Cryptile Dysfunction

The Author Explains the Implications of the Crypto Meltdown as If You Are 5 Years Old

We’ve been on a long, strange journey with cryptocurrency. In thirteen years, it’s gone from being a niche internet thing that your friend Grant, who loves Magic: The Gathering, would try and convince you to invest in, to an asset in the portfolio of the biggest financial institutions, which your more normal friends would try and get you to invest in. Bitcoin, and its sleek cousin Ethereum didn’t just move out of their mother’s basements, they were given the corner office.

Now, like so many millenials during Covid, it looks like it might be headed back to their parents’ house. After reaching soaring speculative heights, Ethereum and Bitcoin, and the cohort of other more minor imitators like Solana and Dogecoin have gone crashing to the ground. I believe that cryptocurrency is likely headed back to its rightful place: as a weird libertarian pet project for people who hate the central banks.

The dramatic rise of these financial assets over the last ten-ish years had created a league of crypto apostles. We all know them. Your friend Joey, who had never had much interest in finance or investing before, was suddenly a Bitcoin evangelist. “The best time to buy Crypto was 5 years ago, the second-best time is right now,” Joey told you, before sending you some YouTube videos.

Sure, crypto is down terribly right now, he might concede. But in the long view, it’s still massively ascendant from where it had started. If you got in years ago, you are still up quite a lot of money. And moreover, everything is down right now! (As of late June of 2022, Bitcoin is hovering a little under 20k, after cresting over 60k during 2021.)

But surely, Joey says, the longstanding “blue-chip” coins of Bitcoin and Ethereum will rebound, just as they’ve always done in prior crashes. Crypto is just being buffeted by the same tempest as every other part of the market and like all storms it will pass.

To understand what is wrong with this line of thinking, and therefore why cryptocurrencies might not ever go back up, you need to understand something: it’s not clear what cryptocurrency is for. Finance people, who gatekeep mercilessly with confusing and slightly a-gramatical jargon to prevent you from realizing their job is not that complicated, call this “the use case.” As in, what it’s used for.

The Use Cases

Outlaw Money: Cryptocurrency was invented by very-online libertarians who wanted to create a way for their money to be hidden and used out of sight of government agencies and central banks. The legitimate-sounding justification here was that libertarians are opposed to the (somewhat voodoo-like) techniques that central banks use to manipulate the conditions of our economy. The more realistic justification is that in my early college years of 2010s, cryptocurrencies were a great way to buy high-quality drugs online via the Silk Road.

Last year your friend Rachel had a random synapse connection and remembered that as a teenager, she’d bought a half-bitcoin for $100 dollars in an unsuccessful attempt to buy acid on the Silk Road. Sure enough when she checked, that bitcoin was worth 30k. As of the writing of this piece, it’s worth 10k. She’s not sure if she should sell.

Online Money: Then, as cryptocurrencies started to pick up, the idea was that Bitcoin or one of its cousins would serve as a sort of borderless national currency. Your friend Grant, returning from his vacation in Spain, told you how coffee shops in Madrid accepted Bitcoin! It was happening! Just another step on the road to a globalized future.

This, of course, was ridiculous. Bitcoin specifically was created in 2008, and the idiosyncrasies of blockchain technology mean that the programs on which it runs can’t be updated without literally creating a new currency. As a result, a bitcoin transaction takes around 10 minutes to complete. Not to mention that constant changes in the value of cryptocurrencies every few moments mean that the price of a coffee or a burger in cryptocurrency would be constantly changing, a nightmare for most shopkeepers. Yet the ball kept rolling down the hill ever faster, and the price kept going up.

Can We Blockchain It?: A blockchain is the immutable online ledger of transactions for a specific cryptocurrency. Now, it’s also a buzzword used to make VC’s ears perk up, like “Machine Learning.” Throw into your investor pitch deck that your platform uses blockchain technology, and they start throwing wads of cash at you. Nevermind that it’s crappy technology invented in 2008, which, by design, can never be updated or improved upon.

Now there’s an entire industry dedicated to trying to find ways to thrust the square peg of Blockchain technology into various round holes. Check out this clown car of a Deloitte report, where some poor analyst has to argue that Blockchain is a potentially world-transformational piece of technology, akin to creation of the postal service or the internet. Potential “disruptive” uses for this technology, the writer says, include preventing ticket scalping and allowing internet users to prove to internet ads that they are real people, so that internet marketers don’t have their analytic data fudged by bots. Wow, guys.

Digital Gold: As soaring value started to pique the interest of VCs and white-shoe institutional investors like Goldman Sachs, cryptocurrency had to take off its “Don’t Tread on Me” hat, put away the drugs, and put on something a little more socially acceptable. So the new justification became that cryptocurrency had a similar value as a financial asset to gold. What is meant by this is that gold historically does not decline much in price and remains consistent. It’s been valued by humans since the first days we started hewing our houses out of stone, and there’s a limited supply of it.

Bitcoin and Ethereum were a “hedge” against inflation and other risk factors, finance people would tell you. What they mean by this is that if you have money in these cryptocurrencies, they didn’t seem to be hurt by the same external factors that could hurt your Amazon stock or your U.S. Government bonds.

The Kicker

Here, dear reader, is the important part. Let’s circle back to what our friend Joey was telling you, that the reason that his crypto holdings are down is because everything is down. The problem here is, the insularity of cryptocurrencies from the rough winds that buffet other investable assets was the entire justification for their use, since the borderless currency idea turned out to be predictably untenable, and you can’t write in your Deloitte report that it’s great for untraceably buying large quantities of MDMA online.

So what’s the point of cryptocurrency now? Many minds are asking, and there doesn’t seem to be a clear answer. But I have an idea:

CNBC has reported on Ukrainian refugees using cryptocurrency wallets to transport their funds over the border to Poland as they fled the Russian invasion. During the Canadian Trucker protest, protestors (with mixed success) used cryptocurrency to fundraise after the Canadian government froze their bank accounts.

The true utility of cryptocurrency lies in its origin: a libertarian tool for hiding your money from the government. That’s distasteful to polite society, but it’s true, and it’s a pressing need for many, which won’t go away.

Forecasting the Future

I am fundamentally sympathetic to the underlying reasons for wanting to create a decentralized finance system. The financial institutions which we rely on to live our lives in the modern world are dystopian leeches, who extract money from us like phantom medieval lieges. The unelected bureaucrats who run the central banks conduct dubious economic hocus pocus, like raising interest rates to fight inflation without the permission of the public. It’s commonly agreed by economists right now that the Federal Reserve is likely in the process of rate-raising the U.S. into an economic recession.

That said, the cryptocurrencies that are currently in the spotlight are not the solution. Declaring Bitcoin or Ethereum to be the pathway to creating a decentralized finance system is like declaring George, who is tying wings to his arms to be the likely inventor of human flight. One day we will fly, but this ain’t it.

In the meantime, extant cryptocurrencies are probably not going away entirely. There’s been an odd admixture in their investors, between a majority who were just gambling on it because it keeps going up and a minority who are true believers and evangelists, who actually care about the idea of a decentralized finance system. The speculators have mostly fled, but the true believers are probably here to stay.

I came to reporting on finance a little under a year ago. I had no experience with cryptocurrency, or economics, or investing. What I did have was a couple of years of experience as a reporter, and one thing you learn quickly on this job is to note when people are saying things that don’t make sense. As soon as I had my bearings in finance enough to know up from down, alarm bells started going off in my head at the fuzzy way people would talk about the world-changing potential of cryptocurrency.

I believe what we’ve seen with cryptocurrency is not a total erasure. It’s a correction. This is a maybe-goofy and maybe-sometimes serious tool for people who, for whatever reason, want the government out of their wallet and bank account. That’s a real need and a real utility. Post-crypto crash prices may not represent a low, but a more accurate representation of the real-world value of these tools.