Is This the End Game for Crypto?
By: Paul Krugman (nytimes)
S E E D E D C O N T E N T
By Paul Krugman
Opinion Columnist
Recent events have made clear the need to regulate crypto, an industry that grew from nothing to a $3 trillion market capitalization a year ago, although most of that has now evaporated. But it also seems likely that the industry couldn't survive regulation.
The story so far: Crypto reached its peak of public prominence last year, when Matt Damon's "Fortune favors the brave" commercial — sponsored by the Singapore-based exchange Crypto.com — first aired. At the time Bitcoin, the most famous cryptocurrency, was selling for more than $60,000.
Bitcoin is now trading below $17,000. So people who bought after watching the Damon ad have lost more than 70 percent of their investment. In fact, since most people who bought Bitcoin did so when its price was high, most investors in the currency — around three-quarters of them, according to a new analysis by the Bank for International Settlements — have lost money so far.
Still, asset prices plunge all the time. People who bought stock in Meta, the company formerly known as Facebook, at its peak last year have lost around as much as investors in Bitcoin have.
So falling prices needn't mean that cryptocurrencies are doomed. Crypto boosters surely won't give up. According to a report from The Washington Post, many of those who subscribed to Twitter Blue Verified, Elon Musk's disastrous (and now paused) attempt to extract money from Twitter users, were accounts promoting right-wing politics, pornography — and cryptocurrency speculation.
More telling than prices has been the collapse of crypto institutions. Most recently, FTX, one of the biggest crypto exchanges, filed for bankruptcy — and it appears that the people running it simply made off with billions of depositors' money, probably using the funds in a failed effort to prop up Alameda Research, its sister firm.
The question we should ask is why institutions like FTX or Terra, the so-called stablecoin issuer that collapsed in May, were created in the first place.
After all, the 2008 white paper that started the cryptocurrency movement, published under the pseudonym Satoshi Nakamoto, was titled "Bitcoin: A Peer-to-Peer Electronic Cash System." That is, the whole idea was that electronic tokens whose validity was established with techniques borrowed from cryptography would make it possible for people to bypass financial institutions. If you wanted to transfer funds to someone else, you could simply send them a number — a key — with no need to trust Citigroup or Santander to record the transaction.
It has never been clear exactly why anyone other than criminals would want to do this. Although crypto advocates often talk about the 2008 financial crisis as a motivation for their work, that crisis never impaired the payments system — the ability of individuals to transfer funds via banks. Still, the idea of a monetary system that wouldn't require trust in financial institutions was interesting, and arguably worth trying.
After 14 years, however, cryptocurrencies have made almost no inroads into the traditional role of money. They're too awkward to use for ordinary transactions. Their values are too unstable. In fact, relatively few investors can even be bothered to hold their crypto keys themselves — too much risk of losing them by, say, putting them on a hard drive that ends up in a landfill.
Instead, cryptocurrencies are largely purchased through exchanges like Coinbase and, yes, FTX, which take your money and hold crypto tokens in your name.
These exchanges are — wait for it — financial institutions, whose ability to attract investors depends on — wait for it again — those investors' trust. In other words, the crypto ecosystem has basically evolved into exactly what it was supposed to replace: a system of financial intermediaries whose ability to operate depends on their perceived trustworthiness.
In which case, what is the point? Why should an industry that at best has simply reinvented conventional banking have any fundamental value?
Furthermore, trust in conventional financial institutions rests in part on validation by Uncle Sam: The government supervises banks, regulates the risks they can take and guarantees many deposits, while crypto operates largely without oversight. So investors must rely on the honesty and competence of entrepreneurs; when they offer exceptionally good deals, investors must believe not just in their competence but in their genius.
How has that been working out?
As boosters love to remind us, previous predictions of crypto's imminent demise have proved wrong. Indeed, the fact that Bitcoin and its rivals aren't really usable as money needn't mean that they become worthless — you can, after all, say the same thing about gold.
But if the government finally moves in to regulate crypto firms, which would, among other things, prevent them from promising impossible-to-deliver returns, it's hard to see what advantage these firms would have over ordinary banks. Even if the value of Bitcoin doesn't go to zero (which it still might), there's a strong case that the crypto industry, which loomed so large just a few months ago, is headed for oblivion.
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As we suffer through pointless attempts to associate crypto currency chicanery with the Democratic Party, this article reminds us that cryptocurrency is closer to libertarianism than it is to any "leftist" beliefs.
Most large scale scams rely on "investors" desire to make money from nothing, at least nothing useful, and that is an "anarchic" philosophy, not a liberal one.
I never understood the draw of Cryptocurrency except for crooks.
Tom Brady and other celebs could be in a truckload of trouble over this.
Cryptocurrency was always intended to work the same way a gold reserve works. Cryptocurrency made it impossible for middlemen to create currency through fractional lending.
A crypto coin is a virtual commodity that overcomes the physical limitations of scarcity. Tangible commodities are limited by physical availability. But virtual commodities do not have that constraint; it's possible to produce an unlimited amount of virtual commodities. However, for both tangible and virtual commodities to have value they must be produced. Cryptocurrencies use decryption algorithms as proof of work to demonstrate that a crypto coin was actually produced by mining and not artificially created by transactions through a middleman.
The idea that cryptocurrency was intended to hide transactions is a flimflam scam. Each crypto coin must have a unique key to prove it's a valid coin. And that unique key means that the movement of crypto coins in transactions can be traced. That's no different than serial numbers on bills to prove validity. However, the virtual nature of crypto coins makes forgery astronomically more difficult. That's no different than a gold reserve; it's not possible to forge gold. The commodity is either gold or it's not. But the virtual nature of the crypto commodity means that banks are an absolute necessity to verify the validity of each crypto coin. However, those banks cannot create more crypto coins without proof of work.
The virtual commodity has not disappeared. If the dollar value of gold collapses, the gold does not disappear. However, the value of the dollar is not tied to the commodity. The dollar has a floating value that is not backed by any commodity. That's the inherent weakness of a fiat currency.
What was this "work" you are talking about?
The decryption algorithms used in crypto mining are proof of work. The physical work of decryption to produce a virtual commodity is a surrogate for the physical work of mining tangible commodities.
Gold and silver exist in the natural world, algorithms do not. Anyone can mine gold or silver, albeit on a small scale, probably. Everyone cannot mine cryptocurrency. It is a scheme . The world doesnt need any more schemes.
Anyone can mine cryptocurrency, too.
Like it or not, there is going to be increasing interest in tying the virtual crypto commodities to quantifiable real world proof of work. As an example, removing carbon dioxide from the atmosphere would be real quantifiable work to produce crypto coins. However, for that approach to be effective it's going to be necessary to peg government sponsored currencies to the virtual commodity. The virtual commodity acts as a reserve used to impart value to the government's currency.
Eventually governments are going to try to reestablish commodity reserves as the basis for currency (using virtual commodities) and attempt to do away with floating or fiat currencies. The financial middlemen and (neoliberal) economists will stridently oppose those efforts.
Imagine a financial sector being required to lower the Gini Index to produce a virtual commodity. The Gini Index really can provide a quantifiable real world proof of work to produce a crypto commodity. By adopting a virtual commodity reserve (just like a gold reserve) governments would be required to actually make tangible progress to expand the money supply. And production of a virtual commodity depending upon tangible proof of work could be used to retire sovereign debt.
US currency is based on neither.
I didnt say it was.