the case against cryptocurrencies
Much of my free time these days is reserved for calls explaining to people outside the software industry why crypto assets are such a destructive force and why I support strong regulation to prevent this company from financially corrosive spread more to the markets. Basically, I have to repeat myself on the basic arguments for every call covering the same basic monetary theory, American history, and technical limitations. so I’m going to summarize the basic argument so that we have a reference and I don’t have to repeat myself all day.
- technology does not solve a real problem.
The crypto project has had 13 years to try to find a problem to solve. did not find any.
Reading: The case against bitcoin
the real world has fundamental constraints that make the technology not work, every time it has to interact with the outside world, the benefits of decentralization disappear and the solutions end up simply recreating slower and worse versions of processes and structures that they already exist.
Despite that, for the last thirteen years these projects have done nothing but swindle people by creating bubbles of synthetic assets to gamble with and destroy the environment. there are fundamental limitations to the scalability of blockchain-based technologies, and every use case is better served by another, simpler technology, except for crime, ransomware, extralegal gambling, and sanctions evasion; all of which are a burden to society, not a benefit. taken as a whole, the technology has no tangible benefits compared to simply using trusted parties and centralized databases.
Cryptocurrencies are simply speculative gambling products that only create a massive set of negative externalities in the world. it is introducing artificial volatility into markets untethered to any economic activity and creating a huge opportunity cost where the only investment opportunity is an economically corrosive synthetic hedge against all productive assets. this is not innovation, this is technical regression and flirtation with ecological disaster in an age when we cannot afford to gamble the fate of our planet on pyramid schemes and dog memes.
- The so-called “cryptocurrencies” are not actually currencies and cannot fulfill the function of money.
money exists to exchange for goods and services in an economy. it is created to mediate the exchange of goods so that we have a common unit of account with which we can trade instead of exchanging goods directly. money must have a reliable and stable value compared to a domestic basket of common goods and services, to ensure that the money supply is controlled by a monetary authority that can expand or contract the supply according to market fluctuations.
A dynamic money supply is a fundamental necessity for a modern economy. a small amount of inflation discourages hoarding and encourages investment in productive businesses that grow the economy and produce prosperity. In contrast, a fixed and static money supply encourages hoarding and is inflexible in times of crisis because it does not allow for intervention. economies do not stabilize and require active intervention to stop recessions.
In an environment where multiple currencies can be mixed, there is a perverse incentive to create counterfeit currency or parallel currencies. counterfeit currencies dilute trust in trade, create counterparty risk and catalyze crime. parallel currencies introduce currency risk and create artificial barriers to trade. the optimal solution within any economic region is to have a single currency with a single authority to control supply, protect against counterfeiting, and lower barriers to trade by discouraging other systems by creating demand. the only possible entity that can fulfill this role is the state and it creates demand for a single currency by requiring citizens to extinguish their obligations to the state in that currency. a single currency and a single monetary authority is the inevitable role of the state due to its unique monopoly on taxes and justice.
Historically, commodity-based money (called “hard money”) was based on metal backing and was widely used in the 18th and 19th centuries. Instead of empowering democratic controls, it empowered unelected international parties that could obtain, mine, and mint metals. under a gold standard, inflation, growth, and the financial system were less stable due to trade imbalances. this led to frequent recessions, major swings in consumer prices, and perpetual banking crises. when these events occurred in one part of the world, the anguish was transmitted more quickly and completely to others and thus a politically unstable, unequal and more violent world was created. We saw this in the golden age of the 1870s to 1920s when hard money created a world of vast wealth inequality, ultimately leading to the speculative market manias that led to the Great Depression. The United States eventually devalued its currency with New Deal policies that slowly weaned the dollar’s dependence on gold and ushered in an era of economic growth and prosperity. By contrast, Europe largely did not engage in these corrective policies and this era saw the rise of populist and fascist strongmen who promised to correct the wealth inequality of the common man and ultimately plunged the continent into the most violent part of human history.
money will always be inseparable from politics. As much as some libertarians want to believe that value must be determined by a divine order independent of the will of men, they cannot escape the logical and historical contradictions at the heart of this idea. Fixed supply ideas of deflationary currencies like bitcoin fundamentally misconstrue the properties of fiat money as bugs when in fact they are features. the crypto project contains intractable logical and economic contradictions in its stated purpose. state-controlled money embeds control and responsibility for fiscal stability and market intervention into the democratic process where it inevitably and rightly belongs.
- The history of private money is one of repeated disasters that destroy public trust.
Even playing devil’s advocate and assuming that cryptocurrencies could function as money, which they cannot, we are faced with the harsh limitation that every time private money has been tried in history, it is created a form of corporate feudalism coupled with a toxic environment that encourages fraud and discourages trade. the lessons of history are quite clear on this subject because the united states flirted with such a system in the free banking era from 1837 to 1863. in this period there were hundreds of private entities issuing their own private banknotes supposedly created one by one with state bonds.
The problem with these so-called wild banks is that their reserves were not always verifiably backed, and therefore they were subject to runs on the bank where customers were unable to access their funds. The second problem is that, unlike public money, which is universally accepted at par, wild banknotes had a massive secondary foreign exchange market in which notes from different banks were not traded at par. a bank of wyoming dollar bill might be worth $0.60 versus a bank of nebraska bill, and these values would fluctuate depending on market conditions. As a merchant, this would complicate business quite a bit, as you would be forced to buy goods in one set of notes, accept notes from customers, and give change in a different set of notes. this was great for bankers who had access to non-public information and could arbitrage these notes for their own profits, but for the average person it was a terribly predatory and exploitative system. Private banknotes are an unnecessarily complicated, risky and inefficient way of running an economy and this was remedied by the National Bank Act of 1863. It was a really terrible idea.
history tends to rhyme with itself, and today we are flirting with the same bad ideas of the past. except now, instead of wild banks, we have wild tech platforms with the same aspirations. they do not want to interact with public money, they want to become private money issuers themselves. a form of fully vertically integrated company voucher that they issue to their investors, employees, and customers to create not just a walled garden, but a walled garden where every road has a toll booth that just takes your coin. The elephant in the room that no VC in these projects wants to talk about is that private money creation, just like in the era of wild banking, is a license to print money by creating markets for these currencies/ banknotes with massive positions and information asymmetries. baked on design. these kinds of private money regimes are just as exploitative today as they were in the 19th century, and the so-called “web3” notion of embedding this form of institutionalized corruption as a first-class structure on the internet is a terrible idea that ignores the lessons of the story.
- Crypto assets are unregistered securities.
When we logically deconstruct the crypto narrative by discarding bogus populism and the cult-of-faith structure in economic absurdities, we end up with an inescapable conclusion that fits tightly within our existing regulatory framework. crypto assets are simply unregistered securities in companies whose stated aspiration is to develop technology to become digital wild banks. they just synthesized their corporate capital and so-called notes into a single financial product.
Cryptocurrencies are not currencies and do not have any mechanism to convert to currency. they are effectively unregulated securities where the sole purpose of the products is price appreciation without ties to any economic activity. the only use case is to bet on random price swings, try to buy low and sell high, and cash positions for profits in a real currency like dollars or euros. however, cryptocurrencies cannot create or destroy real money because, unlike stocks, there is no underlying company that generates income. So if you sell your crypto and make a dollar profit, it’s exactly because some older fool bought it at a higher price than you. therefore, every dollar that comes out of a cryptocurrency is because a subsequent investor invested a dollar. they are inherently zero-sum by design, and when you take into account that the casino (i.e. exchanges and miners) take a commission on the game, then the whole structure becomes strictly negative-sum. for every winner there are guaranteed to be multiple losers. is a game manipulated by experts hacking human psychology.
For cryptocurrencies to have any real utility, volatility needs to calm down. If that were to happen, there would be little reason for the public to speculate on cryptocurrency prices, given that the potential for massive returns would no longer exist. smart money comes out, liquidity disappears and the bubble collapses. this is the inevitable fate of all cryptocurrencies, and we see it reflected in the simple fact that the average return of all these thousands of flash-in-the-pan coins is zero. each crypto currency is randomly walking towards zero along a different path.
The argument presented in this article is a rather complicated edifice and requires a great deal of knowledge at the intersection of several fields of study that, frankly, the public should not have to worry about learning to protect themselves against fraud. public money should work for most people without them having to worry about the details. Ultimately, this is where cryptocurrencies take advantage of the public’s ignorance, desperate faith in technical solutionism, and political resentment and weaponize it for the targets of these private money libertarian charlatans to gorge themselves on. These guys aren’t building a new financial system, they’re just lining their pockets.
history repeats itself first as a tragedy and then as a farce. the wild economic swings of yesterday’s gold standard are today’s canine meme craze. human nature is remarkably unchanged over the centuries, and if we don’t learn the lessons of history, we are doomed to repeat the mistakes of past generations. this time, if we are very lucky, crypto assets simply end in a market crash and a series of progressive new deal-like reforms in our financial system. if we are unlucky, they accelerate the expansion of a shadow financial system used to enrich the already rich, increase wealth inequality to levels unprecedented in history, reduce faith in democracy, and further fuel plus the flames of populism. these trends ultimately converge to leave the fate of humanity to the wild swings of market mania, charismatic demagogues, and strongmen who promise to save us from ourselves. and we’ve seen how that story ends.