“Crypto has a chance of becoming an agreed form that people who are looking for safety hold wealth in,” Larry Summers said, in his capacity as a paid contributor to Bloomberg’s “Wall Street Week” program. “My guess is that crypto is here to stay, and probably here to stay as a kind of digital gold.”
Summers’s comments came at a time when crypto proponents faced one of their most daunting weeks in recent memory.
Bitcoin was besieged on all sides, whipsawed by another about-face from an increasingly mercurial Elon Musk, a Treasury report urging US tax authorities to adopt a more aggressive approach to monitoring transactions and a pair of declarations out of Beijing, where officials plan to “crack down” on crypto.
Bitcoin fell some 25% from Friday to Friday (and 30% intraday on Wednesday). Ether dropped nearly 40% over seven sessions.
Summers cited humanity’s long standing “desire to hold an asset that feels apart from the day-to-day workings of governments.”
That’s a role traditionally played by gold which, as I never tire of reminding folks, has (virtually) no intrinsic value. In that regard, gold is no different from paper money. Yes, it’s relatively scarce. So, no, gold can’t be conjured at will like dollars. But you can say that of any number of scarce things, many of which are far more useful than gold.
The Aztecs were famously befuddled at the Conquistadors’ obsession with the yellow metal. By way of explanation, Hernán Cortés (allegedly) told the people he planned to pillage that: “I and my companions suffer from a disease of the heart which can be cured only with gold.” I doubt that cleared up the confusion, but the Aztecs (and the Inca) would soon learn just how serious that affliction could be.
“One fact that gives even crypto skeptics like me pause is the durability of gold as a highly valued asset,” Paul Krugman wrote this week, amid Bitcoin’s gyrations. “Gold, after all, suffers from pretty much the same problems as Bitcoin,” he added, noting that although “people may think of [gold] as money, it lacks any attributes of a useful currency.”
And yet, centuries on, people still suffer from the very same “disease of the heart” which, in part, drove Cortés and his “companions” to commit genocide in the new world.
Krugman’s assessment of Bitcoin (and cryptocurrencies in general) was familiar. “Twelve years is an eon in information technology time,” he wrote, adding that,
By the time a technology gets as old as cryptocurrency, we expect it either to have become part of the fabric of everyday life or to have been given up as a nonstarter.
I’ve been in numerous meetings with enthusiasts for cryptocurrency and/or blockchain. In such meetings I and others always ask, as politely as we can: “What problem does this technology solve? What does it do that other, much cheaper and easier-to-use technologies can’t do just as well or better?” I still haven’t heard a clear answer.
Neither have I. A dozen years later, I doubt there is one — a clear answer to those simple questions, that is.
I also doubt seriously Summers’s suggestion that regular people will develop the same “disease of the heart” for Bitcoin (or any other cryptocurrency) as humans historically suffered from in relation to gold.
I can, if I choose, buy physical gold and hold it in my hand. I can hoard it, if I want, and while the government can attempt to confiscate it, I can hide it in the yard or choose to die behind it, depending on just how “diseased” my “heart” really is.
The same can’t be said of Bitcoin. Even coins in “cold storage” don’t exist without electricity or computers. (Can you plug a thumb drive into a tree trunk?)
Cryptocurrencies may be “apart from the day-to-day workings of governments,” as Summers put it, but they aren’t “apart” in any other sense. They don’t exist in the same way gold does. “Bitcoin,” like a “dollar,” is not an objective reality. Gold is. Gold exists without humans. Bitcoin and dollars don’t.
Bitcoin, gold and dollars are equally worthless intrinsically, but Summers’s “apartness” argument doesn’t hold up, at least not if gold is the standard of comparison.
In the same linked article (above), Krugman offered a straightforward and, frankly, devastatingly concise critique. “Why are people willing to pay large sums for assets that don’t seem to do anything?,” he asked, on the way to saying that,
The answer, obviously, is that the prices of these assets keep going up, so that early investors made a lot of money, and their success keeps drawing in new investors.
A long-running Ponzi scheme requires a narrative — and the narrative is where crypto really excels.
Crypto boosters are very good at technobabble — using arcane terminology to convince themselves and others that they’re offering a revolutionary new technology, even though blockchain is actually pretty elderly by infotech standards and has yet to find any compelling uses.
But if blockchain is “elderly,” gold is Methuselah. And, again, gold has no “compelling uses” either, other than as a portfolio hedge, and even there, it’s often unreliable.
“Diseases of the heart” are not easily cured. But diseases of the mind are even more intractable. And gambling is a disease of the mind.
Read more:
For The Crypto Crowd, It’s Soul Searching Time
Acknowledging Gravity: Notes On The Crypto Meltdown
Blockchain is a very useful technology as a distributed immutable database for tracking transactions and contracts between organizations. Unlike Crypto, this use does not provide for any anonymity, on the contrary, is provides excellent traceability.
If it’s so superior, why hasn’t the entire world adopted it after 12 years?
And please, spare me the case-by-case, “well, actually…” response.
When a truly superior technology comes along, it dominates. iPhone wiped out BlackBerry, for example. Nobody rides a horse up the highway when they go on vacation. And on, and on.
I don’t mean to be derisive, but is there just no point at which people admit the obvious? Does reality just not matter?
Spot on. This is my go to argument as well and nobody has a satisfactory response — where are all the “smart contract” enabled applications that ETH and other cryptos have promised for over 5 years now?
If this was actually analogous to internet in the 90s then we’d have real-world services migrating to crypto. As far I can tell, none are.
Smells like tulips to me.
As it stands now none of the crypto use cases are better than the fintech solutions that have emerged in the past few years, and it’ll likely be that way for a while since a compelling UI for crypto is still lacking. Even sending crypto wallet to wallet is nerve wracking (though easy enough). So you’re correct here.
However, the fact that crypto can potentially do fintech and legacy finance’s job without relying on centralized authorities (companies, governments, etc.) is undeniably powerful, even though this very decentralization brings problems of efficiency and may spur government intervention. To say that ‘we’ don’t need that is to assume that ‘we’ are all JPM or that JPM interests are ours.
Lastly, btc provides an easy way to turn (marginal) energy into money. While this is deemed a failure by the greenwashing press, it remains another revolutionary use of computing power. If I had idle PC power in the past, the best I could do would be donate it to SETI or folding proteins. Now I can participate in a public finance platform and get rewarded for doing so. Yes, this game is currently rigged by ASICs and large miners, but that doesn’t change the inherent utility (where everyone with a computer now has the fabled money tree). The current economics of energy arbitrage lead to solutions like pumping water up a hill, flaring methane, and Elon Musk’s battery farms. Mining coins provides an opportunity to bring rationality to this space.
Certainly, the ease of wallet to wallet transfer is something I’d want in bank accounts. I’m getting mighty fed up with SWIFT and 1 day or let alone 3 days transfers…
This seems disingenuous. There are dozens of ways to move money from account to account instantaneously. If I want to transfer money to someone and they use the same bank as me, I can do it right now, this second, in multiple ways. And that’s to say nothing of the myriad apps that do the same thing. Society simply doesn’t have the problem people claim crypto is trying to solve.
Ironically, the most expeditious way to solve this purported “problem” is to go down to the ATM, take out $20, and then go to the store with it. That “transfer” is as instant as instant gets, and it’s as settled as settled gets. “Hi, I’d like to buy this package of sponges.” “Great. They are $5.99.” “That’s fair, here’s a $20.” “Here’s your change, your sponges, and a receipt.” If I’m at Walmart, I even get a free, reusable, eco-friendly bag out of the deal.
I could counter-fact you. Electricity was known since Antiquity, thunder got tested famously by Benjamin Franklin in the 1750s. It would take more than a century of attempts to get to Edison and his light-bub (1880s). And some parts of the USA weren’t electrified till the 1960s.
My point is – some stuff takes time. Emails existed in the early 1970s. When I started working, late 90s, they were just becoming ubiquitous.
If we ever get fusion, nanotech or 3D printing to work at scale, those technologies will have been researched and experimented with for several decades.
You reckon hunter gatherers knew how to make lightbulbs and also lamps, but decided “Meh, not worth it”?
And there are plenty of places in the world right now that aren’t electrified. For the most part, it’s not because those folks don’t see the utility (no pun intended) in electricity, it’s a matter of politics and building the infrastructure. Outside of Pyongyang, North Korea is dark at night. And yet, they have nukes. Keeping the people in the dark (figuratively and literally) is a political choice.
3D printing isn’t ubiquitous among regular people because it’s not clear what the benefit to someone at home is of 3D printing something when they can just drive down to the store and buy a Made-in-China version of whatever it is for $9.
I think you’re being a bit obtuse. This is an extremely laborious conversation and proponents’ attempts to rationalize only come across as more and more belabored the harder they try.
The fact is, neither crypto nor blockchain has achieved anything like widespread adoption. And we’re (what?) a dozen years in. You’re suggesting we could go a century or maybe even millennia (your reference to “antiquity”) and you still wouldn’t accept this as settled.
Absent a significant medical advance (maybe nanotech), that presumably means you and I aren’t likely to live long enough to decide this debate.
Long live “New Coke.”
I’ll say you were right if BTC goes back down to being worth a couple of hundred bucks. THAT’d settle the debate.
And your arguments about political will is what I was aiming at. When you are changing industries (or trying to), there’s a lot of real world stuff to work out, it’s not just “roll out a new app”.
Indeed, if we could truly optimize existing tech/existing software (let alone near future AI systems), lots of jobs would disappear but so many of our companies, having existed for decades, are cobbled together with legacy systems etc. requiring lots of humans to compensate.
So sorry but I don’t think I’m being obtuse. As I said, if you’re right, I imagine the price action will validate you sooner rather than later.
I agree that, long term, block chain makes a lot of sense to record/transfer property rights. However, imagine the number of lawyers, title companies, government record keepers and potentially, even real estate brokers that would be put out of business overnight.
A little deflationary movement might be ok, but this would sideline too many high end workers to ever be allowed to happen.
One other point regarding blockchain and property rights. In many parts of the world, there is no system for legally documented ownership rights. Blockchain could “leapfrog” our antiquated written system, much as cell phones leapfrogged landlines in third world/less developed countries.
You have attempted on numerous occasions to sideline discussion on Crypto, but it is a market narrative which has become impossible to ignore. I think it hopefully becomes deflated by a thousand pinpricks instead of bursting.
5%-10% a week seems reasonable so that reasonable investors exit.
I haven’t “attempted to sideline” any discussion. Just like anything else, I talk about it when it’s germane. For an extended period after the first Bitcoin bubble burst, it languished in relative obscurity. So, I didn’t talk about it. It started to become relevant again last year. Proponents will claim it was relevant the whole time, and while that was doubtlessly true for those folks, it wasn’t for the market more generally.
I am a crypto skeptic. Blockchain on the other hand could be widely useful. There is a growing field of decentralized finance, that uses coins as a building block generally for adopting blockchain more widely. Not a slam dunk for growth but this kind of network might end up providing value. Coins as money or investment? Not much to see here. The field of decentralized finance? Possibly very worthwhile. Many might remember the internet boom and bust. What came out of it was a game changer- possibly not what people thought. Same with broadband. Remember all the hype about it? Again we did see vast changes- including a switch to streaming video, voip and a host of other applications. But it took time. I suspect the same might apply to crypto. Unfortunately a lot of folks are going to lose a lot of wealth in the process.
Lots of problems with Crypto and lots of problems with Fiat as well.. The argument interesting as it is goes on and on.. Solution is likely when World events mandate a solution and that may well be Cataclysmic.. Man is NOT noted , as the post indicates , for his/her ability to resolve his/her own greed .. Geopolitics has resolved like issues in the past and it will in this case as well . These are interesting times indeed !
Although I’m a crypto proponent, I truly enjoy your viewpoint on the space.
While I agree that “crypto” hasn’t dominated the world in 12 years, I’d also argue that it’s been around for 12 years, which, as Krugman said, is an eternity in the digital space. I look at crypto similar to the internet; look at what many people such as Krugman said about the internet, versus where it is today. Due to network effects there’s a gargantuan difference between the use cases and “value” of the internet from say 1995-2007 than there is today.
Similarly, I think we’ll likely see something similar in crypto. Despite the numerous “deaths” of crypto, or the multiple “bubbles” over the last 12 years we’ve only seen it continue to grow, iterate, and optimize, rather than disappear as a “failed” concept. Just like many thought leaders/intellectuals couldn’t accurately predict the use or value cases for the internet, I think we’ll see something similar for the crypto space.
Will it be Bitcoin, or Ethereum or something else? Who knows? But there is value there, as a growing number of people “believe” in it like they did the internet and we live in a digital age, like it or not, so why not a whole other new space that grows and develops its own value?
Much like the Aztecs,and gold, crypto May befuddle many of us and lead us to wonder what’s wrong in the hearts and minds of the digital conquistadors, but that still doesn’t change the fact that there is perceived value, as well as use cases being built in this space all the time. Much like internet adoption following an S-curve I think we’ll see something similar to that in the cryptocurrency space as well.
Also too, with regards to value of crypto (esp Bitcoin) versus gold, I think we are spoiled, especially those of us that live in the US and have our monetary value baseline as the US Dollar. It’s essentially the world currency, and people who work and live in America don’t have the same fiscal insecurity as many other people around the world do. Whether it’s people in Lebanon or Venezuela converting what they made that week into BTC (which is a better use case for them than hyperinflation regardless of volatility especially over longer time frames) that they can carry with them (more easily portable and transactable than gold in many places) or business in SE Asia settling cross-border trade invoices in stablecoins because it’s quicker and easier than transacting through traditional exchange routes between national currencies, we’re seeing value and use cases that maybe aren’t as obvious to those of us used to the simplicity and predictability of all transactions being in USD.
I propose to establish a new world “currency” that is independent of all national currencies and central banks and will eventually thwart governments’ ability to conduct monetary policy, monitor or regulate money flows, collect taxes, prevent certain financial crimes, and potentially to regulate or support portions of the banking and financial system, in addition to consuming more energy than most countries.
I assure you, eager buyer, that said governments will take no interest in our activities. HODL!
If crypto is widely adopted that would start to obviate nations. Not sure that even the most progressive of people are ready to live in that kind of world. I’m starting to believe it’s perhaps more likely that bitcoin begets individual national digital currencies, with the unintended effect of giving governments even more control over citizens. If a nation doesn’t have its own currency, is it really a nation?
Humans keep trying to take ‘humans’ out of the equation because we don’t like what we’ve seen so far. That might explain the creation of gods. Most of what I read about crypto is about taking humans (governments, banks, etc) out of the equation. But who created crypto – us. Humans did the same with religion, forgetting that humans created it. Scary being on a spaceship run by a bunch of primate derivatives who keep repeating the same mistakes. Let’s just pretend that something or someone else is driving the bus and can save us from ourselves.