The Pretend World of Cryptocurrencies
Remember cryptocurrency? It was, is and always will be the “next big thing” in currency.
A quick refresher (or primer for those of you who have wisely ignored crypto from the very beginning):
Cryptocurrency is a made-up digital form of money. Its most well-known form is “bitcoin” which was made up by a pretend person named “Satoshi Nakamoto” who likely does not exist nor ever did exist.
This made-up person came up with this idea wherein people could “mine” digital “coins” with computers by solving complex math problems. Your computers solve the problem, get a coin.
Bitcoin, and all cryptocurrencies, are backed by… nothing. No hard assets (like gold), no future cash flows, profits and dividends (like stocks), no government (bonds), nothing. It’s just a bunch of bits and bytes that any random person can roll out of bed and create one morning instead of spending the day playing “Minecraft.”
I’m not kidding. You and I could create a crypto coin later today if we want. In fact, thousands of people have. Most of them are worthless. All of them should be, including bitcoin.
Now, I am sure there are some cryptofanboydouchenozzles who are reading this who are thinking:
1.) “This guy doesn’t know what he is talking about” and
2.) “What, if anything, actually backs the U.S. dollar, or any country’s currency for that matter?”
On the surface, both are valid points. In fact, I’ll concede point #1, just so we can all remain friends.
But point #2, well, now, that’s where the cryptodorks are dead wrong.
Because even though Nixon took us off the gold standard in 1971, the U.S. dollar is backed by the full faith and credit of the United States government. And the full faith and credit of the United States government is backed by you and me and every person and entity that pays taxes. And the fact that we pay those taxes in dollars (which like all other currencies, is a tool for exchanging and transfering value), is what gives the dollar its intrinsic value. That is, that you and I will agree to use it, and that there is a sovereign nation of taxpaying citizens who agree as well.
In other words, WE are the asset class that backs the U.S. dollar. If you don’t believe in the hundreds of millions of taxpayers, then, well, I guess you have cause to believe that the dollar is a scam just like bitcoin. But if you believe that, you’ve got much bigger issues than how our currency system functions.
Bitcoin, on the other hand, is a lousy medium of exchange, because its value bounces around like a toddler immediately after trick or treating. Who wants to use a currency where one day to the next, the cost of Pop-Tarts could fluctuate by 30%?
And as a store of value - i.e. an investment - well bitcoin sucks there too. Again, the price of bitcoin can fluctuate wildly from day to day and year to year. (Bitcoin is down 75% from its all-time high and is down 25% in the last five days.)
“Stocks suck too!” someone might protest. But at least stocks (in real companies, anyway) have the promise of future profits, cash flows and growth, of which you are entitled to your share as an owner.
Having said all this, you may or may not be aware of the latest complete, absolute, total annihilation of a crypto asset asshat.
This one’s name is Sam Bankman-Fried (SBF), the head of yet another crypto exchange, called FTX. He is a 30-year-old who is was a crypto billionaire until yesterday, when his estimated $15 billion went up in smoke. Yesterday, that amount fell to an estimated… WHO KNOWS? It might be zero.
FTX, which is headquartered in that bastion of corporate governance and transparency – the Bahamas - collapsed on Tuesday after what is being described as a “liquidity crisis.” What this means will be revealed in time, but if I were a betting man, I am guessing this is another classic “run on the bank.” (Too many people wanting to get their crypto out at once and it does not appear that the crypto is actually there.) This was one day after SBF tweeted out that everything was safe and everyone who had their crypto stored on FTX was safe. (That tweet was quietly deleted.)
Not so much. FTX was in trouble and turned to a rival, some guy named Changpeng Zhao, who runs a crypto exchange called Binance, for a bailout of FTX. Except it appears that there may be nothing to rescue. The two companies had some sort of non-binding agreement pending due diligence.
Ruh-roh. As of this writing on November 9, 2022, the Wall Street Journal is reporting that rescue is off. FTX is toast.
My guess? That due diligence, such that it was, turned up a couple of laptop computers and maybe an office fern. Like so many other crypto-related “assets” and businesses (dogecoin, NFTs, Terra Luna, Quadriga, Celsius, etc.) it’s all a bunch of digital horseshit, flung at “investors” by technovisionary charlatans. (Eventually, the regulators, the FBI, the SEC, the FTC and maybe the courts will have to figure all that out.)
(Side note: Tom Brady is among the celebrity endorsers of FTX. What a year he’s having…)
In the meantime, if you had your crypto stored on FTX, you may be good and well hosed. It pretty much no longer exists. Actually, it does still exist, but is anyone opening a new account and depositing real dollars there in exchange for crypto? Didn’t think so, though the line of people who want OUT starts at a Starbucks in Nassau, the Bahamas, and stretches around the solar system.
And if you do have an account and/or your crypto is officially recorded on the blockchain (blockchain is the public ledger where all crypto transactions are recorded) or on some account ledger somewhere, good luck trying to withdraw it and turn it back into something real (dollars, platinum, Pop-Tarts, whatever.)
At some point, one would think that if these exchanges keep going bust, that the world’s governments and regulators really should step in and start cracking heads.
But, maybe that is not necessary. The constant, incessant failures of crypto may be the best regulator of all. Don’t want to get burned by crypto? Great. Don’t buy it. That’s how markets work and, in the end, it may just prove to be another version of Beanie Babies and the Tulip Bubble in Holland circa 1635 (Look it up. It’s insane and yet, here we are almost 400 years later, watching the same movie.)
It brings to mind the old joke:
Patient: “Doctor, it hurts when I do this.”
Doctor: “Stop doing that.”
In other words: Crypto investor, heal thyself.
And as Abraham Lincoln, or maybe Charlie Brown in re: Lucy and the football, once said: “Fool me once shame on you. Fool me like 87 times over the course of a decade? That’s crypto investing!”
For those of you who did manage to get your money out of FTX, you could always invest in Twitter. That seems like it’s going really well.