Money For Nothing: Two Views of Crypto

Is crypto more like gold or a simple scam?

I have to confess some perplexity over crypto. Billed as currencies, they are not currencies. Billed as securities, they are not securities, either. They excite a weird kind of enthusiasm in libertarian circles, in dreams of asocial (if not anti-social) finance. From a matter of fringe speculation, they are migrating into the culture at large, influencing our politics, and becoming significant economic actors, with a combined market cap now over three trillion dollars. For me, there are two basic frames for thinking about crypto. One is that they are like gold, an intrinsically worthless, but attractive object of fascination, wealth storage, and speculation. The other is that they are straight Ponzi schemes, rising by a greater-fool process that will end in tears.

Currencies are forms of money with particular characteristics. They are widely used among a region or population, stable in value, and easy to store and exchange. They are typically sponsored by a government to ensure that stability and acceptance. This is done in part by specifying that currency for incoming taxes and outgoing vendor and salary payments. They are also, in modern systems, managed elastically, (and intelligently!), with ongoing currency creation to match economic growth and keep the nominal value stable over time. Crypto entities would like to be currencies. However, they have far from stable value, are not easy to work with, and are not widely used. Securities, on the other hand, have a basis in some kind of collateral (i.e. the "security" part) like business ownership, a contract of bond interest payments, etc. Crypto does not have this either. Crypto has only its own scarcity to offer, a bit like cowrie shells, or gold. Crypto entities are not investments in productive activity. Indeed, they foster the opposite, as their only solid use case has been, at least to date, facilitating crime, as demonstrated by the ransomware industry, which asks to be paid in Bitcoin.

So how about gold? Keynes railed against gold as the most useless, barbaric form of wealth, inducing people to dig holes in the earth and cause environmental degradation. And for what? A shiny substance that looks good, and is useful in a few industrial applications, but mostly was, at the time, held by governments in huge vaults, notionally underpinning their currency values. Thankfully we are past that, but gold still holds fascination, and persists as a store of value. Gold can be held in electronic forms, making it just as easy to hold and transfer as crypto entities, if one is so-inclined. Critically, however, gold is also physical, and humanity's fascination with it is innate and enduring. Thus, after the apocalypse, when the electricity is off and the computers are not connected anymore, gold will still be there, ready to serve as money when crypto has evaporated away. 

Bitcoin barely recovered from an early crisis. 

How durable is the fascination with crypto, as a store of wealth, or for any other purpose, under modern, non-apocalyptic conditions? Bitcoin is the grand-daddy of the field, and seems to have achieved dominance, certainly the field of criminal money laundering and transfer, as well as libertarian speculation. It appears to have a special mystique, whether from the blockchain, its "mining" system, or its mysterious pseudonymous founder. The other forms of crypto range from respectible to passing memes. There is a fascinating competition in the attention space that constitutes the crypto markets. Since they do not have intrinsic value, nor governmental buy-in, they float entirely on buyer sentiment, in a greater-fool cycle of rises and falls. Crashes in the stock market are halted by fundamental value of the underlying asset. As the speculative fervor wanes, vultures step in to, at worst, liquidate the assets. But for crypto, there are no assets. No fundamental value. So crashes can and do go to zero.

There are also external factors, like the fact that many crypto entities have been outright scams, or the environmental costs of Bitcoin, or their facilitation of criminality, which may eventually draw popular and regulatory scrutiny. Boosters have been trying to get the Federal Reserve and other validating entities to buy into the crypto craze, and political contributions from newly crypto-riche holders and exchanges have transformed the landscape to one that seems increasingly sympathetic, especially on the Republican side. Thankfully, the smaller memecoins have market caps in the low millions, so do not present a threat as yet to the financial system, in the almost certain event of their evaporation once each meme passes. This blasé acceptance of "securities" that are pure schemes of speculation is a sad commentary on our current age. The sophisticated investor of today would not study corporate efficiency, market prospects, or finances. He or she would be conversant in current memes on social media, ready to jump on the newest one, and sensitive to the withering of older memes, in an endless conveyor belt of booms and busts. 

It is weird how people fail to learn the lessons of the past, from the tulip craze and other speculative booms. Where there is no value, there is likely to be a very deep crash. The libertarians among us, who may have been gold bugs in the past and now have flocked to the new world of crypto, may represent a psychological type that is ineradicable, so motivated to ditch the humdrum official currency for anything that offers a whiff of notional independence, (though being tethered to the new crypto infrastructure of exchanges and wallets is not for the faint of heart or independent-minded), that they can float these crypto entities indefinitely. But in the absence of deeper value, might their psychologies change to those of hawkers who get in at the ground floor and make out, while the schlubs who buy at the top are left holding the bag? It comes down to human psychology in the end- what is personally and socially valuable, who you think your counterparts are on the other ends of all these trades, and who (and what sort of motivation) is making up the institutions and communities of crypto.

• Star Trek was fighting the cold war.