Crypto: Everyone Was Just That Stupid

$2.1 trillion.

That’s a rough approximation of the total value destruction across the cryptocurrency space from the peak seen in early November 2021 through Tuesday morning, when Bitcoin sat at a two-year low, and endorsement payments to Tom Brady from FTX were being scrutinized by Texas regulators.

Who could’ve known, just 12 months ago, that things would turn out this way for crypto? After all, the private money business sounded even more compelling this go-around than it has in the past.

I’m being sarcastic, of course. The private money business never works, and this time most assuredly wasn’t “different.”

In the wake of the FTX fiasco, much of the breathless crypto coverage emanating from the financial media (mainstream, alternative and otherwise), seems to intentionally avoid addressing the elephant in the room. If that’s the case, it’s understandable. Because to address it would be to concede that nearly everyone — from large media conglomerates to the most respected venture capitalists on the planet to storied hedge funds — was duped into believing that all it took to make the private money business viable was a single innovation.

That’s plainly absurd. For one thing, some experts offer trenchant arguments against the idea that blockchain constitutes a “technology” at all, if technology is supposed to be synonymous with true innovation. Even if it is an innovation, many skeptics argue it’s not an especially useful one. In the interest of brevity, I won’t walk through those arguments, but you can certainly do so yourself if you have Google and half an hour to spare.

Beyond that, though, the notion of private money at scale, and, more to the point, the notion of private money at scale as an investable proposition, is stupid. Not “misguided,” not “misplaced” and not any other more generous adjective either. Just plain old stupid.

Bitcoin as a digital form of “outside money” (so, like gold, only not tangible) makes some measure of sense. The rest of it not so much. Private money can work in self-enclosed micro contexts. For example, when I lived in a third-tier US city, I knew people in the food truck business. It wasn’t immediately obvious to me how they decided where to go on any given day. Third-tier cities aren’t like Manhattan — you can’t just park a cart full of sandwiches on a street corner and expect to make a living. It could be illegal, but even if it’s not, there aren’t enough people.

As it turns out, the truck owners had all manner of scheduled stops, including weekly visits to local communities, some of which had their own internal ledgers, which allowed residents (HOAs and, in rental communities, renters) to use accumulated “points” for purchases from the trucks. The trucks didn’t accept the points. Rather, the community members were allowed to convert their points (presumably awarded based on activities of some kind) to dollars, which were then paid to the truck owners by the community. That’s private money. And it worked — as a novelty. You help clear some fallen trees after a storm and thereby save the association a few dollars not paid to a landscaping company, and you get some points towards the falafel truck next week. Or something.

Fun as that is, it can’t work at scale. Even if every community in the city adopted the same points system, those points aren’t real money. You can’t pay taxes to the US government with them, and you couldn’t use them to buy falafel in Manhattan, let alone a haircut in Des Moines. In fact, you couldn’t even use them to buy falafel in that city, because the trucks didn’t accept the points, they accepted payments, in dollars, from the communities.

On Coinmarketcap’s count, there were nearly 22,000 different cryptocurrencies circulating as of Tuesday. If you wanted to, you could set about describing what each and every one of those coins is supposed to represent. For many, there’s an ostensible use case, not unlike the community points described above. If you use Coinbase, you’re doubtlessly familiar with the feature which awards obscure coins (for free) to users willing to listen to a short elevator pitch. Conceptually, those pitches aren’t much different than the community point systems described above. The tokens have some utility in some context, and although there’s typically a lot of grandiose rhetoric involved, you could pretty easily conjure the same sort of world-changing pitch for the community points (e.g., “A micro-level community approach to enhancing social cohesion through neighborhood-based cooperation”).

Bear in mind: The community points are just one example of micro-level, limited-context private money. There are an endless number of conceptually similar systems. Think of a classroom-based rewards system for grade school children or frequent flyer miles and other kinds of credit card reward points. All of those systems run on a ledger of some kind (how else would you keep track of them?) and if a claim to limited-context utility is all we require these days to consider something “currency” or “money-like,” then all of those systems constitute currency and money, loosely defined.

In theory, we could create exchanges (centralized and decentralized) where anyone, anywhere could freely trade every kind of private money in existence, from community points to elementary school gold stars to Banana Republic rewards. We could set up special, anonymous wallets, and create a mechanism whereby people could fund them with real dollars, euros and yen, which could then be converted to a diversified portfolio of free flights, discounted dress shirts, pizza slices the next time Pies On Wheels stops in Oak Grove and extra recess time at Head Start K-12.

We could create bridges between the different ledgers that allow for conversion of Chase card points to Old Navy rewards (with only minimal risk of massive theft during the conversion process). The exchanges could incentivize users by paying interest on deposits at varying rates depending on supply and demand for extra recess time, Old Navy undershirts and so on. The interest would (naturally) be paid in newly-created private money, which represents a claim on fees associated with trades made on the exchange. We could construct a complex system of derivatives and leverage around the whole thing, and when there’s no market for certain pairs, we could offer huge yields to anyone willing to provide liquidity in, say, K12-OG (the exchange rate for gold stars at Head Start K-12 and Oak Grove community points).

All of this is possible. But why would we do it? What would be the point? The private money traded would have value in some context, but the idea of creating exchanges for it is so blatantly ridiculous that no one would entertain it even for a second. It’s not even worth a thought experiment. In fact, it’s so stupid that at least some readers are probably inclined to suggest I’m comparing apples to oranges. If that’s you, you’d be correct. Because unlike cryptocurrencies, the sorts of limited-context private money I’ve just described all have some identifiable utility somewhere, right now. A third grader can redeem her gold stars for extra recess time today. A frequent Banana Republic shopper can redeem his rewards for free socks at any location, brick-and-mortar or online, right now. The vast majority of cryptocurrencies, on the other hand, serve no purpose whatsoever and can’t be redeemed for any benefit at all. (I’d discourage readers from disputing that, by the way. What you’ll discover when you try is that the crypto “benefits” you end up citing sound a lot less compelling in a bear market than they do when things are going swimmingly.)

What all limited-context private money and cryptocurrencies have in common is that they aren’t real money. You can’t pay taxes with them and although some have a shared mythology that’s stronger than others, none constitutes an intersubjective myth strong enough to compel universal acceptance for goods and services.

The cryptocurrency craze taught us that if enough people believe, the myth can become strong enough to supplant common sense, and the resultant mania can perpetuate the delirium such that skeptics begin to question themselves, on the way to becoming converts. On that level, crypto is really no different than the dollar or any other fiat money. It’s all just a myth, and once there are enough converts, holding out becomes asinine. But no crypto has come anywhere near that tipping point. And thanks to recent events, none ever will.

I don’t expect anyone to like this article, and I fully expect most readers to find it “flawed” on many levels. But it’s not. Flawed, I mean. Instead (and this brings us full circle), the reality is that everyone is just this damn stupid. The entire financial universe, inclusive of VCs, hedge funds, institutional investors, veterans from Wall Street’s largest banks, journalists with otherwise good reputations, former securities lawyers, congresspeople, retail investors and everyday folks from all walks of life, were duped into believing that the private money business can work at scale. That somehow, thanks to blockchain, anyone, anywhere can just print money. And that throwing real money at fake money was a good investment.

In July of 2015, a 45-year-old woman was arrested in Kingsport, Tennessee, for attempting to use counterfeit dollar bills “printed in black and white on regular copy paper” at a local grocery store. When she was detained, police recovered two of the bills, along with a receipt for a new printer and “said copy paper,” as TIME dryly put it.

While explaining herself to police, she reportedly said, “I don’t give a f–k, all these other bitches get to print money so I can too.”

Little did she know, that straightforward pitch would’ve made her a VC darling, a financial media celebrity and a real-life billionaire in 2022.


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30 thoughts on “Crypto: Everyone Was Just That Stupid

    1. I think you hit the nail on the head. “Web3” proponents were essentially dreaming of a world where (essentially) someone could use their J Crew points and trade them for, I don’t know, Exxon points. In this new world, if I wanted to save a couple of bucks on gas, and had some J Crew points I didn’t care about that someone else wanted, and I found this person, sure I suppose that’s “useful”.

      But the practicality of such a situation is farcical. If I truly cared about saving a couple of bucks, I’d not be writing this comment and instead be traversing the web looking for a CODE I could enter into some checkout form.

      1. I recall my former barista friend dreaming about holding a web conference on zoom and turning it into some bizarre competition where people could earn crypto from other participants based on what they were doing on the conference call.

        Apologies for my previous comment where I restated a portion of your article in poor form.

  1. I did not like this article, I loved it. Before you outed yourself about your crypto journey, I was wondering to some degree, whether you had become an adherent.
    This morning before I read this article the thought passed my head to see if I couldn’t find out how much bitcoin keys had been lost. Somewhere between 10 or 25% so bitcoin will probably not go to zero very easily.
    Broken record time.
    Pyramid scheme, dressed in the Emperor’s new clothes.
    So a bitcoin and a dollar walk into a bar.,..,,.

      1. If even a fraction of the money went to gold, the gold bugs would have ruled the day,
        Ontario Teachers Pension investing in crypto instead of bluechip gold miners and royalty streamers paying nice dividends. Interesting older article about gold if you have 28 minutes….

        1. Thanks very much for the link. A very entertaining talk.
          As you might infer from my ID, I take an interest in gold, and precisely for the same reason that Mr. Williams identifies at the end of his presentation. Insurance.
          The 300% gain in bullion since 2008 is purely incidental, and remains variable.

  2. To add further support to your logos, I wonder if the “free” transfer between various cryptos by a single owner or even just the transfer of a single crypto between two different owners actually exists? Or if it is much the same as with airline miles- where the transaction costs take most of the economic benefit from any transfer.

    If you (which H might not be personally aware of because he has previously disclosed to us readers that he prefers not to fly in an airplane) have ever had airline miles that you wanted to transfer to another person or credit card “universal” points that you want to exchange for an actual airline seat, the transaction fees will almost make it such that it would be more economical to just straight up buy an economy seat with USD.

  3. My wife and I spent the first couple years of 1970 in the St Louis area. All kinds of merchants from department stores, to supermarkets, to gas stations, all sorts of places, in fact everyone it seemed, gave out a brand of trading stamps for every purchase (forget the name). The beauty was than unlike green stamps one could redeem the stamps to buy anything from any merchant who gave them out The exchange rate was one book = $3 bucks. If I needed gas I’d fill the tank and hand over the required books. I’ve still got all kinds of stuff I bought with these stamps. They were the best because in the greater metro area they were just about universally valuable. Crypto only matters in dollars and you never know just how many. Someone out there still has some $66,000 bitcoin, the poor sucker.

        1. Indeed! A source of intra-family strife.

          Wasn’t there a competing stamp program as well? Vague memory is they were some kind of orange color?

    1. FWIW, in Germany and in other countries during and after WWI, banks, municipalities, businesses churches, sports clubs, governments, etc. printed “Notgeld” , or “emergency money”.

      Some of it was rather creative, with scenes from German history, or money that could be redeemed for one paving brick at the local construction yard, etc.. Some had political commentary, some circulated quite widely.

    1. They aren’t, except most don’t go all the way to zero, and you have a chance to get your money back on the survivors if you’re young enough (I’m ancient so just standing clear).

    2. Equities are an ownership share of an operating company, which has assets, revenue, profits, cashflow (or not, but then that’s the investor’s choice). The company can do well or poorly, and it’s stock price can be very volatile, but absent BK or delisting prices seldom go to zero. The investor can analyze and value the company on some rational basis (or not, but again that would be the investor’s choice). The ownership share produces dividends (or not, but – you know).

          1. No comparison as in what you’re saying doesn’t make a lot of sense. Equities are a claim on dollar- (or euro- or yen- or etc.) denominated profits and cashflows, and companies typically have “stuff” that can be sold for real money (e.g., buildings, inventory, equipment and so on). I don’t think you’re being 100% serious here (or at least I hope you’re not), and even if you are, the commenter above answered your question concisely, so I’m not going to entertain it any further. If you truly don’t believe there’s a distinction, then you’re free (for now anyway) to cash in a portion of your S&P 500 investments and put the proceeds in a basket of cryptocurrencies or pay someone with a lot of frequent flyer miles to transfer them to you (assuming that’s possible and you like to travel by sky bus).

      1. The company ‘issues’ private money. Sometimes to it’s own employees as payment for labor. In that sense it’s not much different from frequent flyer miles. Your frequent flier miles won’t go to ‘0’ unless the company goes bankrupt either.

        1. now you’re just being dense on purpose … but if not, try trading your frequent flier miles on an open exchange with anyone, any where, at nanosecond speed for actual currency (of any kind) and see how that might work out

          1. The frequent flyer point is simply an attempt to jive with content delivered in the article regarding a broad definition of private money.

    3. Very different. Equities are (in theory) a positive sum game and are intended to generate positive cash flow as a result of operations.

      Crypto is a zero sum game that generates no cash other than what is put in.

  4. I opened the Fidelity app on my iPhone this morning and a pop up asked me if I was ready to purchase cryptocurrency. I hit the “No Thanks” button.

  5. In the first quarter of this year I almost bought into the hype. So many people making millions or billions. I thought the only way this alternate currency made sense was for drug and crime enterprises. But then I read stories of drug dealers getting caught and the FBI figuring out how to get into the blockchain and them having all the records of all the transactions.
    Then the H man came out with articles talking about his foray into and out of it , I knew then I dodged a bullet.

  6. Many people don’t understand that the only way real, spendable (publicly and universally accepted) money is created is 1) Through an act of congress in which the Treasury funds spending into the real economy and 2) A regulated bank creates a loan and deposits it into someones account to spend. (The Fed doesn’t spend money directly into the economy–it is just an asset swap (e.g. Bank Reserves for Treasuries). As Heisenberg eloquently lays it out, all of this other “private money” is nonsense. Some of these shady crypto exchanges were minting crypto coins (private money with no real collateral) and then exchanging it for public money through very convoluted transactions. This, needless to say, is fraud.

  7. I remember green shield stamps. Towards the end you needed 8000 stamps in 12 books to buy a pint of milk. More recently, Groupon, buy a voucher for discounted dog grooming, northern lights in August, return flight to wherever you want to go via Kabul – all useless cr@p. If the sales patter ends in “you just don’t get it”, it’s time to close the curtains, read one of Plato’s dialogues with a nice bottle of Chateauneuf du pape 2010

  8. Funny how free money breeds the dumbest business ideas (Crypto, Theranos, MBS derivatives). What’s bizarre is that there is always mainstream institutional investment that feeds it and winds up with an embarrassment of losses.

NEWSROOM crewneck & prints