(Composite by Hannah Yoest / Photos: Shutterstock)
Noah Smith has a post wondering if maybe crypto might just, you know, go away?
Not literally go away. The blockchains will still exist. (Supposably?) But the idea of using blockchain for monetary and/or financial purposes could go away.
Now, there’s no reason the fall of one single exchange, or one single rich guy, has to be apocalyptic for the crypto space as a whole. There are still plenty of places you can easily trade crypto (Coinbase, Binance), and the whole ecosystem is probably less leveraged than it was when Terra and Luna crashed earlier this year. And yet friends who work in crypto tell me that people in the industry are more pessimistic than they’ve ever seen them. Some on Twitter wondered if this was the beginning of the end for crypto itself.
That’s almost certainly overdone — you can’t really kill crypto, given its decentralized nature, and lots of people will still work on it. But I think the pessimists are right to be pessimistic, because the way that FTX fell suggests that crypto simply hasn’t been able to overcome some of its central weaknesses.
There are, as I see it, three main problems for crypto.
(1) It’s yield-farming all the way down. As Smith puts it:
We often forget this fact in the modern world of hedge funds and trading platforms, but finance is supposed to actually finance stuff. Ultimately, the purpose of finance is to channel capital to productive businesses so that the economy can grow. The “high finance” of fancy derivatives and ETFs and hedge funds and junk bonds and all that stuff is just a superstructure that’s built on the foundation of real productive assets. Sometimes the superstructure can outgrow the foundation and collapse, as we saw in 2008. But the foundation is still there.
Crypto is basically just the superstructure without the foundation. . . .
Sam Bankman-Fried embraced the idea of high finance with no real foundation. In a startling interview with Bloomberg back in April, he admitted that much of the asset creation that went on on his platform — called “yield farming” — was made up of pure Ponzi schemes. But in the end, it turned out that this was basically how his own trading company, Alameda, was making its money as well.
Not great.
(2) It can’t really be regulated. One of Matt Levine’s running jokes about crypto is that the people doing it are in a speed-run of reinventing all of traditional finance. Just, like, on your phone or whatever.
One of the selling points of crypto is that it can’t be regulated.
But one of the truths of traditional finance is that if it’s not regulated pretty rigorously, then it destroys value for the system.
People in finance hate government regulation. But if we didn’t have regulation, then the industry would fall apart under the cumulative weight of a million scams. Regulation builds trust. Trust attracts investment.
Saying that crypto is “trustless” sounds nice. But unless there’s someone with guns making rules and putting the rule-breakers in jail, it’s not really trustless.
If crypto can’t effectively be regulated, then it will not be able to sustain investment in the long term.
(3) Criminals can’t use it anymore. The original killer-app for bitcoin was basically, “Uh, you can buy drugs with it, dude.”
Not just drugs, but anything that you wouldn’t want people to know you were buying. Crypto’s primary use-case was as a way to avoid law enforcement.
That doesn’t really work anymore. Crypto turns out not to be as anonymous as cash, because at some point you have to convert it out and the police can track your progress through the blockchain and then arrest you when you finally make your withdrawal.
So if criminals can’t use crypto, and big institutional investors won’t touch crypto, and normal retail people can’t trust crypto . . . then who exactly is the market for this technology?
Ben Dreyfuss has a tiny aside from the Musk-Twitter follies that shouldn’t be forgotten:
Elon Musk sent a tweet tonight:
Great! Sounds good!
I genuinely wish him well. The problem is that over the last decade we have seen time and time again that mobs of people playing detective on social media do not lead to accuracy. They lead to people being falsely accused of the Boston Bombing. They lead to people being told about false flooding after Hurricane Sandy.
Facebook and Twitter and journalism publications have spent years trying to mitigate the negative truths about social media when it comes to spreading truth online.
But if Musk can fix that then great!
It would be great!
And I am going to say that and then put my night cap on and begin to go to bed and, uh oh…
On a call a friend of mine says that it’s like the end of a fever dream. There was Trumpism and Trumpism seemed to be pointing in a very clear direction – towards a questioning of the legitimacy of the democratic process, towards political violence. And the takeaway from Tuesday was that enough people had finally had enough (at least for now). . . .
That sense of the fever dream breaking extended as well to the left. I was really shocked – I dedicated a whole Commentator piece to it – by the set of ‘retractions’ that appeared in legacy liberal publications over the last couple of weeks, with an implicit understanding that liberals had dropped the ball and allowed extremist progressive positions to push too close to the mainstream (these included a condoning of cancel culture and internet censorship, overzealous interventions during the pandemic and on global warming, as well as – although the articles discussed last week didn’t happen to be about this – an indulgence of defund and abolition movements). Defund – and the hands-off law enforcement practiced in San Francisco, Portland, etc – almost meant disaster for Democrats. Crime turned out to be a winning Republican issue, just as it had in the ’80s, nearly balancing out abortion and extremism. And Democratic politicians – the people who spent the whole cycle distancing themselves from defund positions – must have by now an acute sense of just how readily an association with progressivism can backfire and how quick the GOP has been to turn that to their advantage.
That’s the mood this morning – relief, like the ghost of the old Democratic Party managed somehow to hold the line, Fetterman riding into battle like the Cid and still somehow winning a close election even without being able to, you know, debate or speak or do any of the things one would normally expect of a politician; Biden himself a bit like the Cid, no longer in fighting trim but keeping things together just enough for the cause to survive.
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