Crypto is a Scam – Full Stop

Post is mostly a result of the recent Gabe Newell interview where he talked about a bunch of things – Steam Deck which appears to actually be the real deal, and how Steam’s toe into the crypto market had a 50% rate of scammers.

First, I want to differentiate the concept of blockchain and cryptocurrency. Blockchain is a different approach to chain of custody, where information is decentralized. Like if you bought a car, the government would have the record of that purchase. In a blockchain, that transaction would be a in a publicly accessible ledger that is shared, and through *internet magics*, difficult to tamper. Cryptocurrency is a digital currency that is dependent on blockchain to determine who has ownership of said currency. It has nothing to do with the inherent value of the currency, which is part of the problem.

Second, this adage is core to the concept. An item only has value (in the monetary sense) to the buyer. A pair of Air Jordans cost a couple dollars to make, but are worth hundreds because buyers believe they are worth that amount.

Boiler Room does a really great job on explaining the pump and dump schemes of the stock market, arguably a better lens than Wolf of Wall Street (which is more a biopic on the effects of greed). The idea here is a simple one:

  • Find something with no inherent value (like a rock)
  • Collect many of these things, which has limited if no cost
  • Apply lipstick to say thing (let’s call it a pet)
  • Convince one person that this thing has value <– the first person is the hard part
  • Convince another person that this thing has more value because someone else thought it had value <– this is peer pressure/herd mentality
  • Continue selling this item until either
    • there is no more inventory to sell OR
    • people catch on

The interesting portion on crypto is that inventory is limited and that creation of said inventory is decentralized. It’s called mining, as it’s conceptually the same as normal mining – companies invest to collect resources, and efforts to collect more are exponentially more expensive. Crypto is created through solving complex mathematical problems, typically with video cards as they have the best processing power.

Bitcoin, one of the most recognizable names, has been mined 18.4 million times in 10 years. There are 2.6 million bitcoins left to mine, and that will take ~120 years to complete, in line with the exponential difficulty. So what to do? Well, you create a new crypto currency and mine the crap out of that, hoping that you can make a profit. Nearly every single cryptocurrency out there is predicated on a limited source controlled by a small group, them hyping it so that others believe there is value and buying said crypto, the seller skipping town, and the buyers eventually realizing it was all hype while the value crashes.

Did I mention that the wide majority of crypto currency cannot be exchanged against anything but other currency yet? You can’t buy an orange with it. If you had 1 Ethereum, you would have to convert it to local currency, and then use that to purchase something. This means that you need brokers to convert the currencies, which are using both blockchain (for the crypto) and standard ledgers to track the purchases. Again, in the wide majority of cases, these brokers actually don’t maintain standard ledgers, which make them a great haven for criminals looking to launder. This is why many brokers operate in tax havens, or areas where there are no extradition treaties.

Non-fungible tokens (NFT) are not crypto, but they do operate using blockchain. What is completely hilarious here is that you don’t actually own anything but the token. It’s like you owning the key to a mansion, but not the actual mansion. Public NFT (like say a unique GIF) are hosted in the public domain, with a key that is simply a URL. There is absolutely nothing preventing anyone from simply going to that URL and downloading the item. Private NFT (like say a unique skin in a game) are hosted on private domains, where the token is a unique entry that grants you access to the item. Of course, that item has absolutely no use outside of that private domain, and only exists for as long as that domain does. So it only has value for people in that ecosystem. Similar to crypto, there is a broker in this mix who takes a cut from the transactions. Can NFT make sense for a game like Battlefield? Is there more money to be made from reselling a single skin to single individuals, or the microtransactions of selling the same skin to thousands of people?

And I haven’t even gotten into the ecological costs of crypto and blockchain. It takes a ton of electricity to run the compute necessary for these items. Farms need to be strategically located next to easily accessible, and extremely cheap power sources.

Finally, it’s worth mentioning that China banned all crypto mining and currencies last fall. The absolute dominance of the criminal market was a major driver, but the larger matter of the government wanting to clamp down on all currency exchanges was the fundamental bit.

This isn’t the creation of wealth, it’s the redistribution of wealth. People are investing in this with the hope that there’s an even larger sucker on the other end willing to pay more. And there always is.

Now for the real kicker. While there is a traditional war underway in Ukraine, there is an even larger financial war underway with Russia. Traditional banking is being blocked, which is causing runs on the ruble. People are withdrawing their money to another currency, with the hope that it maintains value. Crypto is an unregulated market with no central ability to manage. It is impossible for crypto to be sanctioned at the global level. It will be interesting to see how long that fact remains true.

One thought on “Crypto is a Scam – Full Stop

  1. NIce, clear explanation of the general principles. I’ve read a lot about all this stuff over the last six months and the one thing that crops up every time but almost no-one draws attention to, from either side, is that every single piece I’ve ever read ends up at some point defining the value of the cryptocurrency transactions in question by referencing their value in a physical currency backed by a government, usually the U.S. Dollar.

    If Etherium or Bitcoin or any of them were real currencies they wouldn’t need to be referenced against analog currencies for us to understand their value. At this point, you might as well have a suitcase full of Confederate dollars. Crypto doesn’t even seem to have the utility of those barter token schemes that were so popular in the 90s, where you’d trade your services as a lawyer for someone else’s services as a gardner at a set rate determined by a not-for-profit organization. Those were pretty useless but at least you ended up with some sevice, even if it was poor. As far as i can see (Not that I’m going to test it out for myself.) Crypto, unless you can cash out for a currency recognized by banks, gets you nothing… except maybe more crypto or some NFTs, which are also nothing.

    That said, if crypto is so heavily involved in money-laundering, presumably soemone is managing to take their clean money out at the end of the process in a form they can spend. Otherwise it’s more like money dissolving.

    Like

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