Friday, January 05, 2024

How many more times will we be conned by crypto?

Why haven’t floating rate cryptocurrencies gone the way of the Beta recorder? Fifteen years of experience have laid bare their fundamental flaws.  

They have no intrinsic value, offer little to no transparency, and anyone — priest or felon — can issue, operate or manage them. Sometimes we don’t even know who creates crypto coins. Their price is often driven by rumors on social media, and once users lose confidence, with no government oversight, the only way to realize any value is to sell before everyone else does. There is no house, car, securities, company or tangible value to liquidate at the bottom of a cryptocurrency run.  

It should not have been surprising in 2021 when economic reality momentarily replaced irrational exuberance and the price of Bitcoin dropped precipitously. That reduction in cryptocurrency value was comparable in magnitude to the crash of the stock market in the Great Depression. Billions more dollars subsequently vanished in the bankruptcies of FTX, Genesis Global Capital, Celsius, Voyager Digital, BlockFi, and Three Arrows Capital.  

Even in the face of mounting evidence exposing their flaws, cryptocurrencies have survived as crypto acolytes reflexively defend it. They dismiss pioneers like Sam Bankman-Fried (FTX) and Changpeng Zhao (Binance) as one-off anomalies who strayed from the true gospel. Investment experts rationalize a continuing financial faith in cryptocurrency because they see its decentralized transparency and it's a “neighborhood-watch” type of oversight as the future of finance. If that were true, it would defy two centuries of experience that have painted a picture of what makes complex financial systems work. 

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