You can look at every major financial crash since tulip bulbs and find the underlying fiction that created paper wealth without any value behind it. Handshakes and winks and it’s fun while it lasts.
In April of 2021, I wrote that Bitcoin was a terrible solution to an interesting problem. It is called a cryptocurrency, but it does not match any previous definition of the word “currency”. As an investment it is, in fact, slightly below “bag of magic beans that aren’t actually magic”. At least with those you could make a nice soup. Soon after that episode, the price of a Bitcoin tumbled, then briefly rose to new dramatic heights in November of the same year, and has since steadily eroded.
It is late and rather than sleep I thought tonight I’d read about the latest crypto disaster. Roughly One Trillion Dollars vanished this week. Poof. Gone. Retirements destroyed, hedge funds cratered. Those investors should have listened to me.
Time magazine (wow has that brand been dragged into the dumpster) included this in an article about crypto volatility:
Given that crypto derives some of its value from people’s belief in it, markets can be rattled by surrounding skepticism or policy changes.
So, close, yet so far. In fact, crypto derives all of its value from people’s belief in it. There is absolutely no other source of value. If you were to buy gold, and then suddenly everyone decided gold had no value, you could at least make something pretty out of it.
What drove this week’s meltdown is complicated on the surface, and simple in substance. There was a cryptocurrency that was, through elaborate mechanisms including game theory, always supposed to be worth a dollar. While my first question is “why would anyone buy that shit instead of just buying dollars,” apparently plenty of people thought that was a good idea.
So how do the people flogging this investment plan to control the value of the tokens they sell? Part of it is by holding investors hostage – people with a vested interest in maintaining this dollar parity will buy up other people’s tokens to maintain their value. But you can’t always rely on that, so these companies also keep reserves so they can maintain the price by buying up tokens when there is a bunch of people selling.
But… whoops! What if your reserves are in other crypto tokens? What if you need to sell all your Bitcoin ($1.7 billion worth, maybe), but Bitcoin is also falling because someone is trying to sell a shit-ton of it, and even when you’re done, it’s just not enough? Everything goes to shit, is what happens.
It’s a regular cycle. Someone finds a way to create an illusion of value where no value exists. Before crypto, it was weird real estate loan guarentee instruments that created an entire market unto themselves, and led to a near-collapse of our banking system in 2008. That was done by bankers who should have known better, and there were (for a little while) regulations in place to keep it from happening again. In 1929 it was shell companies that all owned each other but not any company that actually made a profit.
Crypto, on the other hand, is a much more egalitarian fraud. Anyone can play! Elon Musk used the power of his twitter account to rob countless less-wealthy people through Bitcoin price manipulation (he claims he was not being corrupt, just stupid – but both can be true).
One thing that none of the press I read tonight mentions – Bitcoin uses lots and lots of electricity. When the cost of power goes up, ultimately that has to effect the value of their tokens.
Universally the press has treated the crypto crater just like they would any other investment issue. Treating crypto with the same words they would use for something that has intrinsic value. That’s simply not right. None of them are saying “This is all fake! Get out while you still can!”
I could create a crypto tonight, call it “eco-coin” and vaguely suggest that we only accept electricity from windmills, or at least I’ve seen some pretty bitchin’ windmills, windmills are cool, so you should invest in eco-coin. If I could catch the ear of the Master Influencer at Credulous Weekly, eco-coin would be off to the races.
In terms of actual value, my new crypto would be worth exactly the same as Bitcoin: zero. I’ll finish this episode with the same words I used to start it: You can look at every major financial crash since tulip bulbs and find the underlying fiction that created paper wealth without any value behind it. Handshakes and winks and it’s fun while it lasts.
I should have mentioned that there is one value of crypto: it’s easier to commit tax fraud. Rich people who don’t want to pay their share love crypto. If the rest of us refuse to pump up the value of their tax shelters, everyone will be better off.