In two previous articles published in The Philippine STAR in 2018 (“Bitcoins: The Emperor Has No Clothes” and “Bitcoins and Blockchains: Murphy’s Law”), I tried to warn readers about the lack of logic in cryptocurrencies. This year, 2022, Warren Buffett and Paul Krugman supported my point of view.
One point made in my 2018 articles was: “Instead of dealing with crypto money directly, you can work through an exchange (such as a stockbroker or a bank, but almost certainly less trustworthy). . “. Recent events seem to confirm this skepticism.
In fact, most of the recent “investors” in cryptocurrencies do not actually own cryptocurrencies. There are too many practical problems involved in deriving and protecting the highly complex alphanumeric keycodes required. If you type one letter wrong, or if you lose the USB drive that stored your codes, or if you are targeted for a home invasion, your money is lost forever. In addition, directly trading or transferring cryptocurrencies is cumbersome and costly.
Therefore, most crypto investors simply prefer to buy their cryptocurrency through an “exchange” – they give the exchange old money (for example, US dollars) and receive bitcoins in return. (For convenience, let’s just call them bitcoins, realizing that there are many different cryptocurrencies.)
Except they don’t actually receive bitcoins. They get an accounting entry, a promise from the exchange to give them the USD value of those bitcoins at whatever market price was at that time.
This trend is itself based on a complex delusion. The original premise and appeal of cryptocurrencies was that they were anonymous, decentralized, and not controlled by any government. Now investors invest through well-known exchanges, we know the name, address and possibly bank of each client, which are the central clearing houses for many investors and which, after all, are just corporations registered under the rules of this or that government and obeying the rules. the supervision of this government. Indeed, many crypto investors are now demanding government intervention, which they ostensibly despise.
Thus, all the philosophical premises of cryptography, all the reasons why they were the “money of the future”, are directly and undeniably depreciated by the emergence of cryptocurrency exchanges.
This brings us back down to earth, financially speaking: well, we are not anonymous, we are now taxed, we are subject to the rules and whims of the exchange, and shrewd governments can even return bitcoins hidden by criminals. But there’s also the exchange’s promise to pay us, right?
Like any promise, it is only as good as the person making the promise.
This is what an honest, well-organized exchange will do:
• Receive real money (eg USD) from the customer first. If he does, then at least it’s not completely stupid.
• Maintain very, very tight control over your many crypto alphanumeric codes so you don’t get hacked. (One organization had such tight controls that when its founder died, all digital keys were lost. Or he could live in Brazil. Either way, the contributors were wiped out.)
• Don’t spend money on high overheads in the form of wages, rent, and advertising.
• Resist the temptation to “create a market”. “Making a market” means that when there are not enough buyers or sellers for a particular cryptocurrency, the exchange, as per policy, steps in at its own risk to fill the gap by providing liquidity. This is beneficial for the market as a whole, but entails risk for the exchange involved.
• When you place an order to buy or sell a cryptocurrency, the exchange is actually buying or selling it. If he does this religiously, he will have balanced financial statements and will be largely immune to any movement in market prices. But no one is really watching.
That’s all. Most crypto exchanges got the first place. Several exchanges have already failed at #2. The jury is absent for #s 3, 4 and 5.
Have you heard about FTX, about $40 billion in bankruptcy? This violated at least #3 and #4. It may have violated #5. FTX was founded in May 2019 when bitcoin (that particular cryptocurrency) was worth around $6,000. The founder of FTX, a very smart person, has gone on record saying that cryptocurrencies are just hyped gas. However, people wanted to give him real money to buy steam. So he took it. The temptation to just pocket customers’ money (without actually buying crypto) must be strong – $6,000 in exchange for nothing.
Except that cryptocurrencies then grew in market value by more than 10 times.
As prices rose further and further, some customers must have wanted to cash out. But if FTX didn’t buy and therefore own cryptocurrencies on behalf of the clients now selling, it would have to pay for the clients’ profits out of pocket.
Solution? Exaggerate financial prospects in order to attract more money not from clients, but from large investors of the exchange itself. They should have looked at expensive and completely unnecessary offices in Hong Kong and the Bahamas, but they did not.
So where are we now? With the theory that some other exchanges were even smarter than FTX and colluded with each other to sell near the highs, these exchanges will hope the price continues to fall. (Collusion to lower prices is illegal for stocks, but not for cryptocurrencies. Do you want to be free from government interference? You got it.)
At some point, they will need to cover their shorts and the crypto market will recover. Speculators who entered between $60-80,000 hoped that this would happen at $50,000, then $30,000, then $20,000. At the time of this writing, Bitcoin has fallen to $16,000. My guess is that somewhere around $10,000 Bitcoin will bounce back, although no one knows how much (this is not financial advice, just an inside opinion based on what I would do if I were the one to sell without coatings).
My 2018 articles were met with contempt and ridicule by the crypto believers, calling me a dinosaur unable to understand new technologies. So let me remind readers of another quote from these articles: “You can get rich off bitcoin, so don’t let me ruin your mood.”
Keep the faith. Lots of luck.
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As a World Bank staff member, Manny Gonzalez has advised governments and financial institutions; as an investment banker, he developed derivatives and evaluated IPOs. Now he is a successful entrepreneur.