In my last three posts on this subject I started with a bit about my background running an alternative currency system and how these can fill a real need. Next I talked about fiat currencies and how money ultimately comes down to being a collective decision by people to accept it as being valuable. And, in the last one I talked about how crypto really doesn’t serve any useful purpose and how it just seems to be a speculative bubble.
At this point readers may be excused for asking ‘if crypto is just a speculative bubble based on nothing more than moonshine, why hasn’t the bubble popped the way non-fungible tokens did?’
This is a useful question, and my hypothesis is that there are several reasons why crypto hasn’t collapsed as quickly as the market in non-fungible tokens did:
unlike a Ponzi scheme, profit-taking in crypto currency only occurs when people sell their shares.
there are no on-going, systemic costs associated with crypto purchases like in a housing bubble
unlike non-fungible tokens, crypto has a limit on how quickly the pool of digital currency expands
powerful political forces have created a impressive propaganda system that ensures a constant flow of naive people who have ‘drunk the koolaid’ and believe in the techno-utopian and libertarian mythos
Initially I saw crypto currencies as being a variation on the classic Ponzi scheme. The difference is that in one of those, each round of investors has to be paid a very good rate of return on their investment. This means that the scheme has to grow at an exponential rate in order to just stay afloat. This means that the they will always hit a ‘wall’ and collapse fairly quickly—especially if the people organizing it are siphoning-off money to profit from it. (Which is the whole point of the thing.)
This doesn’t happen with crypto. Speculators don’t get any profit until they sell off their holdings. Which dramatically lowers the need to constantly find a rapidly expanding pool of people buying the tokens.
Also, because crypto doesn’t actually serve any objective, human need, it is isolated from the sort of problems that bedevil speculators in more tangible assets. This is where it is different from the people who don’t take into account the risks of investing in housing. Nobody is going to wake up some morning and realize that they are losing money on bitcoin because a pipe burst.
And, unlike nonfungible tokens, there is a significant limit on the creation of new crypto currency due to the cost of maintaining the blockchain. This point gets obscured because of the language used, which calls it ‘mining’. To quote the Bitcoin wiki:
Mining is the process of adding transaction records to Bitcoin's public ledger of past transactions and a "mining rig" is a colloquial metaphor for a single computer system that performs the necessary computations for "mining". This ledger of past transactions calls itself the blockchain as it is a chain of blocks. The blockchain serves to confirm transactions to the rest of the network as having taken place. Bitcoin nodes use the blockchain to distinguish legitimate Bitcoin transactions from attempts to re-spend coins that have already been spent elsewhere.
Mining is intentionally designed to be resource-intensive and difficult so that the number of blocks found each day by miners remains steady. Individual blocks must contain a proof of work to be considered valid. This proof of work is verified by other Bitcoin nodes each time they receive a block. Bitcoin uses the hashcash proof-of-work function.
The primary purpose of mining is to set the history of transactions in a way that is computationally impractical to modify by any one entity. By downloading and verifying the blockchain, bitcoin nodes are able to reach a consensus about the ordering of events in bitcoin.
Mining is also the mechanism used to introduce Bitcoins into the system: Miners are paid any transaction fees as well as a "subsidy" of newly created coins. This both serves the purpose of disseminating new coins in a decentralized manner as well as motivating people to provide security for the system.
Bitcoin mining is so-called because it resembles the mining of other commodities: it requires exertion and it slowly makes new units available to anybody who wishes to take part. An important difference is that the supply does not depend on the amount of mining. In general changing total miner hashpower does not change how many bitcoins are created over the long term.
It might seem odd that miners get paid in bitcoins while at the same time stating “supply does not depend on the amount of mining”, but remember that the difficulty of mining increases as the supply of bitcoin goes up. This means that there is a practical limit to the number of bitcoins that can be ‘mined’ at a profit even though there are no legal limits to how many people mine bitcoin. (This is why it has become so tremendously energy intensive.)
To understand this, consider the number pi. It’s a real number, but it’s irrational. This means that whenever you see a number called ‘pi’—like 3.14—it’s an approximation. There’s no real limit to the number of numbers past the decimal that a mathematician can calculate, it’s just that the more precisely it’s calculated the more work it is to do it and the practical value of the result becomes less and less. It’s the same thing with bitcoin mining. (It doesn’t have to be this energy intensive—other crypto ‘currencies’ and blockchain applications aren’t—but Bitcoin was designed this way specifically as a speed limiter to control the item’s velocity of growth.)
To understand my fourth point, it’s important to bring in a new term: ‘meme stock’. I introduced something like this in my last post when I wrote about crypto currencies being supported by people’s belief in ‘techno utopianism’. But this new phrase can be used to explain more the way a belief is propagated rather than its content.
According to the Investopedia
A meme stock refers to the shares of a company that have gained viral popularity due to heightened social sentiment. This social sentiment is usually due to activity online, particularly on social media platforms. These online communities can dedicate heavy research and resources toward a particular stock. Meme stocks often have heavier discourse and analysis in discussion threads on websites like Reddit and posts to followers on platforms like X (formerly Twitter) and Facebook.
The value of a meme stock has absolutely nothing to do with objective reality. Instead, the point is that something becomes valuable because people start to believe it is valuable. Generally, this happens because of some bogus theory gets propagated online and convinces enough people to have a significant impact on the price of the stock. In effect, a meme stock is the investment equivalent of a conspiracy theory—like QAnon, Pizzagate, and, Great Replacement.
This doesn’t mean that people can’t make money off a meme stock. It’s just that they aren’t making that money by investing in a new technology or business that will actually be of some use to people. Instead, all that’s happening is they are taking money away from foolish people who want to buy into this bubble but will end up holding onto worthless stock once the bubble bursts—just like all the people who threw away money buying non-fungible tokens.
But is crypto an example of a meme stock that is never going to crash?
I’d suggest that it isn’t a case of a bubble that isn’t going to crash so much as a bubble that will take a long time to crash because it surfs on the major changes in society caused by the World Wide Web. As such, I suspect this particular bubble may last as long as various conspiracy theories, the wave of populism that is threatening democracy all over the world, and, the neoliberal consensus that has resulted in tremendous wealth stratification all do. In other words, I think the best way to understand the crypto bubble is to see it as a by-product of forces that are wreaking havoc in all the rest of our lives.
In fact, if you hearken back to my last post on this subject, I posted an video advertisement by the crypto exchange “kraken” that pretty much lets the cat out of the bag. Here’s a clip from the ad that illustrates what I mean:
I suspect that the people who made the kraken ad didn’t mean the tsunami of fake news and conspiracy theories when they refer to what ‘the Web could do for finance’—but I think that that is exactly how we all should understand it.
Indeed, as I was writing this article, Donald Trump announced an Initial Public Offering (IPO) of stock in his ‘Truth Social’ social media company. It ballooned in value even though it has a small number of users and almost no income stream. If there was ever a case of a meme stock, this is it.
It’s hardly surprising that Trump would create a meme stock like this because his entire election project has been an enormous grift aimed at fleecing the Republican party and the naive fools that support it.
This stock will collapse eventually, depending on whether or not Trump ends up in jail, loses the election, has a heart attack and dies, or, decides to cash in his stock. When it does, all the naive people who bought stock because they support his political cause will end up losing most or all of their money.
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One of the things that constantly amazes me is the way so many people refuse to learn from history. People have told me idiotic things like ‘real estate never declines in value’ or ‘interest rates won’t ever go up again’. I’m not that old, but I have lived long enough to see two housing bubbles and two sets of mortgage interest hikes that forced people to sell their homes at a loss. Unfortunately, though, I have learned to accept that if they haven’t lived through something themselves, many people simply will not believe that it can even happen..
In case there are one or two readers who actually try to learn from history, here’s a chart that shows booms and busts in commodity prices in the US over the last two hundred years or so. It’s not the best chart I could find on the subject (check out this one from US government archives), but it fits into the blog format—so it will have to do. If you could chart data on personal wealth, employment, etc, you’d find similar recurring booms and busts.
All I want to point out is that just because things haven’t changed much in the last twenty years doesn’t mean that they will continue that way forever. Indeed, the only thing that seems certain in the long haul is that just about everything booms and busts eventually.
The above graph includes historical events in order to correlate commodity prices against historical events like wars and technological change. Obviously there was a huge demand for things like metals, energy, food, etc, during major wars. But there are also flags for ‘Easy Credit Speculative Boom’ and ‘U.S. Industrial Revolution’.
When future economic historians create similar graphs to explain the present moment, they are going to be hard-pressed to find enough room to stick in all the labels of historical events happening at the same time:
Climate Change: rampant forest fires, flooding, decarbonization, etc
the COVID Pandemic
the explosive growth of the World Wide Web over about three decades
development of transformative new technologies: 3-d printing, recombinant DNA, quantum computing, cell phones, lithium-ion batteries, pseudo AI (pattern prediction software), etc
emergence of authoritarian populist leaders: Trump, Poilievre, etc
fragmentation and destruction of traditional news sources
emergence of new political constitutencies: First Nations, Black Lives Matter, Palestinian supporters, etc
web-based business models that flaunt the rule of law: Uber, Air Bnb, Twitter, FaceBook, etc
the housing emergency
Given time, I probably could have come up with some more issues. But hopefully readers now understand what I’m talking about. We are living through very uncertain times. And one of the things people do when such events happen is separate into different tribes which follow different worldviews. And one of those specific factions we have right now believes in THE FREE MARKET!!!! and TECHNOLOGY!!!!
I’ve mentioned that I suspect that the people who buy crypto are ‘libertarians’. I say that because when I’ve read through statements both by boosters and people who manage systems, there tends to be a lot of talk about ‘opening up the market’ and ‘freedom from regulation’. Among members of the libertarian tribe these are invariably good things. For myself, this presents a red flag.
That’s because I have read some economic history and it tells me that just about every regulation on the books has come about for very good reasons. For example, one rule is called ‘deposit insurance’. This is a government program that ensures the savings at my Credit Union will be there if everyone tries to take out their savings at once. It was introduced because in the bad old days if people heard a rumour that their bank was insolvent people would sometimes show up en-masse to remove their savings—which would destroy it. This meant that other than the first people to take out their savings, everyone lost the money in their accounts.
Part of the ‘freedom from regulation’ that attracts people to crypto is it has no deposit insurance. That means if a lot of people decide that bitcoins are no longer worth $100,000 each and try to cash out at the same time the value of it will just collapse into nothing. (Just like nonfungible tokens.) Again, the question is worth asking ‘why hasn’t it already?’
I’d say it’s because the roiling, tempestuous times were are living in are creating a significant fraction of the population who have very strong opinions divorced from common sense about all sorts of things such as vaccination, Donald Trump, the carbon tax, climate change, and, government regulations in all forms. I would suggest that until we get a handle on all these other types of craziness, crypto is going to have a solid base of potential speculators.
Having said that, it’s important to understand that graph I posted above. Wars end. Technological innovation ebbs and flows. Political movements fizzle-out. And, speculation bubbles eventually burst. Just like all the others, so will crypto. And when it does, anyone who either holds onto their coins or buys in late is going to end up having thrown away the money they put into it. But the guys who make a profit will have gotten ‘money for nuthin’. That’s because buying crypto is gambling—plain and simple.
So while I have no way of telling when the crypto bubble will collapse, I am absolutely sure that it will. And when it does, many of the naive people who ‘drank the koolaid’ will end up losing a lot of money. It’s just like when you gamble in a place like Las Vegas—over the long haul the house always wins.
One last thing that needs to be said, although I’ve never read anyone else make the same point.
Decades ago I was asked by a friend to be a best man at his wedding. I agreed. Then he asked me to come over for a friendly game of cards. I said ‘fine’ and asked if I could bring someone along. It turned out that ‘the friendly game’ involved betting and the guy I brought in won all the money that my friend had saved up for furniture in the apartment he and his wife were moving into. The guy I brought was willing to just give the money back, but my friend’s pride was on the line and he refused.
To make a long story short, I didn’t even attend the wedding—let alone be the best man. That was when I realized that gambling was awful. You either lose money, which sucks; or, you win and that means someone else loses, which also sucks. I simply cannot see anything good in profiting from someone else’s misfortune, so speculation is simply something I will not do. Investing in something that promises to bring value to society can be a very good thing—but speculation by definition simply isn’t. Since crypto is just speculation, it is inherently immoral.
I don't understand how anyone with a high school education could have thought that NFTs were anything other than a scam. Episodes like that are incredibly depressing and drain what little faith in humanity should exist.