PDM: Peak Dumb Money and The Coming War on Public Blockchains

Have we passed Peak Dumb Money?

This is a letter for people who love crypto and also love to trade crypto.

There’s another shift happening. It will require a big adaptation from all us amateurs, because the new money is not going to play by the established rules, and I am not talking about just market manipulation, but something far more radical.

Maybe you’re new to crypto or maybe you’ve been around for years.

Either way, if you’re trying to make money in this space, there’s one undeniable truth that has to be accepted:

When a coin is going up, in order for it to keep going up, someone has to risk buying the top. Nothing can go up forever, and when someone new ends up buying the top, they learn a harsh lesson as their buy-in immediately starts losing money.

Now think about where they got the money they used to buy the top. Unless that person just got into crypto yesterday, they probably already had some holdings. Maybe they overinvested and didn’t have enough to chase their next FOMO. That means they likely sold their existing holdings at a loss to pursue a better return.

When these same buy-high, sell-low traders also don’t understand what they are buying and selling, it’s fair to call them dumb money.

That’s not meant to insult anyone. I think it’s fair to say we’ve all been dumb money at some point.

But what happens when there’s no more dumb money?

In other words, imagine what happens when we run out of people who will freely risk buying the top or selling the bottom.

I’m contending that the scenario we see unfolding in the crypto space looks like we may have passed Peak Dumb Money.

For some time, a good chunk of the profit in crypto has been made off of people who are foolish enough to sell low and buy high. Now, the new dumb money entering crypto has slowed to such a trickle that this chunk is becoming disproportionately large.

There’s been a widespread failure to understand something: while there is new money entering the market — a LOT of it — that money is smart. Really smart.

When the head of the IMF says that crypto is probably going to win, you can bet banks and governments around the world have taken heed.

No more dumb money means only smart money is left. And that means the game will shift radically.

What we are dealing with here as crypto matures and institutions enter, is a vicious new level of competition. The smart money entering the market has been playing this game too long. They will try (and are trying) to rig the crypto game in their favor. And that means they will be buying as low as possible: the bottom. And when the top comes around, it’s not going to be them buying it… unless it’s to pump their own cryptos, and in that case they’ll do it with fiat that they can print as much as they want of.

In practical terms, over the next few years here is what I expect:

A coordinated campaign to devalue existing cryptos as banks and governments attempt to enter and dominate the crypto space.

That might sound a bit fantastic, but context will help explain why it’s rational to expect this.

Public blockchains have already increased massively in value. There is no way to buy the bottom. Furthermore public blockchains can’t be directly controlled. Therefore public blockchains represent an obstacle to maximum profitability, and to regulation.

The logical approach for a bank or government wanting to buy the bottom is to create their own currency. Thus, government- and bank-run cryptos are inevitable. The cryptoruble is only the beginning.

There are many in crypto who would say: Network effect! First mover! They can’t stop us! Public and private chains can coexist!

Network Effect:

Existing crypto does have a large network effect in its favor, but it is dwarfed by the existing financial network. There are many very smart devs working on public crypto, but there are also many smart devs in the existing financial and government sectors. Some existing crypto devs will take (and have taken) jobs at the big institutions. They will train (and are training) others.

First mover:

One word: Myspace. Another word: Napster.

They can’t stop us:

The existing network is not only massive, it’s backed by governments and militaries. Governments can triumph via the laziness and fearfulness of the common citizen. They don’t need to destroy public blockchains, they just need to make using them risky enough, and using the official solution easy enough, that the average person has no tangible reason to take the risk. Think torrenting vs. iTunes.

Public and private chains can coexist:

Thanks to their peer to peer nature, public chains probably always will exist, but the question is, how valuable will they be in comparison to private chains? Again, think torrenting vs iTunes / Netflix.

What I am talking about here is, in effect, war. But, it is likely to be a war of subterfuge and marketing more than anything else. Think Microsoft’s “embrace and extend” strategy writ large.

If there is anyone who is going to tell me with a straight face that the existing institutions are just going to play our game, I will have to seriously question their grip on reality. All currencies are a medium of exchange, so all currencies are in competition with each other by definition. A currency is only valuable by virtue of it being widely used. Governments and banks have no choice but to act, or risk having their own currencies lose value to crypto as crypto becomes more widely used.

To be clear, I fervently desire to see public chains win. I am not trying to FUD or spread doom and gloom here. Additionally, there is a silver lining to big money’s coming war on public chains. If, during the initial period of “embrace and extend”, a government or bank gives its official stamp of approval to an existing crypto (or more likely a fork of one), we can expect massive amounts of new dumb money to pour in. There will be fat profits to be had, no doubt.

But the larger question we should be asking ourselves is, what can crypto accomplish if we fight to make public blockchains the world’s currency?

And what possibilities will we lose if we allow public blockchains to be devalued and replaced by private chains tethered to existing fiat currencies?

In the campaign promoting these private chains over public ones, the exact language that will be used is yet to be known.

However, “unlicensed blockchain” or a similar phrase may soon become frequently heard as the big money-backed marketing war commences.