Thanks to the collapse of FTX, the world may have come to terms with the grim reality that the cryptocurrency “industry” is nothing more than a get-rich-quick lie, shrouded in hype, floating in an ocean of libertarian techno-talk. Will anyone do something about it?
LONDON. Sorry for the terrible money management (or was it a scam?) that left FTX with less than $1 billion in short-term liabilities of $9 billion. Similar things are known to happen with banks.
Forgive the non-transparent reporting, incestuous loans with fictitious collateral, and $8 billion that someone “accidentally” lost. Similar failures happen in the Russian Bratva, and in the Italian Camorra, and in the Japanese Yakuza.
Forgive the much-touted database technology, which in many cases is slower, more expensive, and more cumbersome than the established 30-year-old ways of doing things. Someday someone will find a use for all these blockchains.
Pardon the exaggerated rhetoric about cryptocurrencies as a miracle tonic not only for economic growth, but also for “reducing war and corruption and bringing more happiness.” Crypto nerds aren’t the only ones talking nonsense.
What is truly inexcusable is that in the 14 years since Bitcoin was introduced, the crypto industry has failed to produce anything of value. What factories have been built with cryptocurrency? What new products and services are available? Which government raised money through cryptocurrency? Certainly not El Salvador, which has adopted bitcoin as legal tender and is now on the brink of default.
Worse, the main promise of cryptography – better money – turned out to be completely fictitious.
Brian Armstrong, co-founder and CEO of cryptocurrency platform Coinbase, recently made a monetary case for cryptocurrencies. Financial Times that it allows you to trust “the laws of mathematics, if you will, not the laws of men.” So, “instead of” do not be evil “-” can not be evil. This is the promise of cryptocurrency.”
The “people” in Armstrong’s statement work for governments that issue old-fashioned fiat currencies. If these “men” print too much money—say, to finance a large budget deficit—then the value of that money falls and the government levies the amount of tax on the citizens left with the depreciated currency. Libertarian distrust of politicians and government is the driving force behind the cryptosphere.
Unlike supposedly suspicious fiat money, cryptocurrencies are governed only by the “laws of mathematics”. The algorithm fixes how much cryptocurrency can be “mined” and at what price. The more units you produce, the more expensive it will be to mine the next unit. No politically motivated men (or women) can devalue cryptocurrency. Mathematical rigor saves us from evil government.
Sounds good, right? If it were true.
There are two reasons why people around the world (not just US and European Union citizens) are happy to hold currencies like the dollar and the euro. The first was identified by John Maynard Keynes, who argued in his General theory that “the fact that contracts are fixed and wages are usually somewhat stable in monetary terms no doubt plays a large role in bringing such a high liquidity premium to the money.” Guillermo Calvo of Columbia University called it “the theory of the value of money.”
If my monthly salary is set in dollars, like supermarket prices, I can be pretty sure how many kilos of rice or bottles of beer I can buy with my dollars. So, I’m happy to keep dollars primarily for transactions, but also for storing wealth. This is where cryptocurrency fails: Supermarket prices are not set in bitcoin or its equivalent, and no one (except for a few Silicon Valley fanatics) gets paid in cryptocurrency.
Another reason why a US resident is happy to hold dollars (or a Eurozone resident holds euros) is that the government sets a floor on this currency, allowing it to pay taxes. That is, the value of a dollar in the financial markets can never be less than the value at which Uncle Sam will redeem this dollar when you pay taxes every April 15th.
Here, again, cryptocurrency fails. These evil “people” in the government cannot guarantee a minimum price for cryptocurrencies. Its only value comes from the expectation that others will want to keep it. If yes, then I want to hold it too. If not, then I’ll drop it. This is exactly what happened last summer with the Luna cryptocurrency, which collapsed and disappeared in a few days. This can happen with any other cryptocurrency on any other day.
The first economist to understand this riddle was Frank Hahn. Khan explained in 1965 that inherently worthless financial assets like cryptocurrencies are like nothing else. If the price of a baguette is zero, then the demand for it will be huge, because everyone will want to eat this priceless loaf of bread. On the contrary, if the price of an asset like Bitcoin is zero, then the demand for it is also zero, because it cannot be eaten, made into rings, used for dental treatment, or paid taxes on it.
After all, claims that the value of cryptocurrency is isolated from the whims of “men” are nonsense. In fact, cryptocurrencies are entirely dependent on whims, and in the worst possible way: the only engine is self-fulfilling expectations (what is politely called “market sentiment”). What the great MIT economist Charles Kindleberger called “mania, panic, and collapse” is the norm for cryptography, not the exception.
Dark-suited technocrats who run institutions like the US Federal Reserve, the Bank of England, or the European Central Bank are losing just over 10% of the purchasing power of their currencies in a bad year like 2022. This is the rate of depreciation that cryptocurrencies often experience within a day or – in the crash we’ve seen recently – within minutes.
This is not a match between “men” and “math”, but between “men” in dark suits and “men” in baggy T-shirts and cargo shorts. In this competition, the suits win every time.
Thanks to FTX, the world may have come to terms with the grim reality that crypto is a get-rich-quick lie, shrouded in hype, bobbing in an ocean of libertarian techno-babble. Will anyone do something about it?