothing really has changed since 2018 when that was written.
I look forward to the day in my work when some FinTechBro is not on a panel with me emitting a cloud of nonsense about blockchain that stands up to no close operational scrutiny.
@MarkedMan: Voting of course it removes the secrecy of the ballot. Somewhat problematic.
The logistics chain observation you made (as a logistics investor) is quite proper.
A proper issue resides in the potential manipulation by having controlling – it really only avoids manipulation if there is not dominant control. Else you are back to the same trust problem but have inserted inefficiency.
Thank you for the evaluation. I will endeavor to say less and more in the future.
After 150 years or so of technological progress, where many people dismissed technologies that proved transformative, there’s a tendency now to embrace the “new thing” that is hyped up as transformative, and often to throw lots of money at it.
On the one hand we got e-commerce and video streaming on demand, on the other we got social media and crypto currencies and NFTs.
Umm, not exactly; the initial premise is to create a medium of exchange nor controlled by anyone (a government or a bank); the “crypto” in “cryptocurrency” as to do with the use of cryptographic technics to manage the money without a central authority, not with the transactions being secret
I hear you. But I can see a glimmer of a sliver of an application there (which may turn out to be just a bit of undigested beef, so to speak). Right now, the best combination of speed and security we have in the US is essentially the same technology i used 45 years ago to take my college entrance exams. Fill in circles on a piece of paper and then later on let a machine read them. But the handling ballots and maintaining the machines and the speed of the results can still be problematic. A system that allowed results to be instantly counted, but at the same time allowed a voter, perhaps with a token, to go in and look at their ballot in the final tally and see that it matched the ballot as they actually voted, well that would be a good thing. I don’t myself see that could be solved by the blockchain but there are enough verbs in common that I wouldn’t be surprised if someone figured it out.
IIRC, bitcoin was a “solution” to other problems that they have.
The biggest factor in electricity use isn’t so much the computing power itself, but dissipating the heat generated by the stacks on stacks on stacks of chips.
The difficulty of the cryptographic puzzles increased and a rush of miners intensified competition , the larger pools changed tactics. They moved their operations to locals with very cold ambient temperatures and State funded or heavily subsidized electricity.
The computing power itself is mostly an upfront cost that is recouped easily as long as the market price for a coin is high. But also keep in mind that transaction fees distributed to the network can be exorbitant. Those fees are in addition to newly minted currency and separate from exchange fees for buying and selling.
Hardware, especially if the chips used are consumer GPUs, recoup some costs on the backend through the used market. (If you ever buy a used GPU, don’t get one that was used for mining.) And even the specialized mining hardware fetches a pretty penny second hand, because smaller miners are a generation or two behind the release schedule.
One other thing to keep in mind, is that different blockchains use different minind protocols. So the long awaited Ethereum switch from “proof of work” to “proof of stake” changes the demand for expensive hardware. But it keeps getting pushed back.
Labor and admin costs are minimized because of the decentralized nature of the tech. Essentially the labor associated with processing transactions in the traditional financial system are handled by miners in the crypto world.
Admin varies by blockchain, but to my knowledge the best way to describe it is by (rough) analogy. The traditional financial system is administered by various banking institutions. Think of them as Microsoft (Windows) and Apple (MacOS/iOS). Those firms develop their products how they see fit. Blockchains are more like Linux distributions with design handled within a larger, wider network of the users themselves.
It’s easy to see why it’s seductive for those with particular ideologies.
Last thing: most people within the crypto world are traders, not so much investors, and definitely not producers.
@Kingdaddy: I have long been a proponent of education for precisely this reason. The way you solve a problem like this is by educating people in rhetoric and critical thinking. In being able to accept that not only can you be fooled, no matter how smart you are, but often times you have been fooled and that doesn’t make you a lesser person. But as a society, we rely on throwing people to the sharks and hoping they figure out how to swim before they get eaten.
@Mimai: I’ve been aware of crypto for around 8 years now. Your “definition” mainly means that running a scam is a real world application and leaves cryptocurrency undifferentiated from imbuing oil with the holiness of a saint’s fingerbone. The blockchain could conceivably have an application someday. When I heard about NFTs last year, I thought, “oh, they finally figured out how to securely tie ownership to usage?” So I looked at the technology, and no, they hadn’t. The blockchain could have an application, but it doesn’t right now. It never has. Cryptocurrency is not a currency; they came reasonably close, impressively so, but they did not achieve the stability necessary to make it a currency.
The fact that you conflate the technology of “blockchain” with its application of “cryptocurrency” does not speak well to your understanding. I acknowledge my ignorance: I never got more than toe-deep into the topic, despite having a friend who ended up working with the Coinbase board and myself being involved in discussions for years and having the programming and cryptography chops to keep up. So I know that there’s stuff I don’t know. I’m not familiar with the personalities involved, for example, or the specific exchanges that are available, or which coins are best established by what degree. Dan Olson absolutely did more effective research and knows more than I do about it.
The problem is not my ignorance. The problem is that no one can explain it in a way that justifies any kind of legitimate adoption. This is not a question of open-mindedness. I am still open to seeing a useful application of blockchain. The idea of encrypting a jpeg such that its decryption necessarily results in a report to a royalties distribution system is theoretically possible. I’ve no idea how blockchain could accomplish that, but I’m sure someone could do it if they tried hard enough. Alas, it seems that no one has tried hard enough. Think about that. Think about why, after nearly a decade of effort, no one has actually demonstrated a usefulness for the blockchain or any of the cryptocurrencies built upon it. Demonstrated, not imagined. And I do not implicate the technology in this. Again, conceivably, an append-only ledger with its integrity guaranteed by a solution to the Byzantine Generals problem could have a useful application. After all, encrypted communications largely function through the silly trick of prime factorization, a far simpler bit of cryptography. So if it comes, I expect it’ll be pretty neat.
In saying what you’re saying, you’re not being thoughtful. You’re being a useful idiot. If you don’t know, then don’t parrot their talking points. Research groups that are actively investigating applications and invest in their efforts. Don’t shill for scammers for free. At least get paid for it.
@Kurtz: All the patent applications with blockchain I’ve been dealing with are still using “proof by work.” Sigh….
Lots of conference papers out there as well. You can’t think of a particular network (Internet of Drones, for example) without someone wanting to slap blockchain on it. Most of the papers I’ve seen recently have been coming out of China.
This is your first comment on this thread. You clearly are informed. And you did not make sweeping pronouncements about the idiocy/evil of the players or the game. Hence, my comment was obviously not directed at you.
As for parroting the talking points, I expressed mild hope for an application involving international transfers for common folk living under authoritarian regimes. Nowhere did I wax poetic about the reality of crypto or anything of the sort.
I also noted that this area has been overpromised and that proselytizers abound. If those are talking points, they’re really shitty ones.
And I also noted that I have no skin in this game. But I suppose that makes me all the more an idiot — useful variant. That said, if I can somehow get paid for making such comments, I’m open to that.
In short, I don’t know who you’re arguing with, but it isn’t me.