Crypto is now worth trillions of dollars. All of that value is premised not on some fundamental utility, but rather on the idea that there will always be someone else who will come along and pay you more than you spent on your crypto. This is going to end badly.
Twelve years ago, I heard about Bitcoin for the first time.
A poker pal touted something called “cryptocurrencies” as the next big thing in personal investing. Credit Bryan Micon way back in 2010 for knowing something long before everyone else did, and investing heavily in Bitcoin. Presumably, he’s now very rich. I’m genuinely happy for him.
Many well-connected people within the poker community were among the early pioneers, users, and evangelicals of the crypto movement. Many still are. In fact, many have vast sums of personal wealth invested in not only Bitcoin, the most well-known cryptocurrency, but other “coins” which are entirely speculative. There are thousands of (mostly worthless) options of crypto investment out there. Some were introduced as gags and morphed into bonafide modicums of exchange. Shibu Inu anyone? Dogecoin anyone?
I got caught up in the hysteria before I knew any better. In 2015, an online company in Costa Rica paid me $4,500 for a consulting gig. They insisted on paying me in Bitcoin. That was the only option of payment. Reluctantly, I set up a Blockchain wallet, and then checked a Bitcoin machine that had just been set up inside a Las Vegas candy store (true story). At the time, one Bitcoin was $313. So, I had about 14 Bitcoins in my “wallet.”
Two months ago, Bitcoin hit an all-time high — exceeding $68,000. Good thing I had those 14 Bitcoins in my wallet since they were now worth $952,000.
Oops!
I gradually sold off Bitcoins, a few at a time. By 2017, they were all gone. Meanwhile, many friends and associates got very rich. I mean, insanely rich. Like I said about Bryan Micon before, good for them.
Missing the boat on cryptocurrency isn’t any cause for bitterness, nor even any regret. Do I wish I’d hung onto my Bitcoin? Sure. I also wish I’d bought Apple stock 20 years ago and bet it all on the Los Angeles Rams yesterday (they upset Tampa Bay and covered +3 points). Life is too short to look back and spend time wishing things were different. I’m pretty happy with the way things are.
The trouble is, there’s a storm on the horizon. More like a cyclone and an earthquake. Lots of people are about to get burned, really bad.
Bitcoin was at more than $68,000 in November. It’s worth about half that today. Where will it be tomorrow? Who knows? But that doesn’t stop a flourishing industry of idiocy, so-called crypto “analysts” and get-rich-quick gurus who sling around terms like “support level” and “resistance” like they’re trading shares on the NASDAQ. This would all be comical — a Tin Men script — if it weren’t so dangerous.
Seeing that the monster is now out of the cage, Crypto has just reached the shoeshine boy stage. Recall the famous Joe Kennedy story from mid-1929 when the patriarch of America’s famous family stopped on the street to get his shoes shined. The shoeshine boy polishing Kennedy’s loafers mentioned he was totally vested in the stock market, a raw indicator the financial bubble was about to burst. Kennedy had the sudden intuition that the end of the decade-long bull market was near and subsequently he decided to short the market and then became a multi-millionaire.
Renaming a sports arena after Crypto.com is a modern-day shoeshine boy moment. So too is hiring actor Matt Damon as a pitchman for a television commercial to lecture us on “fortune favoring the brave.” There are fewer and fewer suckers left to elevate the giant Ponzi pyramid yet another notch. I mean, they’re now running ad spots in El Salvador for crying out loud, desperately trying to shake every last leaf out of the money tree. Already tossed out of China, and about to be banned in other countries soon, the fields of exploitation are becoming increasingly infertile. And so this mock “industry” heavily polluted with slick conmen and fully compromised by finance media cheerleaders invested in the crap they’re touting in their own “reporting” are running out of marks and suckers. The Three-Card Monte game is up. It’s desperation time.
In theory, the whole crypto investment principle was a giant scam from the start. Not that everyone who invested (and got rich) was a scammer. Many were (and are) true believers. And many are decent people. But let’s also remember that all cults have willful disciples. Crypto is no different.
Fortunately, we have a lot more information today about this form of investing than we had back in 2010 or 2015. Now, we can look at the totality of what cryptocurrencies are, what they’ve become, what they can and cannot do, and how utterly ruinous they might be to the majority who invest in them. [*see footnote below]
Consider the following sources, with several quotes taken from each article:
Outtakes from the article by Hamilton Nolan, The Ticking Time Bomb of Cryptocurrencies
If you think the Angry White Men were scary during the Trump years, just wait until the crypto bubble pops.
The crash of crypto is bound to happen for the same reason that all Ponzi schemes eventually crumble: There is not an infinite supply of new people willing to pay ever-increasing prices for the stuff that you currently own. The more interesting question is not whether many small-time investors will lose a lot of money on their crypto investments, but what will happen when they do?
The foundation of everything happening now is a sort of late capitalist nihilistic politics fueled purely by culture wars — an almost primitive flight from rationality driven by a half-century of rising inequality and crumbling faith in ineffective public institutions. The American dream is dead: Children no longer do reliably better than their parents. The dream of a one-income supported household is over. In its place have sprouted the gig economy, crushing student debt, the death of unions, and generalized precarity. The rich are unimaginably richer, and everyone else is spinning their wheels.
In the spring of 2020, was the pandemic. The economy briefly shut down, and there was a panic, and then there was a ton of government stimulus money, which has successfully staved off another Great Depression. That is good. An effect of that, however, is that there is simply a lot more money in America than there was before. That money has flowed into every sort of asset — stocks, real estate, you name it. Its enormity is fueling weird bubbles, the kind of bubbles that happen when people are searching desperately for salvation.
They are called crypto “currencies,” but clearly they are not currencies. Their value fluctuates far too much to be a useful medium of exchange. So what are they? They are collectibles, pure speculative objects with zero intrinsic value. If you buy a stock, you own a portion of a business; if you buy a house, even if the price goes down, you still have a house. If you buy a Bitcoin, you have nothing but the title to a piece of computer code that can do absolutely nothing for you except to the extent that someone else can be induced to pay you money for it.
The American way is to cheer on the few lucky ultra-rich people, fete them as heroes, and look for a way to emulate them, although such a thing is mathematically impossible. Instead of socialism, we have given people crypto. They buy crypto, for the most part, not because of lofty beliefs in techno-futurism, but because they think it is a way to get rich quickly for a low entry price. Crypto is just a modern lottery ticket. But whereas lottery tickets only cost you a little at a time, crypto will inflate to the moon and then crash into the gutter in a far more devastating way. The bitterest irony, perhaps, is that while the regular folks flock to crypto because they think it’s a utopian land of opportunity for the little guy to make a buck, it is, in fact, largely controlled by a small cartel of rich investors. Just like everything else.
Outtakes from the article by Sohale Andrus Mortazavi, Cryptocurrency is a Giant Ponzi Scheme
Cryptocurrency is not merely a bad investment or speculative bubble. It’s worse than that: it’s a full-on fraud.
Cryptocurrency is a scam. All of it, full stop — not just the latest pump-and-dump “shitcoin” schemes, in which fraudsters hype a little-known cryptocurrency before dumping it in unison, or “rug pulls,” in which a new cryptocurrency’s developers abandon the project and run off with investor funds. All cryptocurrencies and the industry as a whole are built atop market manipulation without which they could not exist at scale.
The majority of cryptocurrency mining is now conducted in commercial mining farms, essentially huge warehouses running thousands of high-powered computer processors day and night. The electricity expended mining Bitcoin and other cryptocurrencies is rapidly approaching 1 percent of global usage, which is famously greater than the total electricity consumption of many smaller developed nations.
Given that cryptocurrencies don’t produce anything of material value, this enormous waste of resources renders the whole enterprise a negative-sum game. Investors can only cash out by selling their coins to other investors — but only after the miners and various cryptocurrency service providers take the house’s rake.
Tether has become integral to the functioning of global crypto markets. The majority of Bitcoin trades are now conducted in Tether, 70 percent by volume. By comparison, only 8 percent of trade volume is conducted in real dollars, with the remainder being other crypto-to-crypto pairs. Many industry skeptics, and even proponents, see this as a systemic risk and ticking time bomb.
Should faith in Tether falter, we could see its peg to the dollar collapse in a flash. This would be a doomsday scenario for crypto markets, with investors holding or trading crypto assets on unbanked exchanges unable to “cash” out, since there was never any cash there to begin with, only stablecoins. This would almost certainly cause a liquidity crisis on banked exchanges as well, as investors rush to cash out their crypto anywhere possible amid cratering prices, and banked exchanges processing far less volume would almost certainly not be able to pick up the slack. There is no reason to have any faith in Tether.
Tether has never undergone an external audit, none of this really matters, since Tether’s own terms of service make it clear that they do not guarantee the redemption of their digital tokens for cash. Should the market suddenly lose faith in Tether and exchanges become unable or unwilling to exchange them one for one with dollars or the respective amount of cryptocurrency, Tether accepts no obligation to use whatever reserves they may or may not have to buy back tethers.
While a few listed companies, most notably Tesla and MicroStrategy, have taken multibillion-dollar gambles on cryptocurrency with company money, most of these companies are simply offering custodial or transactional services rather than investing into cryptocurrencies themselves. They are operating parasitically, profiting off investments into the crypto Ponzi while rushing toward IPOs before the whole thing collapses.
China already banned cryptocurrencies entirely, and India and Pakistan are poised to do the same. Other countries have also made moves to prohibit or constrain cryptocurrencies, but Western liberal democracies are notably permissive. This is in no small part due to aggressive industry lobbying, which includes hiring former financial regulators and compliance officers into the industry to influence policymakers.
These people and everyone else in the cryptocurrency industry are complicit in the Ponzi scheme and actively misleading the public. They understand that fraud is the engine driving their industry and fueling their profits — and that is perhaps the most damning indictment of private cryptocurrencies and the industry surrounding them.
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*Footnote: I am not qualified to give, nor am I giving financial advice. But neither should any crypto-slinger with a blatant financial conflict of interest–which applies to just about everyone vested in these coins. Some investors, riding the swings manipulated by clever pump and dump artists, will still make money in this sector. Prices for cryptocurrencies could rise again and again, and spark yet another “bull market.” Anything is possible in the short run. But in the long run, this sector will crash and fail because the basic fundamentals are flawed beyond repair. Without significant regulation and far greater stability, cryptocurrencies will remain nothing more than a speculative air currency requiring constant exaggeration and hype. This is precisely what cryptocurrency advocates are buying — not tangible assets — but hype. They desperately need the next generation of suckers.
Note: This article originally appeared HERE on January 23, 2022.