Tales From the Crypto

Turns Out I'm Going to Complain About Cryptocurrency After All

This was supposed to be a Florida swamp but DALL-E really struggled with combining that with Dutch tulips

I rarely – for good reasons – attempt to be “timely” with these pieces.¹ This time, however, fate has smiled on me by creating a huge news story that is coincidentally about a topic I’ve spent almost a year working on. Which means that despite recently declaring crypto to be a subject I missed out on, it’s back in the news thanks to the unbelievable collapse of burgeoning empire of the ridiculous Sam Bankman-Fried.

If you’ve managed to avoid reading about the clown that was dubbed The Next Buffet – although, in fairness to Fortune, if they meant chilling in the tropics, they nailed it – I give you a pair of choices. First, this fawning profile from a “journalist”² working for CNBC that came out two months before the FTX collapse. Second, skip forward two months and read this fantastic piece in New York that explains the situation and includes a fascinating discussion on the effective altruism angle. But if you’re lazy and don’t want to read either, just know this: some dude built a crypto empire, became fabulously wealthy, donated huge amounts of money to charities and politicians, and was a complete fraud who was so ridiculous he may pull off the most impressive thing in modern American life: going to jail for white collar crime.

Part of this is that after a brutal year for cryptocurrency, here is one more massive blow. It was less than a year ago that you couldn’t watch an NFL game without seeing this:³

Now, instead, crypto is the Miami Heat desperately trying to change their arena name.  The crypto market has cratered, and true believers try and assure themselves this is merely another crypto winter, the equivalent of a bear market. They shall rise again.

The problem is that’s probably not true. Because the situation goes far deeper. And it is, simply, that cryptocurrency – as currently devised – cannot work. And I feel I am well placed to state that for the simple reason that I am not an expert on blockchain technology. I can barely explain how it works! This just so happens to be why cryptoenthusiasts claim I am unqualified to talk about it. But last I checked, there weren’t any Super Bowl ads with Larry David to sell crypto to blockchain engineers. This point is so important I’m going to do something I never do and bold my text: the technology behind cryptocurrency is completely and utterly irrelevant to why it is fatally flawed. And, frankly, if you think there’s an engineering or mathematical solution to a human problem, you are behind anyway.

The problem with cryptocurrency is that it cannot be everything it wants to be.

There are essentially two versions of cryptocurrency. The more prominent version is the one that Sam Bankman-Fried – or should I say SCAM Bankman-Fried? Get it? Get it? I’ve got jokes now! – and Gwyneth Paltrow and Shaquille O’Neal and Tom Brady and Reese Witherspoon pitch, which is an investment. Buy crypto, get rich. Its price will go up because other people will want to buy it too.

I don’t want to purely pick on the crypto people. I think someone much smarter than me could write an excellent piece about the transformation of stock markets from a societally beneficial way of growing businesses to the world’s most dangerous and ugly casinos. But the Bankman-Fried version of crypto really is divorced from reality. Something having value because other people will want it in the future is not valuable. Real commodities have intrinsic value. Whether it’s shares of Amazon, real estate, artwork, or oil, those things have actual value to them separate from “someone else will want it more.” I’m not even reinventing the wheel here. Countless people have pointed this failure out, including the real Warren Buffet, who long ago accurately described it as “not producing anything.” Cryptocurrency is as worthless as Beanie Babies unless it has some real value.⁴

This is where the other version of cryptocurrency comes in: cryptocurrency as an actual currency. Which, well, why? Cryptocurrency enthusiasts make a lot of arguments in favor of why crypto should exist, and, frankly, they generally leave one baffled as if that person has interacted with the world. The best argument I know of is that theoretically it is beneficial to have a currency that exists outside of the control of government. As someone who is constitutionally leery of authority, I buy this idea. Granted, much of it is overblown, because at the end of the day, barring a world where it achieves near universal acceptance, it needs to be converted into fiat currency or it is functionally worthless. That said, yes, theoretically this is valuable. And if this seems like I’m endorsing a way to make illegal activity easier, I most definitely am. Something useful for circumventing sanctions – a policy mechanism where the cruelty is only matched by the ineffectiveness – is useful. Of course, whether this actually works is unclear. Crypto’s performance during the Canadian trucker protests, its biggest test yet, was uneven. But certainly, you can imagine the benefits of anyone from Harriet Tubman to Solidarity having access to a stable currency not controlled by a government. So sure, I can see the theoretical value.

But that’s about it. How much do we need that? Let me pitch you on a currency. It’s accepted by almost everyone in the world, and the places it isn’t accepted I can convert it into what they do accept. I can transfer it electronically with the greatest of ease but also easily convert it into a form that makes it untraceable except to the most determined efforts. If someone steals it, I can report it to the state. And – relevantly – if anything happens to my bank, the currency is guaranteed by the most powerful government in the history of mankind. What is this amazing currency? It’s called the United States Dollar.

Here’s where my favorite quirk of cryptoenthusiasts comes in: an absolute obsession with inflation. Cryptocurrency is supposedly a hedge against inflation, or, at least, monetary inflation. There’s lots of talk about printing presses and such. To which I ask, if inflation is theft, what the hell is this?

Bitcoin value over the last year also showing you how late I published this

Look, you can’t be both a currency and a high yield investment. The entire value of a currency is in the ability to use it. I’m sure this level of dumbing down is making the economics majors out there retch, but at the end of the day, the dwindling dollars I have in my bank account are valuable to me because I know the good folks at Chewy.com will accept them in exchange for my dog’s preferred food. And they’ll accept them in part because they know that, even with inflation, it’s still going to be worth tomorrow essentially what it was worth last week. They’re not going to want to accept my Meta stock. And anything that can collapse that quickly and steeply is going to make for a terrible currency. Moreover, it would still be a terrible currency even if we looked at the charts where Bitcoin surged upward. I love the good folks at Chewy.com, but if I thought my dollars could be worth significantly more if I wait a week, I’m not going to want them to have my dollars.

If I want a good currency, I want stability.⁵ Massive volatility is exactly the kind of thing that cryptoenthusiasts point out as a problem with so-called fiat currency, yet they rapidly accepted it to make a lot of money. And if it has no use as a currency, well, we’re back to it having no value. And thus, although I’m sympathetic to the theoretical version of cryptocurrency, the Sam Bankman-Fried version of cryptocurrency is, like him, a fraud and a failure.

And it’s likely this Crypto Winter is not just a brief pause because in addition to stability, currency works well when it has public confidence. Even if we accept that cryptocurrency was a good theory that could have had useful applications but was quickly overrun by frauds and fools – with the difference, like the devil, being in the details – that really doesn’t matter that much. What matters is that this type of high-profile embarrassment is not going to be quickly forgotten by, well, people like me. Regular folks. And that’s who matters when it comes to crypto. Rich people who can code are great, and maybe they can have a little currency they use like drink tickets at a happy hour. It’s like why the once vaunted “Web 3” was so unlikely. You cannot create anything valuable designed solely for people who have money and coding abilities. Or, you could, but you won’t, for the same reason crypto failed: greed.

At the end of the day, you have the same problem that the early internet had: there’s just not a lot of money that can be extracted from the small amount of people who can understand the technologies. There’s a reason that WebTV made it possible for people to just plug into the internet from their TV. There’s a reason AOL mailed roughly a billion⁶ CDs to people to try and get them online. The internet was always going to be more profitable the more people used it. You can make some money off the outer party, but at the end of the day, you need the proles to make real money.⁷ And convincing them you’re a giant scam isn’t the correct way to go about it.

If there’s one thing I’d hope we can take from the cryptocurrency saga it is simply this: let’s all try and be a bit more skeptical. That may seem odd considering, well, the very name of this Substack. But it’s true. Remember that when you read something from a journalist there’s a strong chance it’s just corporate PR. Remember that even the most talented and respected writers can pull a Michael Lewis and have no clue what they’re talking about. Remember that those who achieve respectability are often not reluctant to cash it in. Remember that just because someone can code or is highly educated or is rich does not mean they are smart and certainly does not mean you should trust them. Remember that I’m probably just as full of shit as everyone else and 99% of what I write is wrong. Remember that every single new technology – from code to a tractor to a way of throwing a baseball – should have to do a great job of answering “why do we need that?” before we get too excited about it. And, perhaps most importantly, remember that we’ve had about 12,000 years of human civilization and in that time, we’ve built a lot of things – both physical and intangible – and some we’ve done pretty well. As excited as we should be about what’s to come, we should have appreciation for what’s come before. That means that some technologies don’t need disrupting. And that means somethings are eternal, like any time we can invent something new, there will always be someone there who figures out a way to make a quick buck off it. Because it’s a lot easier than working for a living.

1. As it turns out, this one will not be that timely either. I originally wrote this intro following the last piece then came down with some nasty sickness. I’ve done a lot of writing in my life, and I know that it is probably best to avoid writing while not in possession of my faculties. I’m no Hunter S. Thompson. Following that was American Thanksgiving so I skipped that week as well. Thankfully, the hilarious Sam Bankman-Fried news keeps coming out so I’m still a little bit timely.

2. Look, this is perhaps unfair, I’m sure Kate Rooney is a wonderful human being who loves her dog and volunteers at a soup kitchen. But the state of financial “journalism” is embarassing, and I highly suggest reading that article and then reading her Twitter feed. Perhaps she’s done this elsewhere, but I see no apology for writing a corporate PR piece less than two months before his empire imploded. My favorite is it included the line “Similar to Buffett, he lives modestly. Bankman-Fried shares a house with 10 roommates and a Goldendoodle named Gopher.” You can see what a modest $40 million home in the Bahamas looks like. I entreat you to remember that every time you ever read or see anything on CNBC.

3. Matt Damon takes a lot of crap for this but never forget that Spike Lee pushed crypto by making it a social justice issue. It may also be useful to remember this the next time Spike Lee weighs in.

4. The irony here is that there’s something that does not have intrinsic value that is extremely useful: fiat currency! But it’s incredibly useful as a currency, despite being used as an epithet by cryptoenthusiasts.

5. There’s long been a movement inside crypto for something called a stablecoin which would try and avoid these problems. The less said about the reputability of the most prominent stablecoins, the better.

6. This is not an exaggeration.

7. This is even more true with cryptocurrency. I can’t state this enough, but money only exists to buy goods and services. If you can’t use it for that purpose, it’s worthless except to get someone else to give you real currency to use.