It’s hard to see red flags when you’re wearing rose-colored glasses.
In the middle of a sweltering summer cooled off by a crypto winter, now seems an ideal time to reflect on just why cryptocurrencies have lost a staggering $2 trillion since their high in 2021. In my opinion, it’s because the motivation for a significant portion of those involved in trading currency has less to do with a genuine attraction to its utility and more to do with its status as a speculative asset through which one can make a lot of 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 don’t think so. Let me explain why.
Will Crypto Recover?
What Can We Learn From Meme Stocks?
Last year, a media frenzy followed the seemingly bizarre rise of GameStop stock. What made it so strange is that the stock that was growing in value was not, objectively speaking, attached to a healthy financial company with strong prospects. Most people involved in the concerted effort to artificially elevate GameStop’s stock price saw the entire affair as a joke. Their actions were less about believing in the company’s value than finding a loophole to create massive wealth, afflicting financial pain on elite investors who were shorting GameStop, and comically pointing out the weaknesses of our financial system.
The same goes 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 its broader market. Although that may seem like a meaningless distinction, the reason why people get involved in an endeavor can play a significant role in determining its staying power. In other words, people will flock to cryptocurrency when they can make a quick buck but will leave it in droves when they’re losing their shirts. Sure, true believers can “buy the dip,” but eventually the floor falls through when there’s no real foundation.
It seems crucial to note that the current crypto winter struck directly after a massive, concerted effort from the industry to gain mainstream adoption. Greater awareness didn’t lead to greater adoption, as showcased by the recent struggles of Coinbase, the most well-known cryptocurrency exchange. The “Crypto Super Bowl” was followed by a fumble, with now-infamous commercials starring Matt Damon and Larry David that appealed to a sense of FOMO about making money rather than articulating any actual utility cryptocurrency may have. But is that utility legitimate?
Large macroeconomic trends can exert 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 of those Super Bowl viewers who got inspired to be brave and buy currencies like Bitcoin (which was over $42,000 then), what happens now? Well, Bitcoin currently stands at around $20,000, which is a far worse financial hit than the weakening purchasing power of 9.1 percent inflation (as of June 2022) in the United States. So much for Bitcoin being a hedge against inflation, which has been a major selling point for its advocates.
People who are attracted to speculative assets may see this as an opportunity to buy the dip, but the masses who were burned by the hype will likely see this as their opportunity to hit the eject button. Their motivation for entering the market was weak (FOMO, making a quick profit), which will quickly erode once they lose money.
Is Cryptocurrency Useful?
Here’s an important question: What problem does cryptocurrency solve? It’s certainly not used in regular transactions. And why would it ever be? Aside from the fact that crypto transactions are cumbersome and slow, the process of mining is terrible for the environment, the industry has clearly made a Faustian bargain in positioning 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 isn’t ever going to be mainstream. So, the narrative about blockchain isn’t “This tech is cool,” but rather, “This tech is cool because you can make a ton of money.”
When I had conversations with people about Bitcoin a decade ago (yeah, it’s that old), our discussion was littered with references to the subjective nature of fiat currency (which is money that a government declares as legal tender), the risk of the U.S. dollar, and the folly of President Nixon getting the United States off the gold standard (where all monies are backed by gold). So, if you were a libertarian with a skepticism toward the U.S. government and its banking system, cryptocurrency does solve a major problem because it creates a meaningful financial system outside of the confines 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 its face, the “invest in crypto” narrative seems eerily similar to the dot-com boom in which investors mindlessly propped up companies because they viewed any e-commerce endeavor as a sure path to riches instead of believing in the underlying purpose and value of the company. The same goes with the boom-and-bust cycle of Beanie Babies, a plush toy that evolved into a speculative asset that defied logic, that played out in the 90s. Why were so many people investing in Beanie Babies? And why were so many people investing 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 were investing in Beanie Babies and Pets.com, everyone else just saw that others were getting whipped into a lather so they followed suit.
That, of course, comes crashing down when the easy money stops flowing. The Beanie Baby craze wasn’t about the immense attraction to intentionally underfilled plush animals; it was about excitement over making easy money. Once that promise ended, a significant portion of the audience faded away.
Likewise, the cryptocurrency audience can be divided into the true believers and the I’m-here-’cause-I-might-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 just there to make a buck.
Do Investors Understand How Blockchain Works?
I often use a Mark Twain quote as an important guide for whether a given technology will likely have mass adoption or not: “The more you explain it, the more I don’t understand it.” A few weeks ago, I was having a conversation with another crypto skeptic about why so many people are getting involved in NFTs when, to a lot of people (myself included), the whole thing reeks of a get-rich-quick, boom-and-bust hype cycle where people effectively just own a jpeg. Advocates, of course, pepper conversations with a word salad of newfangled terms to justify the seemingly unjustifiable valuations. Why would people fall for this?
Our conversation centered around the two major choices that a person has when confronted with information that doesn’t make logical sense. For me, my brain goes from, “This doesn’t make a lot of sense” to “Therefore, it’s illogical to get involved in NFTs.” Other individuals take the entirely opposite approach, assuming that their inability to grasp the value of NFTs is merely their inability to understand a heavily technical concept.
For these people, the fact that others are making a lot of money on NFTs offers proof that the concepts are sound, they’re just unable to fully understand them. In other words, “I don’t get how this makes sense, but it must make a lot of sense because so many others are getting involved and making a lot of money off of NFTs.”
NFTs don’t make sense for a very good reason — they’re nonsensical.
Should You Spend Cryptocurrency?
For me, the million-dollar pizza early on in the history of Bitcoin is what highlighted its inability to truly serve as anything but 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, however, is how the story is typically framed: If only this guy didn’t spend his cryptocurrency, he would be rich!
Poor Lazlo made the mistake of believing in Bitcoin’s narrative that it is a currency, and he paid handsomely for it. If he had recognized it as a speculative asset, he’d be on a yacht right now.
Likewise, the last 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 tie-ins, and renamed stadiums have been burned. Sure, people can get whipped up into a lather with new crypto financial mechanisms such as NFTs, but once their NFT value drops they’ll start questioning why they spent so much money to own a jpeg.