AS I WRITE this piece, crypto-markets are crashing. BTC has broken through its $19 000 support level and ETH is below the $1,500 price region. Of course all of this is happening in the run-up to the much vaunted ETH upgrade (or merge) and the Cardano Vasil hard-fork, and following Fed chairman, Powell’s Jackson Hole speech, signalling higher interest rates.
I’ve written about my misadventures with crypto-markets before. You should probably take a look here.
And had ample time to reconsider my strange journey. Lo and behold, I now find myself more interested in crypto than ever before. It’s no longer the FOMO that keeps me inserting coins and pulling the crypto-chain, but rather a return to first-principles. And yes, on second thoughts, my early experiments with these digital tokens wasn’t so crazy after all.
My latest take is entirely consistent with my initial summation.
Yep, like Warren Buffet I still don’t see BTC as anywhere near an investment grade instrument, not a traditional asset to put in one’s portfolio alongside an EFT or equity (at least not without a massive firewall). According to Forbes contributor Wayne Duggan “most cryptocurrencies are not tied to physical assets or intellectual property and don’t generate cash flow or pay a dividend or interest to investors. Instead, their prices are connected exclusively to supply and demand, making it difficult to assess their fundamental value.”
Tokenomics is the topic of ‘understanding the supply and demand characteristics of cryptocurrency‘.
In his investment book, Margin of Safety, value investing legend Seth Klarman explains that, “In the short run supply and demand alone determine market prices.” Stuart Langridge, Head of SEO at CoinMarketCap writes “If we believe that to be true and that it applies to cryptoassets using blockchain technology as well as the stock market, then understanding the factors that will impact either supply or demand are of vital importance to both speculators and investors.”
But investment in market supply isn’t why I find the cryptospace fascinating. In fact this idea of finite or rather predictable supply may be a chimera leading us astray. Who holds and who sells (i.e market supply) is not a factor of the innate rules of the blockchain (i.e total supply). Always check sites such as CoinGecko which show a cryto’s circulating, maximum and total supply. Ultimately, one only pays what you think a coin is worth at the spot rate, and we may all be driven by ‘greater fool theory’ if you believe Bill Gates.
Rather, I wish to focus here not on foolishness, but on the sheer utility of exchange, the logical expression of BTC unbridled innovation — the exuberant energy we observe behind the cryptosphere — energy which is being sorely tested right now by brutal financial markets. A ‘crypto winter’ event which may just put paid to any further misallocation of capital and the needless ‘dissipation of scarcity’ by the creation of unnecessary derivative coins? (Are you a crypto bull or a bear? Let me know in the comments below). Characteristics such as speed, efficiency, a rules-based monetary system and what Elon Musk calls ‘solving for scarcity’, in other words a trend driven by information science, towards creating a better financial system.
Some like Mark Drilldown believe BTC represents a point of convergence, or Focal Point, sometimes also known as a Schelling Point, which is a powerful Game Theory concept, introduced by the American economist Thomas Schelling in the 1960s. “A Schelling Point can be seen as a solution, or a course of action, that people converge on without necessarily agreeing or coordinating their efforts with each other.”
“The power of a Schelling Point also depends on how exclusive it is. If a Schelling Point offers a solution to a problem that can’t be obtained any other way, or a means of expression that has no real alternative, it can behave like an electro-magnet, exerting a pull on most who discover it.”
Memes before there were meme-stocks
The value of cryptocurrencies are really a product of their natural use-value, nothing else. If a better technology for doing what we do when we exchange fiat for crypto and BTC for AltCoins and so on, comes along, then the technology will die. It really is as simple as that. Absent the problem which created BTC and the space will either evolve or disappear, or will it?
To provide further context as to why convergence around crypto seems to be our future, I believe one needs to expand a bit upon tokenomics. Before there was crypto, there were gaming tokens, and even a period in which people went a bit balmy about Tide soap powder coupons.
BTC ushered in an era in which one could exchange virtually, any economic unit, even the most fanciful token with ease. Previously there was no real way to take a gaming token on one platform and exchange it for a different token on another. I couldn’t take Linden Dollars from Second Life and make them pay for Roblox. In fact it was relatively difficult to reward anyone online with anything, since fiat currency comes with a bunch of encumbrances, the least of which are the bank charges.
The trust-less cryptographic algos solved this problem to some extant. Network fees haven’t gone away, but rather drive debate on things like ETH gas fees. More importantly cryptos like ETH allow the creation of smart contracts providing a tonne of usefulness. Did I mention P2P lending and DeFi? Staking and arbitrage?
No crypto didn’t create digital gold, or make inflation go away, (digital energy may be a better metaphor if you follow BTC maximalist Michael Saylor) and no it hasn’t made money laundering any easier (see this one debunked by Martin Cheek) but the system has ushered in a host of new formulas and platforms for financial exchange and with relative ease. Once this token cat was out of the IOU bag, there was nothing regulators could do, except hope to draw in the novel system.
In fact the momentum which drove the last two crypto bull runs may simply end with crypto being absorbed into traditional financial markets, the same way dematerialized share trading, once considered cutting edge, became a norm, as ordinary as the weather. An end to volatility is however, unlikely in the short or medium term, and volatility is not necessarily a bad thing if what one seeks is quite the opposite of traditional markets.
Crypto continues to exist outside of the conventional. It has all the hallmarks of the counter-strategies that have emerged out of pure necessity, within the realm of counter-economics, (and by that I mean unregulated or open markets). And whether one sees this crucial idea as many economists used to put it, as ‘black’ or ‘grey’ markets, or view the cryptoworld as they do today, as ‘the next big idea after derivatives and spread-betting,’ the essential fact remains — crypto enables anyone to circumvent the pitfalls of traditional banking and currency systems (not necessarily government or the taxman), which is itself, of major benefit and utility.
Would banks have driven such innovation? Highly unlikely.
Banks with their high fees, and tendency towards cartel and monopoly behaviour, trend us towards stagnation. Governments with their penchant for printing money, destroy value. But with BTC these problems may become nothing more than an impediment, as currency traders become a mere encumbrance to ordinary market trade.
As a result the banksters have been forced to innovate, to catch-up or lose out. And the result may just be that liquidity is slowly drawn out of the cryptospace by the traditional players. Which leads one to evaluate out of necessity, the size of the crypto market. The global cryptocurrency market reached a value of US$ 1,782 billion in 2021, and this market is projected to reach US$ 32,420 billion by 2027, according to one report.
Overall cryptocurrency 24 hour trade volume from July 1, 2020 to August 18, 2022 however, shows that the market has gone from a $500 billion peak in May 21 to its current $77 billion day average signalling a bear market.
If crypto is to survive, it needs to continue innovating. As the cryptospace, is literally drawn inexorably into the banking lobby, one sees many exchanges beginning to offer OTC share and forex trading as part of a bouquet of services that are indistinguishable from what the first generation of conventional trading platforms offered when markets first dematerialised.
Still seem unintelligible to anyone but a geek?
So my advice to ordinary people when it comes to crypto? A somewhat counter-intuitive response and it won’t be everyone’s cup of tea. Don’t put your Fiat money on the table seeking to Invest. Put your money into crypto like you’re gambling at a nearby Casino with jelly-beans provided by the House. Play with Crypto ‘custodial exchanges’ like they’re GrandWest or your child’s Kindergarten birthday party. Be reckless, be foolish, but above all be brave
And remember, if you don’t own the keys, you don’t own the crypto.