Signs of carnage are everywhere. The price of bitcoin, the 13-year-old groundbreaking cryptocurrency, has fallen 50% in six months. The values of other digital tokens with exotic names like solana, ethereum, XRP and dogecoin (started as a joke and increasingly behaved like one) have dropped by similar percentages.
A “stablecoin” called terraUSD, which was supposed to be pegged to the US dollar to facilitate predictable trading, collapsed. Non-fungible tokens, which are marketable reproductions of digital objects, have lost their luster. The collector, who paid $ 2.9 million for Twitter co-founder Jack Dorsey’s first tweet, reportedly chose not to sell it as the best he could earn was $ 14,000.
All of this is as painful for enthusiasts as it is confusing for the uninitiated. So let me explain why the bloodshed, even though they were unavoidable, could lead to something better.
Various forms of cryptocurrencies have been invented by a mix of venture capitalists, software coders, and entrepreneurs over the past decade to provide an alternative system for financing and other digital transactions. The idea was that the global financial system is squeaky clean and controlled by bony governments. A new system based on decentralized accounting technology called blockchain would democratize the global exchange of goods and services.
At least that is the vision.
In practice, crypto-followers have a hard time saying exactly what their creation is, or more importantly, what it is used for. Cryptocurrencies are not real currencies because almost no one uses them to pay for anything. (Pornography and criminal activity are notable exceptions.) Even Coinbase, a large cryptocurrency exchange, charges customers dollars to trade on its platform. Cryptocurrencies are also not securities such as stocks and bonds, although regulators are considering declaring them so in the name of investor protection.
Crypto enthusiasts predicted (okay, maybe hoped) that their creations would behave like commodities, especially gold, as a store of value. But the recent fall in cryptocurrencies in the face of rising inflation has shattered those dreams. Instead, speculative bets on unproven cryptocurrencies have gone badly with other failed bets.
Warren Buffett got it right recently when he called bitcoin and its assets unproductive. They rise when people pay more for them, and go down when people pay less. But they have no value in themselves.
All this search for meaning would be good if it were not for all those who have lost real money by investing in the imaginary. You can draw a straight line from the dotcom bubble of the late 1990s and the debacle of subprime lending a decade later to today’s crypto mode. Each involved the core of a good idea, which was then inflated by hucksters, charlatans and other credible men and women, convincing average consumers that they were investing instead of speculating. The highlight of this era may turn out to be the announcement last month from staid Fidelity Investments that it would allow employers to allow employees to allocate a portion of their retirement plans to bitcoin.
Given the carnage, I would not be surprised to see Fidelity slow down its plans because few companies are taking the lure.
Predictably, crypto-cheerleaders call it a blip – and one they’ve seen before. Silicon Valley investment firm Andreessen Horowitz, for example, released a report last week that ironically called the downturn in the business one of a series of “price-innovation” cycles. .
But there are real losers here, encouraged by celebrities and public figures, such as New York Mayor Eric Adams (D), who in the name of promoting his city as a “fintech” capital promised to convert his first three payslips to Bitcoin and Ethereum . Matt Damon, Gwyneth Paltrow and LeBron James are just a few of the A-lists that shrank for various crypto deals. One of my friends decided last year to invest $ 1,000 in a crypto basket so he could see what it was all about. It’s worth $ 280 today.
As with the aftermath of other financial crises, something good is likely to emerge from the great cryptocurrency crisis. There will undoubtedly emerge legally beneficial products, firmly regulated by governments, that will earn fortunes and improve people’s daily lives.
Until then, crypto remains a solution in the hunt for a problem.