Crypto - I Don't Buy the Hype

Either I’m an old man who is shaking his fist at the clouds, or I’m a rational person that isn’t easily bedazzled and deluded by the madness of crowds. I prefer to think I’m the latter. Crypto has captivated the masses, and delivered opportunity to the financial grifters who portray themselves as disciples of a new financial world order.

I may be missing out on ‘easy wins’, trading cryptocurrencies - buying low, selling high. What I know for certain, however, is that I’m missing the opportunity to be the last one holding the hot potato when the music stops and the entire Ponzi scheme comes crashing down.

Wherever there is fervour, I see risk. Where a financial instrument is deigned by “experts” to be capable of changing the world, I see a snake oil salesman wanting to offload empty promises at my expense.

To my mind, a crypto asset has no inherent value beyond the hope that somebody thinks it will be worth more, and so will be willing to pay more, so they can on-sell to the next chump who thinks it will also go up. That’s not a good recipe for sound investing. That’s gambling. Crypto itself has no underlying value. It’s not a commodity with underlying value. It has no intrinsic productive value.

A few days ago I attended the West Tech Fest conference in Perth, and a huge chunk of the day was dedicated to speakers excitedly talking up crypto, memecoins, and other such “financial instruments”. One person was explaining that the younger (current?) generation are more financially aware with a higher tolerance for financial volatility, and therefore willing to ‘take the risks’. I’m calling bollocks on all of this. Of course, these statements were also made by an industry insider - a representative of a business that offers a platform for trading crypto. Now why would they be encouraging profligate “investment” in ridiculous products with no underlying value? As always, this is where I turn to my man, Lester Freamon.

Further Reading

If you’re not convinced that crypto is simply an energy-sapping, hype offering that isn’t going to deliver any of the amazing things it’s zealots say it will, I encourage you to undertake some further reading, and apply some rational economic thought.

We’ve seen bubbles before. They always work the same way. Sure, some people get rich. Some do okay. But many are hurt, and left holding an, ahem, “asset” that isn’t worth jack. Just because this is a digital item riding the Web3 hype train doesn’t mean it’s going to end any differently.

I suggest you read the brilliant work of Stephen Diehl. He has published a number of excellent, considered articles on this topic. Read his work, follow the links and maintain an open mind.

There are a number of great quotes in his articles; below I’ve extracted just a few of my favourites. Everything Stephen writes is so good though, I encourage you to follow the links and read the full articles.

On memecoins:

Memecoins are pure greater fool investments, they’re basically a hot potato that people trade hoping to offload it on someone dumber than them who will pay more for it. And the implicit assumption behind the terminal value of these assets is that there’s an infinite chain of fools who will keep doing this forever. Nassim Taleb deconstructed this concept from a quantitative finance perspective in his whitepaper but nevertheless these assets persist because people behave economically irrationally and like lighting money on fire and dumping it into memes regardless of financial sanity. Meme coins like dogecoin exist simply for people to gamble on a fantasy about talking dogs, and bitcoin is a meme token for gambling on a fantasy about living in a cyberpunk dystopia. At the end of the day, memecoins are not that economically distinguishable from Ponzi schemes.1

On the value of crypto as a valuable commodity:

After twelve years of these technologies existing (roughly the same age as the iPhone) there is basically only one type of successful crypto business: exchanges which exist to trade more crypto. 1

Unlike a gallon of petrol which can be burned for energy, or a kilo of wheat which can be made into bread, or a[n] ounce of gold which can made into jewelery, there is no intrinsic use of a bitcoin. There is nothing inside of a bitcoin that can be used for anything other than to offload it on someone else who will buy it for more than what you paid for it. It is nothing more than a pure greater fool-seeking asset.2

On crypto as a Ponzi scheme:

Crypto assets are the synthesis of a speculative mania and a financial scam built around an opaque technology, phoney populism, with a tolerance for intellectual incoherence at its core. And it is a novel type of a scam, one that we don’t have a precise term of art for. They share the obscured and circular payouts of Ponzi schemes, the cult-like recruiting of multilevel marketing schemes, the ephemeral nature of high-yield investment fraud, and payout mechanics of pyramid schemes but strictly speaking they aren’t exactly like any of the classical scams. 2

Andrew Canion @canion