As someone who was in school for a computer science degree before crypto took off, it's been weird watching normal people get so enthusiastic about an obscure academic exercise. Bitcoin was interesting because it presented a clever, incentive-compatible solution to the double-spending problem in distributed transactions.
Now, when you do research in distributed computing, the first assumption you make is that you can't trust anyone. That's because assuming trust makes most problems disappear. That same reason, however, it why it's so fucking stupid that people think crypto has any applicability to a real, modern economy.
Like, in this imaginary future where there is no source of fiat authority, how are you going to get a mortgage for a house? If you buy a house, how will you have title to it? When a burglar comes in through the window, are you going to point to where it says on the blockchain that he's not supposed to do that? It's all so stupid in that techno-libertarian way that takes for granted everything you like about modernity and whines about everything you don't like. Move to <war-torn country> if you want the freedom to live in a post-trust economy.
Whenever someone asks, I explain to people that crypto is like Zelle except it's 1,000x slower, takes 100,000x as much electricity, and instead of being run on a bank's computers it's being run on a Chinese server farm. It's great for illegal activity and speculators.
The thing about cryptocurrencies that makes me think they will be with us forever in some form is that they're a lot like gold, only stripped to its essence. Gold is really not an investment the way a stock or commodity is. Gold is not completely useless, but it's quite close. Yes, it's used for jewelry, and for (mostly cosmetic) plating of fancy electrical connectors, and.... that's pretty much it. There's far more of it already pulled out of the ground to satisfy the actual uses for the next hundred years or more.
So gold is already kind of a pure "greater fool" kind of investment. More charitably, you could see it as a way of betting on overall investor sentiment. The problem is, gold is an actual physical thing that is actually pulled out of the ground and stored in vaults and so forth, and that affects its price in a way that isn't super useful if you're really trying to bet on (or hedge) changes in investor sentiment. Cryptocurrency is a way of distilling that "investor psychology" component of gold into a non-physical realm.
To my way of thinking, this is a great reason not to invest in crypto, for the same reason not to invest in gold. You're betting folks won't suddenly realize the emperor has no clothes. It's entirely possible that if people see crypto as "digital gold," instead of making crypto more valuable, it will reduce confidence in gold. Which it should! Gold is wildly overvalued! But realistically, gold has a psychological hold on a lot of people around the world and it will take a lot to shake it. Crypto doesn't have the same legacy, so my guess is it still has plenty of room to fall and spend time in the weeds before returning again. It's just too useful as a pump-and-dump to abandon completely.
So first of all, yes, crypto markets are a lot like the gold market. But the gold market is stupid, too. It's vestigial -- before we had advanced economic management that made fiat currencies stable and reliable, gold was the best thing available to standardize money. And I don't think crypto is superior to gold in the way you describe. Yes, the supply of a given type of crypto is on a reasonably foreseeable path, and you don't have to worry about someone digging into the ground and finding more. But you do have to worry about cryptocurrencies falling in and out of fashion relative to other cryptocurrencies, while there are only a handful of precious metals and nobody is inventing new ones.
I agree and should have been more clear. My point is exactly that crypto and gold are both stupid, yet gold persists for no good reason. Crypto may also persist for no good reason.
"... before we had advanced economic management that made fiat currencies stable and reliable." I would agree to some degree with the caveat of "so far".
From 1946 to 1971 there was an international gold standard that allowed for a fixed exchange rate of all major currencies to the dollar. The inflation rate in the U.S. for that period averaged 3.22%. Since 1971 the inflation rate to date has averaged 3.75%. That .53% difference is not insignificant.
I don't know what the future holds but the Federal Reserve has been in uncharted waters for14 years or so.
I'm really not convinced. I find it very hard to see how any of these supposed "applications" have any intrinsic value. Most importantly the blockchain itself and the mechanism of resolving transactions via proof-of-work consensus is clearly and unambiguously orders of magnitude less efficient than using a ledger (database) managed by a trusted entity (bank or other institution). If any of these innovative applications turn out to be widely useful, it will trivial for banks to replicate them using their old-school database technology. They can also easily undercut the costs associated because of their massive efficiency advantage.
Proof-of-stake is somewhat better from an efficiency standpoint, but still not as efficient as a database. There are also problems with acceptance. There seem to be a significant chunk (possibly a majority) of crypto users who are not enamored of proof of stake because of the greater (or at least more visible) trust given to the largest stakeholders.
I share your exasperation on crypto, but there are deeper levels to its uselessness for the problem it's trying to solve. According to its boosters, crypto is "trustless." They often say "more trust means more truth." Fundamentally, though, what problem is this solving? I suppose a person could wake up some day and see that their bank account suddenly has a balance of $0 and the bank won't do anything about it. But does this regularly happen to people? I don't really think so. It's hard to see a use case for crypto beyond money laundering.
A few years ago, it was fashionable to say "Cryptocurrency may not be the future but the blockchain itself is an important technology. Smart contracts!" And, to my knowledge, the only product that is remotely viable from blockchain-enabled tech is NFTs, which are an obvious scam. If the law started to recognize NFTs, then it would be different, but it doesn't, so you're left with the world's best certificate of ownership.
As Josh notes, if you actually apply logic to crypto, it doesn't make any sense. But, after years of being wrong, do you really want to bet against it?
I’m with you on crypto, but I’m curious how you would explain the difference between that and any fiat currency. It seems to me that the government backing of real currencies is what makes all the difference, but I’m not certain.
Yes. A fiat currency is backed by a state. And behind that, as Max Weber put it, a state has the monopoly on the legitimate use of physical force. If you default on a debt, the state will enforce the forfeit of the collateral, and if you try to resist, the state will put you in prison or kill you. The beautiful thing about modernity is that on top of that brutish underpinning we've built an elaborate structure of trust, norms, and law such that the use of state violence is so rare that it's invisible.
The essentially dumb thing about crypto-utopianism is that it assumes we can have all the trappings of a modern economy without a state. It's like that Ayn Rand-ian libertarianism that says the state should only enforce contracts, without asking itself how such a state would derive its legitimacy, and what other political demands people might make of it.
Active management by a central bank to try to keep the value of the currency stable seems pretty key. It makes fiat currency not a useful speculative investment, which is a feature not a bug. Also makes fiat a much better store of value than crypto.
Isn't this somewhat in tension with the old adage in economics that "if something can't go on forever, it won't"? A related claim is that if something seems pretty impossible, it probably is. (e.g., How can my Volkswagen diesel legitimately get better MPGs than anyone else's diesels? How can many lower-income buyers in 2005 afford half-million dollar homes? How did only 4,400 Chinese die of COVID?). Every claim coming out of the cryptoverse seems equally (or more) impossible or unlikely. Have we really found the deepest well of credulity in financial history?
There are people who trade forex the same way they trade crypto. Anyway, Josh's argument wasn't specific to cryptocurrency being used an investment tool. It was that crypto is stupid because there's no way to derive its value from fundamental factors like dividends or interest payments. As far as I can see the same argument says we should be skeptical of the US dollar.
Exchange rates are not arbitrary. They are driven by outcomes and expectations about things like the differences in monetary policy between issuing countries, economic growth, trade balance, etc. The fundamental value of a national currency comes from the fact that you need to pay tax in it, government employee salaries are paid in it, and various other transactions must be conducted in it for either legal or customary reasons. Reserve currencies have additional value because of expectation that the currency will remain widely demanded and inflation in the currency will be low and stable. Other kinds of assets could theoretically play these roles — gold did so before we came up with the superior fiat currency technology — but crypto has no advantages, (including no advantage on price stability; look how wildly the prices move) and many disadvantages.
"AT: In a simple functionalist way, you can define the role of money as consisting in some combination of three things: means of payment, store of value, unit of account. Clearly, in certain circuits folks have begun to price things in cryptocurrencies – NFTs, digital art objects, etc. – so crypto is serving as some kind of unit of account. But crypto is not a particularly useful unit of account because its value in terms of other units of account fluctuates so much, which also means that crypto is a bad store of value (unless you have a high preference for speculative gambles) and is unlikely to become widely accepted as means of payment. (In an upswing, the risk is that, in using it, you undervalue your tokens. In a downswing in crypto prices, only a highly risk-tolerant merchant would accept payment in crypto, unless at a large discount.)
If we depart from such functionalist accounts of money and stress instead the role of money in constituting community, founding polities, etc., then crypto has clearly gained purchase in certain communities and helped to configure and constitute them. The question then is, how stable, robust, and widespread are these social groupings that have organized themselves around this money and/or how powerful are their opponents?"
I bought $250 in ether out of curiosity. A basketball player had some weird kind of auction and I placed a bid. Doing so required that my ether be converted to some kind of other, evidently more usable form of ether. I lost the auction. This other form of ether costs $80 to convert it back to ether. Oh, and while I've waited for transaction costs to fall, the value of that ether has fallen 40+%.
I don't really care about the money but it absolutely convinced me that this crap is entirely useless and that even the above board "applications" are scams. Happy to hear why I'm wrong.
Okay, but the basketball player is Andre Drummond. The OpenSea project, which is the source of the "wrapped ETH" or "wETH" that I now hold, is partners with andreesen horowitz. If the scam were truly akin to a Nigerian Prince, the problem would be an inability to identify the participants. But as a lawyer who frequently deals with white-collar fraud, I do not have a claim because it's not a true scam, it's just comically inefficient. No one stole money from me. They just caused me to convert it into a less usable form.
Yes. I held $250 in ETH in one of these many wallet apps (but it was one from one of the primary, above board companies), to place an auction bid it needed to be converted to wETH. When I lost, I got refunded wETH. My understanding is that to convert it back into ETH (or USD) would cost roughly half of the value of the wETH.
I appreciate the more balanced reply. I don't like being called an idiot! Granted, I called it a "scam" myself, but I really meant that the whole zeitgeist that crypto currently has lawful and sensible use cases seems fabricated. The transaction costs are outlandish and the benefit to using this stuff for legal transactions is near zero.
It is important to differentiate Bitcoin from those cryptos that came later. Your point is spot on. Bitcoin should be viewed as Crypto 1.0, Ether as Crypto 2.0. There are also new blockchains, my favorite is Cardano the token for which is ADA. This is a third generation blockchain project that has real world changing goals, IF SUCCESSFUL. And it's fully possible that all these blockchains will blow up at some point, but my gut tells me that something revolutionary is afoot.
I'm an old guy. I'll be 71 this year. I don't expect I'll see the impact that future generations of blockchain will have, if any. I decided a few years ago to "invest" a very small amount in three different blockchains, one of which is Cardano. None of which is Bitcoin. I went in knowing this is money that is 100% at risk.
Yogi Bearra famously said "Predicting is difficult, especially about the future." Trying to predict our technological future is even more so. Well see.
That's fair criticism. I reckon it's the tortoise and hare story. I just like the long-term goals. In the end, any "investment" and I use the word loosely, is a big gamble. The other two I own are Ethereum (ETH) and Ripple (XRP). Any crypto purchase is rolling dice.
Exactly, it has always been thus with technology. The new obviates the old; not sure that will happen with blockchain but that's been the pattern for the last couple of hundred years.
Here's an interesting tidbit I read this morning. Some miners are having trouble paying their electric bills.
As mining creates less and less bitcoin as the software approaches the 21 million token limit the income from new coins goes down. The miners therefore are dependent on fees all the more. As bitcoin becomes more and more useless as a transactional device that too will decline. So, where does this eventually lead?? Not anywhere good. But then I could be FOS.
As someone who was in school for a computer science degree before crypto took off, it's been weird watching normal people get so enthusiastic about an obscure academic exercise. Bitcoin was interesting because it presented a clever, incentive-compatible solution to the double-spending problem in distributed transactions.
Now, when you do research in distributed computing, the first assumption you make is that you can't trust anyone. That's because assuming trust makes most problems disappear. That same reason, however, it why it's so fucking stupid that people think crypto has any applicability to a real, modern economy.
Like, in this imaginary future where there is no source of fiat authority, how are you going to get a mortgage for a house? If you buy a house, how will you have title to it? When a burglar comes in through the window, are you going to point to where it says on the blockchain that he's not supposed to do that? It's all so stupid in that techno-libertarian way that takes for granted everything you like about modernity and whines about everything you don't like. Move to <war-torn country> if you want the freedom to live in a post-trust economy.
Whenever someone asks, I explain to people that crypto is like Zelle except it's 1,000x slower, takes 100,000x as much electricity, and instead of being run on a bank's computers it's being run on a Chinese server farm. It's great for illegal activity and speculators.
The thing about cryptocurrencies that makes me think they will be with us forever in some form is that they're a lot like gold, only stripped to its essence. Gold is really not an investment the way a stock or commodity is. Gold is not completely useless, but it's quite close. Yes, it's used for jewelry, and for (mostly cosmetic) plating of fancy electrical connectors, and.... that's pretty much it. There's far more of it already pulled out of the ground to satisfy the actual uses for the next hundred years or more.
So gold is already kind of a pure "greater fool" kind of investment. More charitably, you could see it as a way of betting on overall investor sentiment. The problem is, gold is an actual physical thing that is actually pulled out of the ground and stored in vaults and so forth, and that affects its price in a way that isn't super useful if you're really trying to bet on (or hedge) changes in investor sentiment. Cryptocurrency is a way of distilling that "investor psychology" component of gold into a non-physical realm.
To my way of thinking, this is a great reason not to invest in crypto, for the same reason not to invest in gold. You're betting folks won't suddenly realize the emperor has no clothes. It's entirely possible that if people see crypto as "digital gold," instead of making crypto more valuable, it will reduce confidence in gold. Which it should! Gold is wildly overvalued! But realistically, gold has a psychological hold on a lot of people around the world and it will take a lot to shake it. Crypto doesn't have the same legacy, so my guess is it still has plenty of room to fall and spend time in the weeds before returning again. It's just too useful as a pump-and-dump to abandon completely.
So first of all, yes, crypto markets are a lot like the gold market. But the gold market is stupid, too. It's vestigial -- before we had advanced economic management that made fiat currencies stable and reliable, gold was the best thing available to standardize money. And I don't think crypto is superior to gold in the way you describe. Yes, the supply of a given type of crypto is on a reasonably foreseeable path, and you don't have to worry about someone digging into the ground and finding more. But you do have to worry about cryptocurrencies falling in and out of fashion relative to other cryptocurrencies, while there are only a handful of precious metals and nobody is inventing new ones.
I agree and should have been more clear. My point is exactly that crypto and gold are both stupid, yet gold persists for no good reason. Crypto may also persist for no good reason.
"... before we had advanced economic management that made fiat currencies stable and reliable." I would agree to some degree with the caveat of "so far".
From 1946 to 1971 there was an international gold standard that allowed for a fixed exchange rate of all major currencies to the dollar. The inflation rate in the U.S. for that period averaged 3.22%. Since 1971 the inflation rate to date has averaged 3.75%. That .53% difference is not insignificant.
I don't know what the future holds but the Federal Reserve has been in uncharted waters for14 years or so.
I'm really not convinced. I find it very hard to see how any of these supposed "applications" have any intrinsic value. Most importantly the blockchain itself and the mechanism of resolving transactions via proof-of-work consensus is clearly and unambiguously orders of magnitude less efficient than using a ledger (database) managed by a trusted entity (bank or other institution). If any of these innovative applications turn out to be widely useful, it will trivial for banks to replicate them using their old-school database technology. They can also easily undercut the costs associated because of their massive efficiency advantage.
Proof-of-stake is somewhat better from an efficiency standpoint, but still not as efficient as a database. There are also problems with acceptance. There seem to be a significant chunk (possibly a majority) of crypto users who are not enamored of proof of stake because of the greater (or at least more visible) trust given to the largest stakeholders.
I share your exasperation on crypto, but there are deeper levels to its uselessness for the problem it's trying to solve. According to its boosters, crypto is "trustless." They often say "more trust means more truth." Fundamentally, though, what problem is this solving? I suppose a person could wake up some day and see that their bank account suddenly has a balance of $0 and the bank won't do anything about it. But does this regularly happen to people? I don't really think so. It's hard to see a use case for crypto beyond money laundering.
A few years ago, it was fashionable to say "Cryptocurrency may not be the future but the blockchain itself is an important technology. Smart contracts!" And, to my knowledge, the only product that is remotely viable from blockchain-enabled tech is NFTs, which are an obvious scam. If the law started to recognize NFTs, then it would be different, but it doesn't, so you're left with the world's best certificate of ownership.
As Josh notes, if you actually apply logic to crypto, it doesn't make any sense. But, after years of being wrong, do you really want to bet against it?
I’m with you on crypto, but I’m curious how you would explain the difference between that and any fiat currency. It seems to me that the government backing of real currencies is what makes all the difference, but I’m not certain.
Yes. A fiat currency is backed by a state. And behind that, as Max Weber put it, a state has the monopoly on the legitimate use of physical force. If you default on a debt, the state will enforce the forfeit of the collateral, and if you try to resist, the state will put you in prison or kill you. The beautiful thing about modernity is that on top of that brutish underpinning we've built an elaborate structure of trust, norms, and law such that the use of state violence is so rare that it's invisible.
The essentially dumb thing about crypto-utopianism is that it assumes we can have all the trappings of a modern economy without a state. It's like that Ayn Rand-ian libertarianism that says the state should only enforce contracts, without asking itself how such a state would derive its legitimacy, and what other political demands people might make of it.
Active management by a central bank to try to keep the value of the currency stable seems pretty key. It makes fiat currency not a useful speculative investment, which is a feature not a bug. Also makes fiat a much better store of value than crypto.
Yes, it's government backing, especially the guarantee that you can pay your taxes only in that currency.
Isn't this somewhat in tension with the old adage in economics that "if something can't go on forever, it won't"? A related claim is that if something seems pretty impossible, it probably is. (e.g., How can my Volkswagen diesel legitimately get better MPGs than anyone else's diesels? How can many lower-income buyers in 2005 afford half-million dollar homes? How did only 4,400 Chinese die of COVID?). Every claim coming out of the cryptoverse seems equally (or more) impossible or unlikely. Have we really found the deepest well of credulity in financial history?
Can't you make exactly the same argument about the dollar?
The dollar is not widely viewed as an investment tool.
There are people who trade forex the same way they trade crypto. Anyway, Josh's argument wasn't specific to cryptocurrency being used an investment tool. It was that crypto is stupid because there's no way to derive its value from fundamental factors like dividends or interest payments. As far as I can see the same argument says we should be skeptical of the US dollar.
Exchange rates are not arbitrary. They are driven by outcomes and expectations about things like the differences in monetary policy between issuing countries, economic growth, trade balance, etc. The fundamental value of a national currency comes from the fact that you need to pay tax in it, government employee salaries are paid in it, and various other transactions must be conducted in it for either legal or customary reasons. Reserve currencies have additional value because of expectation that the currency will remain widely demanded and inflation in the currency will be low and stable. Other kinds of assets could theoretically play these roles — gold did so before we came up with the superior fiat currency technology — but crypto has no advantages, (including no advantage on price stability; look how wildly the prices move) and many disadvantages.
I thought Tooze had a good explanation here: https://adamtooze.com/2022/01/22/chartbook-74-crypto-and-the-politics-of-money/
"AT: In a simple functionalist way, you can define the role of money as consisting in some combination of three things: means of payment, store of value, unit of account. Clearly, in certain circuits folks have begun to price things in cryptocurrencies – NFTs, digital art objects, etc. – so crypto is serving as some kind of unit of account. But crypto is not a particularly useful unit of account because its value in terms of other units of account fluctuates so much, which also means that crypto is a bad store of value (unless you have a high preference for speculative gambles) and is unlikely to become widely accepted as means of payment. (In an upswing, the risk is that, in using it, you undervalue your tokens. In a downswing in crypto prices, only a highly risk-tolerant merchant would accept payment in crypto, unless at a large discount.)
If we depart from such functionalist accounts of money and stress instead the role of money in constituting community, founding polities, etc., then crypto has clearly gained purchase in certain communities and helped to configure and constitute them. The question then is, how stable, robust, and widespread are these social groupings that have organized themselves around this money and/or how powerful are their opponents?"
Takes a special and rare politician to show empathy.
Even to just feign it consistently.
I would suggest the most their handlers can hope for is to stay on message.
If the message includes feigned empathy, so much the better.
Please do another one on why NFT's are dumb and a scam :)
I bought $250 in ether out of curiosity. A basketball player had some weird kind of auction and I placed a bid. Doing so required that my ether be converted to some kind of other, evidently more usable form of ether. I lost the auction. This other form of ether costs $80 to convert it back to ether. Oh, and while I've waited for transaction costs to fall, the value of that ether has fallen 40+%.
I don't really care about the money but it absolutely convinced me that this crap is entirely useless and that even the above board "applications" are scams. Happy to hear why I'm wrong.
Okay, but the basketball player is Andre Drummond. The OpenSea project, which is the source of the "wrapped ETH" or "wETH" that I now hold, is partners with andreesen horowitz. If the scam were truly akin to a Nigerian Prince, the problem would be an inability to identify the participants. But as a lawyer who frequently deals with white-collar fraud, I do not have a claim because it's not a true scam, it's just comically inefficient. No one stole money from me. They just caused me to convert it into a less usable form.
Yes. I held $250 in ETH in one of these many wallet apps (but it was one from one of the primary, above board companies), to place an auction bid it needed to be converted to wETH. When I lost, I got refunded wETH. My understanding is that to convert it back into ETH (or USD) would cost roughly half of the value of the wETH.
I appreciate the more balanced reply. I don't like being called an idiot! Granted, I called it a "scam" myself, but I really meant that the whole zeitgeist that crypto currently has lawful and sensible use cases seems fabricated. The transaction costs are outlandish and the benefit to using this stuff for legal transactions is near zero.
It is important to differentiate Bitcoin from those cryptos that came later. Your point is spot on. Bitcoin should be viewed as Crypto 1.0, Ether as Crypto 2.0. There are also new blockchains, my favorite is Cardano the token for which is ADA. This is a third generation blockchain project that has real world changing goals, IF SUCCESSFUL. And it's fully possible that all these blockchains will blow up at some point, but my gut tells me that something revolutionary is afoot.
I'm an old guy. I'll be 71 this year. I don't expect I'll see the impact that future generations of blockchain will have, if any. I decided a few years ago to "invest" a very small amount in three different blockchains, one of which is Cardano. None of which is Bitcoin. I went in knowing this is money that is 100% at risk.
Yogi Bearra famously said "Predicting is difficult, especially about the future." Trying to predict our technological future is even more so. Well see.
That's fair criticism. I reckon it's the tortoise and hare story. I just like the long-term goals. In the end, any "investment" and I use the word loosely, is a big gamble. The other two I own are Ethereum (ETH) and Ripple (XRP). Any crypto purchase is rolling dice.
Exactly, it has always been thus with technology. The new obviates the old; not sure that will happen with blockchain but that's been the pattern for the last couple of hundred years.
Here's an interesting tidbit I read this morning. Some miners are having trouble paying their electric bills.
As mining creates less and less bitcoin as the software approaches the 21 million token limit the income from new coins goes down. The miners therefore are dependent on fees all the more. As bitcoin becomes more and more useless as a transactional device that too will decline. So, where does this eventually lead?? Not anywhere good. But then I could be FOS.