Crypto Crash: Will Crypto Recover?
It’s hard to see red flags when you’re wearing rose-colored glasses.
In the middle of a sweltering summer cooled by a crypto winternow seems an ideal time to reflect on why cryptocurrencies have lost a staggering $2 trillion since they were high in 2021. In my opinion, that is because the motivation for a significant portion of those involved in trading forex has less to do with a genuine attraction to its utility and more to do with its status as a speculative asset that can be profited much money.
Or, in the case of the current crypto winter, lose a lot of money. The Billion Bitcoin question now is whether cryptocurrency as an industry will come roaring back.
I do not think so. Let me explain why.
What can we learn from Meme stocks?
Last year, a media frenzy apparently followed bizarre increase in GameStop stock. What made it so strange is that the stock that grew in value was objectively not linked to a healthy financial company with a strong outlook. Most people involved in the concerted effort to artificially inflate GameStop’s stock price saw the whole thing as a joke. Their actions were less about believing in the company’s value than finding a loophole to create massive wealth, inflicting financial pain on elite investors who shorted GameStop, and comically pointing out the weaknesses of our financial system.
The same is true when it comes to why someone would be motivated to buy Dogecoin. The purchase is less about a deep belief in Dogecoin itself and more about confidence in the wider market. Although it may seem like a meaningless distinction, the reason people become involved in an endeavor can play a significant role in determining its persistence. In other words, people will flock to cryptocurrency when they can make money, but will leave in droves when they lose their shirts. Sure, true believers can “buy the dip”, but eventually the floor falls through when there is no real foundation.
It seems crucial to note that the current crypto winter hit directly after a massive, concerted effort by the industry to gain mainstream adoption. Greater awareness did not lead to greater adoption, as demonstrated by last matches by Coinbase, the most famous cryptocurrency exchange. «Crypto Super Bowl” was followed by a fumble, with now-infamous commercials featuring Matt Damon and Larry David that appealed to a sense of FOMO about making money rather than articulating any actual utility cryptocurrency might have. But is that tool legitimate?
Major macroeconomic trends can put downward pressure on the economy and create high inflation, and a selling point for cryptocurrency has always been that it acts as a hedge against inflation. So, for all those Super Bowl viewers who were inspired to be brave and buy currencies like Bitcoin (which was over $42,000 then), what happens now? Well, Bitcoin is currently on around $20,000which is a far worse economic blow than the weakened purchasing power of 9.1 percent inflation (from June 2022) in the USA. So much for Bitcoin is one hedge against inflationwhich has been an important selling point for its advocates.
People attracted to speculative assets may see this as an opportunity to buy the dip, but the masses who got burned by the hype will likely see this as their opportunity to hit the eject button. Their motivation to enter the market was weak (FOMO, make a quick profit), which will quickly erode when they lose money.
Is cryptocurrency useful?
Here’s an important question: What problem does cryptocurrency solve? It is certainly not used in normal transactions. And why would it ever be? Apart from the fact that crypto transactions are cumbersome and slowis the process of mining terrible for the environment, the industry has clearly made a Faustian coup to position cryptocurrency as a speculative asset as opposed to a game-changing technology. The industry needed to advertise cryptocurrency as a speculative asset because the core community that finds utility in cryptocurrency as an alternative to government-based ones is never going to become mainstream. So the narrative about blockchain is not “This technology is cool,” but rather “This technology is cool because you can make a ton of money.”
When I had conversations with people about Bitcoin a decade ago (yes, it’s that old), our discussion was full of references to subjective nature of fiat currency (which is money that a government declares as legal tender), the risk to the US dollar, and the madness of President Nixon getting the US off the gold standard (where all money is backed by gold). So if you were a libertarian with a skepticism about the US government and its banking system, cryptocurrency solves a big problem because it creates a meaningful financial system outside of government. But the average person didn’t get involved in cryptocurrency because they don’t like Uncle Sam; they got involved because they like Matt Damon.
On the face of it, the narrative of investing in crypto seems eerily similar dot-com boom where investors thoughtlessly backed companies because they were watching someone e-commerce attempt as a sure path to riches rather than believing in the underlying purpose and value of the company. So is the boom-and-bust cycle of Beanie Babies, a plush toy that evolved into a speculative asset that defied logic, which played out in the 90s. Why did so many people invest in Beanie Babies? And why did so many people invest in dot-com companies that had shaky business models?
The answer: because the fear of missing out on making a lot of money clouds our judgment. So instead of questioning why people invested in Beanie Babies and Pets.com, everyone else just saw others being whipped into a lather, so they followed suit.
Of course, it collapses when the easy money stops flowing. The Beanie Baby craze wasn’t about the huge appeal of deliberately understuffed stuffed animals; it was about the thrill of making easy money. When that promise ended, a significant portion of the audience disappeared.
Likewise, the cryptocurrency crowd can be divided into the true believers and the I’m-here-because-I-can-make-a-lot-of-money crowd. The crypto winter shakes the latter group out of their stupor and they stop getting involved in cryptocurrency since they were never involved because they cared about the technology. They were only there to make money.
Do Investors Understand How Blockchain Works?
I often use a Mark Twain quote as an important guide to whether or not a given technology is likely to have mass adoption: “The more you explain it, the more I don’t understand it.” A few weeks ago I had a conversation with another crypto skeptic about why so many people get involved in NFTs when, to many people (myself included), it all smacks of get-rich-quick, boom-and-bust hype -cycle where people actually only own a jpeg. Advocating, of course, peppering conversations with a word salad of newfangled terms to justify the seemingly unjustifiable value judgments. Why would people fall for this?
Our conversation centered around the two main choices a person has when confronted with information that doesn’t make logical sense. For me, my brain goes from “This doesn’t make much sense” to “Therefore getting involved in NFTs is illogical.” Other individuals take the complete opposite approach, assuming that their inability to understand the value of NFTs is simply their inability to understand a strong technical concept.
For these people, the fact that others are making a lot of money from NFTs is proof that the concepts are good, they are just not able to fully understand them. In other words, “I don’t see how this makes sense, but it must make a lot of sense because so many other people are getting involved and making a lot of money from NFTs.”
NFTs don’t make sense for a very good reason – they’re junk.
Should You Use Cryptocurrency?
For me is million-dollar pizza early in Bitcoin’s history is what highlighted its inability to truly serve as anything other than a speculative asset. As the story goes, Florida resident Laszlo Hanyecz paid 10,000 bitcoins for two large pizzas, which, even with today’s reduced Bitcoin value, comes in at a cool $240 million. The really interesting part, though, is how the story is usually framed: If only this guy didn’t spend his cryptocurrency, he’d be rich!
Poor Lazlo made the mistake of believing Bitcoin’s narrative that it is a currency, and he paid handsomely for it. If he had recognized it as a speculative asset, he would be on a yacht right now.
Similarly, the past year has cast a dark cloud over the industry because so many people who entered the space for the first time after being bombarded by commercials, celebrity affiliations and renamed stadiums have been burned. Sure, people may be whipped into a lather with new crypto-financial mechanisms like NFTs, but when their NFT value drops they will start to question why they spent so much money to own a jpeg.
