I thought this post at Heisenberg Report about the shakeup in the cryptocurrency industry raised some interesting point.
In the wake of the FTX fiasco, much of the breathless crypto coverage emanating from the financial media (mainstream, alternative and otherwise), seems to intentionally avoid addressing the elephant in the room. If that’s the case, it’s understandable. Because to address it would be to concede that nearly everyone — from large media conglomerates to the most respected venture capitalists on the planet to storied hedge funds — was duped into believing that all it took to make the private money business viable was a single innovation.
That’s plainly absurd. For one thing, some experts offer trenchant arguments against the idea that blockchain constitutes a “technology†at all, if technology is supposed to be synonymous with true innovation. Even if it is an innovation, many skeptics argue it’s not an especially useful one. In the interest of brevity, I won’t walk through those arguments, but you can certainly do so yourself if you have Google and half an hour to spare.
Beyond that, though, the notion of private money at scale, and, more to the point, the notion of private money at scale as an investable proposition, is stupid. Not “misguided,†not “misplaced†and not any other more generous adjective either. Just plain old stupid.
Bitcoin as a digital form of “outside money†(so, like gold, only not tangible) makes some measure of sense. The rest of it not so much.
Here’s my question. Let’s assume that what’s going on right now is an actual shakeup in the sector, more than just a blip on cryptocurrency’s blast into the stratosphere. Does it have broader implications?
To some degree that depends on the degree to which cryptocurrency has been attracting participants (I hesitate to say “investors”) who wouldn’t have participated in anything else. If all of the participants were uniquely attracted to cryptocurrency then, no, the shakeup wouldn’t have ramifications beyond the sector itself.
However, if cryptocurrency managed to attract investment that would otherwise have gone somewhere else, a general loss of confidence in cryptocurrencies might will have ramifications throughout the technology sector. Furthermore, the number of developers working actively on cryptocurrency projects is estimated as something between 8,000 and 11,000. That’s not a large number in the total scheme of things but those developers need to be considered another cadre of developers out of work along with the layoffs announced at Amazon, Meta, Twitter, Salesforce, Oracle, Microsoft, etc.
Far as I can tell its only real utility lies in paying off cyber ransom attacks and it sounds like that is becoming less viable. Its one of those things that some people really want to work for some ideological/philosophical reason but its certainly not practical and the area is full of scammers. (Hoda, Hoda, Hoda!)
Steve
I suspect there’s a lot more than 10,000 developers working on cryptocurrency; Coinbase has 3000 employees, and it’s not even the biggest company solely dedicated to the industry. Beyond that, cryptocurrency has a whole ecosystem, in addition to software engineers, there’s hardware engineers (mining GPUs), mathematicians, etc.
As to loss of confidence, it depends on what one means by “cryptocurrency”. If you strictly define it as “digital bearer assets that aren’t backed by a government” like bitcoin, Ethereum — yes, that is happening and, in a way, it’s healthy since the bubble was a gross misallocation of resources.
If one defines it as loosely, like “distributed ledgers” on the technology side, and “central bank digital currencies” on the finance side, they have real utility and will be a part of our lives. There will be developers working / applying both concepts for a long time to come.
Crypto currencies are a variant of the Ponzi scheme. Thre is no value there, except as a means of money laundering.
It’s not the only scam out there. Paper gold is another. The amount of paper gold certificates issued is at least an order of magnitude larger that the gold held by the issuers. Of course, gold bugs think the same about fiat currencies and fractional reserve banking.
Someone pointed out that gold, and maybe crypto, are hedges against economic collapse. But if collapse happens you really need guns and ammo. With those you can keep what you have and get what you need. And ammo is great barter material
To me, the problems with crypto are mostly self-correcting. People investing in speculative new technologies took a risk, and they got burned. Lesson learned.
As long as crypto isn’t a risk to the economy generally, then regulation should be relatively light and confined to ensuring transparency and full disclosure.
Money is a store of value. Currency is a medium used in value-tovalue transactions. You do not invest in money. You save money. Fiat money has no value.
Except for a miniscule number of dollars, they are all electronic, but as opposed to cryptocurrency, they have an intrinsic use, and that intrinsic use determines their worth. So, fiat money is worth whatever everybody agrees upon, but that worth can and does change over long periods of time.
The biggest problem with cryptocurrency is the amount. To replace just dollars would require an increase of several orders of magnitude. The second problem is their worth is based upon speculation, and that speculation is dollar based.
The only reason a bank is willing to store money is because they can use it for investing – capital requirements, etc. That investing involves leveraging assets to create new fiat money. That is a feature, not a bug.
Fiat money has value; its intrinsic utility is that it is legal tender. That’s the issue with cryptocurrency. If it isn’t legal tender, its utility is speculation or to support illegal activities.
That’s why “central bank digital currency” could / will be a thing. Governments notice several of the innovations in cryptocurrency are useful, like the concept of traceable and unchangeable transactions (helps fight money laundering), time-based revokable tokens (think about money that must be spent by YYY, or it disappears, control velocity of money). Digital wallets that can be frozen….
It wouldn’t shock me that decades from now, people are using a cryptocurrency backed by the government; and contrary to the idea that cryptocurrency would break government control of money; it strengthened governments control.
@CuriousOnlooker
Fiat money has value; …
I will rephrase: Fiat money has no intrinsic value. It is only worth what somebody will trade for it. It is currency. The dollar is quasi-fiat money. With the possible exception of M0, it is backed by financial assets (debt), and therefore, a dollar’s value is derived from the perceived value of those financial assets.
The US government can print and coin dollars, but other than physical dollars, the government cannot create dollars.
The Fed is a private bank, and like any other bank, it can create dollars. These are backed by assets, usually financial and debt based. Note: The debt is well in excess of the US. Other than physical dollars, all dollars are electronic, and they are accounted for on a balance sheet somewhere in the world.
Prior to 1968, the gold cover provided some value to the dollar, and internationally. Bretton Woods allowed foreign governments to redeem dollars at a fixed amount of gold. When Nixon closed the gold window, the US defaulted on the dollar, but since most dollars were created by the global financial system, these dollars did not derive their value from gold.
This is one reason there was no mass exodus from the dollar. The other reason was there was no place to run, and the ensuing deflation would render financial assets worthless.
… its intrinsic utility is that it is legal tender.
In other words, the dollar is currency.
“central bank digital currencyâ€
With the exception of physical dollars, all dollars are “central bank digital currencyâ€, and they are accounted for on balance sheets. Replacing paper dollars with a plastic version does not change anything.
A currency must have a somewhat stable valuation over a short time interval. Inflation and deflation affect this valuation, but if these become extreme, people will choose to use a more stable store of value. (I am not getting into an inflation/deflation discussion.)
To be usable, a “central bank digital currency†would need some valuation. I know how many Snickers bars I can but with a dollar. and while that number may change, I have confidence that it will be about the same in one to five years.
Like gold coinage, the problem a fixed amount of dollars quickly alters the valuation with increased economic activity. The “Cross of Gold” will become the “Cross of Blockchain”.
Finally, there is no way to keep people from using alternative money. Cigarettes, postage stamps, and gift cards are used as money.