The Case Against Crypto

January 7, 2022 ☼ crypto

Source: Stephen Diehl (Link)

Crypto assets are all unregistered securities.

When we logically deconstruct the crypto narrative by tossing out the phoney populism and cult-like structure of faith in economic absurdities, we end up with an inescapable conclusion that fits firmly within our existing regulatory framework. Crypto assets are simply unregistered securities on ventures whose stated aspiration is to develop technology to become digital wildcat banks. They’ve just synthesized their corporate equity and alleged notes into one financial product.

Cryptocurrencies aren’t currencies and have no mechanism to ever become currencies. They are effectively unregulated securities where the only purpose of the products is price appreciation untethered to any economic activity. The only use case is gambling on the random price oscillations, attempting to buy low and sell high and cash out positions for wins in a real currency like dollars or euros. Yet crypto cannot create or destroy real money because unlike a stock there is no underlying company that generates income. So if you sell your crypto and make a profit in dollars, it’s exactly because a greater fool bought it at a higher price than you did. So every dollar that comes out of a cryptocurrency is because a later investor put a dollar in. They are inherently zero-sum by design, and when you take into account the casino (i.e. exchanges and miners) taking a rake on the game then the entire structure becomes strictly negative-sum. For every winner there are guaranteed to be multiple losers. It’s a game rigged by insiders by hacking human psychology.

For cryptocurrency to have any real utility, the volatility needs to cool off. If that were to happen, there would be little reason for the public to speculate on cryptocurrency prices, given that there would no longer be the potential for massive returns. The smart money exits, the liquidity disappears and the bubble collapses. This is the inevitable fate of all cryptocurrencies, and we see this reflected in the simple fact that the median return on all these thousands of flash-in-the-pan coins is zero. Every crypto coin is just on a random walk to zero by a different path.