Cryptocurrency is neat but overhyped (Pt. 2)
Welcome to the 'vibes' economy
OK, in part one we established that crypto technology is interesting but faces some headwinds. Now onto the bigger question: where is this all going?
People bullish on cryptocurrency aren’t going to like the answer.
Financial institutions and other industries – and maybe some government agencies – will leverage blockchain to build more efficient databases and information transfer capabilities. Companies like Ripple, who provide a service customers want, will survive and emerge. Maybe, at some point, expensive legacy services like Ticketmaster and Western Union will be replaced.
But Bitcoin, Ethereum, Solana, Tezos … all those tokens you’re following the price of? I think they’ll mostly disappear. For the vast majority of people, doing business in a non-dollar environment is an alternative with no real advantage. There is a use case for, say, getting aid to Ukraine or sending funds to people living under oppressive regimes. Otherwise, not so much.
Separating the tech from the token, there only known incentive to use cryptocurrencies instead of dollars is to speculate on prices as part of your stock portfolio. And is that even a good idea?
The company you keep
Before you start trading tokens hoping to make money, let’s look at what kind of behavior and investment strategies that crypto is attracting.
Why did most people buy Bitcoin? Because it was going up in value. Why was it going up in value? Because more and more people were buying it. That’s it. Investors in this space suddenly had a big incentive to encourage more people to buy tokens and make business moves based on the assumption token values would keep rising. Which would only happen if they kept recruiting new people. Uh oh.
In part one, I mentioned the crypto industry kinda sorta collapsed for a bit. There was this kid named Sam Bankman-Fried (SBF) who, for reasons still unclear, people with lots of money decided must be a genius. It turns out that SBF was NOT smart, unless you count allegedly committing financial crimes as a sign of intelligence. If you were his lawyer, you’d probably hate him; he has a habit of confessing things in public.
Unfortunately, this was not an isolated incident. Check out Molly White’s website “Web 3 is Going Just Great”; it’s a one-stop shop of “Why the heck did we do this?” stories.
I’d argue that people who bought into crypto tokens weren’t given the full story. They didn’t really understand what they were buying, and crypto evangelists didn’t need to explain much if the price of Bitcoin kept going up.
The imaginary crypto utopia no one asked for
If you’re a crypto evangelist, what I said above is stupid and things like Bitcoin are the future of finance. Once the holdouts realize the US dollar is bad and the American finance system is broken, the economy will run on crypto!
Wait…what?!?!?!?! That’s absurd. Who would even think that?
Hardcore libertarians, for one.
Their theory works something like this. The US dollar is evil because the Federal Reserve is evil and the federal government is evil and banks are evil because they work with the first two.
Thinking that crypto must be totally out of the government’s hands to matter, more than a few policymakers want to preemptively ban the creation of a Central Bank Digital Currency (CBDC), including GOP presidential candidate Ron DeSantis.
A CBDC would put the US dollar “on the blockchain.” The US dollar is the most trusted and popular currency in the world. Unless you think the US dollar is a liability (it’s very much not) or going to fail (doomsday?), I think a CBDC would be a major step in the adoption of blockchain technology.
More importantly, there isn’t evidence that anyone wants or needs this utopia. As University of Chicago professor Anthony Lee Zhang explains, a crypto ecosystem would be very valuable in a country with a less sophisticated economy or a corrupt government. You don’t have to love big US banks to agree that your money is quite safe. And if someone stiffs you out of money they owe, we have enforcement agencies and courts that handle things effectively.
There are “network effects” to think about, as well. As off-putting as some people find Elon Musk’s antics, the social media community didn’t leave Twitter en masse and join one of the new competing platforms. There has been a steady trickle outward, but we’re all sitting around waiting to see what other people do. Leaving the dollar would be infinitely harder than leaving Twitter, and first you need to convince people we should even bother.
Most importantly, I would be willing to bet a majority of people who invested in crypto tokens didn’t believe in or care about any of this futuristic utopia. They saw a thing of value growing in value and wanted a piece.
Your Bitcoin token is not equity; you own nothing
Let’s say you’re in the latter group. You’re level-headed and don’t expect the backbone of the US economy to go away. You see crypto as a great tool to integrate into the economy, so you bought a Bitcoin token.
Well, that doesn’t entitle you to anything substantive that I’m aware of. You didn’t buy shares in “crypto.” If crypto businesses start building solutions capable of mass adoption (other than trading tokens), you’re not in line to share in any of those profits.
All you did was buy a token that only has value based on how popular it is. Especially if you own a token that commemorates a silly Internet meme.
Moving tokens around on a network with other tokens is a technological experiment, not the future of the economy. If you’re OK with that, fine. But if you bought tokens on the advice of Matt Damon, Spike Lee, or Tom Brady, you probably weren’t given that impression.
The Web3 Fever Dream
Crypto evangelists weren’t the only ones doing aggressive marketing. At some point, people decided “blockchain” didn’t sound cool enough. They changed the name to “Web3” to signify a new era in how we surf the net.
Why wouldn’t we incorporate blockchain into everything we do online? Energy efficiency is one answer. The other is that – right now – people don’t want to, including those who spend more time online than any of us. If something will make money, videogame companies will find a way to sell it to gamers. So far the response to Web3 gaming has been, “Meh.”
The Web3 vision would say, “Why not take ownership of your online presence? Your data, your ideas, anything of value that you create … Web3 would give you control of your online experience and monetize it!”
Best I can tell, this goal assumes that people would trade the convenience of surfing the web as is with the stress and headache of running their own small business. Or maybe a better way to think of it is trying to surf the Internet without a web browser. If you can do it, good for you. But most people can’t or don’t want to.
The fact that advocates struggle to explain why people will truly buy into Web3 is another warning sign. Maybe that time will come, but it’s not here yet.
Q&A for later
But John, many companies now accept Bitcoin as payment! Yes, but corporations that accept Bitcoin or other crypto didn’t do it because its easier. They did it because it got them free advertising back when people got excited about any new development.
Why wouldn’t people want more ownership of their data, given concerns about Big Tech? People hate “Big Tech” but tend to appreciate the convenience provided by Google, Amazon, etc. The other issue is your data, on its own, is nowhere near as valuable as you think.