Happy New Year! Enough Cryptocoins Already!
Thanks to Google’s news algorithms, I get to see the onslaught of opinion pieces pushing blockchain and cryptocurrencies. Most of these are, surprise, surprise, published on websites dedicated to cryptocoins. What’s concerning is that some of these are also published on Forbes and Bloomberg, and they recommend people make “investments” in cryptos. These pieces come off like they were written by someone with a D- in economics. This drove me to do some research and eventually write this article. My research started when I thought to myself: “Gee, I wonder if there is a cryptocurrency that isn’t a pyramid scheme?”
Unfortunately, my search has been fruitless. Any shmoe can cook up a crypto thanks to open source software. Steal the code, make a few tweaks, give it a new name. Bam! Done! Take Bitcoin, reduce the difficulty and increase the block size! Now it processes more transactions per second and wastes less electricity! PROGRESS!
I mean, blockchain technology was created by a genius. It’s impossible to exploit or attack. These crypo developers are super smart, and this amazing blockchain technology could not have been dreamt up by any mere mortal.
Look, you know who throws the word “genius” around? People who aren’t geniuses. Bitcoin has all the hallmarks of amateurism on it. It was supposed to be like paypal but without the middleman, but it isn’t. It doesn’t scale. It doesn’t have event driven responsiveness, its more like polling. It’s stupidly wasteful and expensive to record a transaction. On top of that, throw in “guess and check” tuning, a hallmark of “it doesn’t work quite right so we have to keep fiddling with it”.
The Gold Rush
There’s a gold rush right now, and it’s to take money from suckers who don’t understand what they are doing. Cryptocurrencies are play money. They can be created at a whim. They’re effectively the same as if a casino opened up a virtual stock market and let you buy and sell fake shares of a fake company.
There’s so much greed right now that it seems like almost daily there’s news about yet another crypto.
What frustrates me about this whole thing is that this play money is making its way into our real financial system. Advocates of cryptos say that governments can print money at will (which they don’t, because that is stupid), yet here we are where cryptocurrencies are creating something out of nothing in our global money supply, and wadd’ya know? We have a bunch of inflation! Good job, jerks! What do you think will happen when cryptos crash and suck all that wealth out of our global money supply?
If you don’t know what I mean, imagine that three people own a cryptocurrency. Person A and Person B keep buying and selling the currency from each other at increasingly greater prices. Person C just has a set supply and doesn’t pay attention. At the start, all three people had $1,000 and 100 coins worth $1 each. The total value in our system is $1,100 x 3, which is $3,300. Let’s say Person A most recently paid Person B $10 for all of their coins. Person A now has $2,000 worth of liquidity, in the form of coins. Person B now has $2,000 cash, and Person C now has $2,000 split between cash and coins. The total value of our system is now $6,000. Now prices inflate because people’s buying behavior and cost of services reflect how much money they think they have. Let’s say Person A tries to sell his coins, and suddenly finds there are no buyers. He gets scared that his coins are worthless, and drops the price. Eventually, someone buys them but at a much lower price. However, there’s now seemingly less money to pass around, Person C no longer feels so rich, and you get an economic recession.
To make this real-world mixing even worse, we have derivatives being approved for bitcoin when there’s clearly individuals that hold a substantial percentage of bitcoin’s supply. There’s a reason for insider trading laws. With bitcoin, someone could literally buy the short ETF, then sell their stake, then buy the long ETF, then buy it back, and rinse and repeat to make out like a bandit.
Blockchain Technology Kind of Sucks
Blockchain could have its uses, but in its current usage it sucks. There’s an arms race between miners who run the network and the network that increases the difficulty which results in an immense amount of waste.
Imagine if you will, that you want to keep stats in a football game. You typically have a scorekeeper on each team, and then the refs, announcers, etc. will periodically check on things and act as a sort of auditor.
Now imagine instead we have this “peer to peer” system where everyone in the stadium is keeping score. And instead of pencil and paper they have to use a hammer, chisel, and clay tablet. And they have to keep track of season and career stats too, and they’re not allowed to keep a running tally, they have to go through the effort of one-by-one checking everything in a historically linear fashion. When someone successfully does this horribly inefficient task, they are given a hot dog and everyone else has to throw away their clay tablets and start over.
Yeah, it’s really inefficient. Modern banks keep track of their account holders and have internal and external auditors. They can’t just open an account, type in “100000000” and suddenly be rich (by the way, a fork of bitcoin tried to do exactly that very recently). You don’t need a distributed highly duplicated ledger of every account and every transaction (yes I’m aware you can prune blocks, shut up) to effectively manage and transfer money.
Some people will point out that this isn’t true, and actually it’s more like one person in each section is keeping score and wanting to win that hot dog, and everyone is really hungry so they can resell that hot dog for much more than its worth. First, stop being pedantic. Second, the clay tablet metaphor is still accurate; it’s still stupidly inefficient. Third, this reality goes against the claims that the record keeping is highly distributed. If it costs so much to keep track of a distributed ledger that only a few entities can afford to do it, then you no longer have the advertised capability to ensure that it can’t be tampered with.
Could you have blockchain without the stupid inefficiency? You totally could, but the whole system would need to behave much differently.
Government Backed Currencies Have Intrinsic Value
Intrinsic value is a sort of baseline for everything you can invest in. I can buy a baseball card and recycle it. I can buy gold and use it to make jewelry. I can liquidate a company’s assets and give whats leftover to shareholders. A stock or bond pays a dividend/interest. There’s a misconception that government fiat currency isn’t worth anything, just like cryptos.
Let’s go way back in time. You’re in biblical times, and the tax man says you owe a dime in taxes. He doesn’t know your income and he doesn’t care. The government would hire people to do things and paid them in this fancy pants concept of “money”, and the only way to keep from getting thrown in jail was to give this money back by earning it. Thus, the money being used as payment by the government was worth something. In this case, you have demand for it from the government and demand from people who need to pay the government.
Now fast forward to today, where the poor are no longer taxed and the rich make up the bulk of the taxes collected. The government has bonds which it sells at an interest rate. It has to pay back those bonds, so it needs to collect taxes to pay them back. This is (partially) what it means for the US Dollar to be backed by the full faith and credit of the US government. The government is still the underlying entity fueling demand. If things were to catastrophically fall apart, the government could still go back to pegging the currency against a resource such as gold and let you exchange dollars for gold like it used to. A fiat currency was chosen because it is easier to stabilize and can’t easily be influenced by outside market forces.
With cryptocurrencies, there is no demand except for the criminals who use it to transfer wealth outside of normal avenues. As long as there is any value, the currency can be used for bypassing the law and transferring wealth. I mean, just go pick a random block and tell me with confidence that none of the transfers look like money laundering. You can’t. 15 accounts plug into one, and then that account transfers into 15 new ones. And on and on, as rhythmic as a washing machine.
So what’s that mean? It means by driving up the price of bitcoin and attempting to give it legitimacy, the Winklevoss twins are by extension supporters of terrorism and criminal activity. Congrats! See, where a government provides the demand needed to give its currency value, the twins are doing the same with bitcoin. Who needs bitcoin? The twins do!
On the Subject of ICOs…
ICOs (Initial Coin Offerings) are hilarious. Being a publicly traded company is a lot of work and money. There’s all this accounting and paper-work to make sure you aren’t defrauding investors. With ICOs, all you need is a white paper and promises.
The premise of a non-diluting share of a company is tempting (if that’s even guaranteed, I’m not positive on that), but think about that for a moment. What if a company burns through its cash reserves like most do? Does it do another ICO? Or does it go out of business? How are either better than share dilution? That’s not assuming they didn’t blow the money on parties and personal items, excessive compensation, and other things public companies have to inform everyone about.
Can I point out that the trust aspect of the tokens being peer to peer is worthless when there’s nothing to prove the trust of the underlying entity selling the tokens in an ICO?
Some companies use ICOs as an alternative to Kickstarter. Good, I’ve always thought Kickstarter’s and GoFundMe’s fees are egregiously high. However, if you consider the cost to market, code, and set-up an ICO in this fashion and you can see that these clearly are just situations where tokens are being used as a substitute for stock.
You know, assuming it’s all not just fraud anyways.
…And the Laundry List of Risks
As a developer I’ve learned to test everything and to expect everything to fail the first time it’s tried. And here we are expecting cryptos like Bitcoin to continue to function when the block limit is reached. If/when it doesn’t, there’ll be more forks and more developers hoping to cash in on these opportunities to print themselves money.
The intrinsic value of blockchain cryptos is not the cost to mine a block; that’s the event horizon, the point of no return when the whole thing will shut down, and the pyramid scheme is over. Just look at any of the existing cryptos where the cost to mine exceeds the value. They just die. Bitcoin and other crypto’s difficulty scales down as miners leave the network, but it doesn’t rule out the possibility of that happening suddenly and grinding the network to a halt since difficulty changes only occur after a set number of blocks.
Likewise, if the difficulty scales down gradually from miners leaving, then the value of the crypto must also scale down for running the network to make economic sense, since with so much competition from other cryptos and, you know, Western Union, PayPal, every bank in the world, etc. it seems very unlikely that fees will go up to compensate. Less hardware running the network means less overhead to mine a block. What might happen? The crypto might devalue to where people just abandon it. Why hold an asset that just continues to lose value? It becomes less distributed, revenue from fees become worth less, etc. etc. Basically, it becomes a death spiral.
Even if it doesn’t fail in this fashion, this is all software. For example, someone might discover that most crypto miners run on linux, find an exploit in a common library, use it to alter the miner’s in-memory code, and steal or print millions or billions without anyone catching it. Hell, you might see a bug “fix” that secretly opens up a backdoor. This is a bunch of C++ code, good luck catching everything! There’s probably exploits in the software right now!
Bitcoin’s Resiliency Despite Being the Crappiest Coin
Another topic to touch on — why does bitcoin maintain such high value? Maybe because it’s the gateway drug to all the other cryptos. Imagine if there’s a hot stock you want to buy, but in order to buy it, you had to buy a share of Apple instead, then trade that for shares of the company you really wanted. What would happen to the price of Apple shares? Exactly, there would always be demand for it, even after the iPhone X! There’s a lot of bitcoin exchanges and for whatever reason getting alternative coins requires going through exchanges that only convert bitcoin to other coins. Coinbase has largely been a gatekeeper, and to no surprise when a crypto gets added there, its price suddenly skyrockets.
Maybe the other reason bitcoin maintains its value is that bitcoin sucks and so people fork it. These forks give new currency to all the existing bitcoin holders. So if you hold bitcoin prior to the fork, you suddenly have both bitcoin and the new fork, thus making you richer.
I’ve also read about people developing a layer to go on top of bitcoin to fix its slow transaction issues. Because, you know, it’s an asset and not a currency and because people are willing to shore up thousands of dollars for a database record with a number it’s worth going through effort to preserve its wealth. Or maybe there’s a lot of people with skin in this game now and they don’t want to watch their “investment” topple like a house of cards.
Dammit, this whole thing wreaks of greed.
Could There be a Good Crypto? Of Course!
You know what makes transactions work? The idea that if I buy something from someone, I have a way of suing them if they attempt to defraud me with a phony product or try to pull something. It’s the whole “well if you try to rip me off, at least I know where you live” thing that keeps people honest. That’s what I want to see in a crypto. Not disposable wallets that are less secure if you re-use them. I want to say, “this is my account, I don’t want to send money to someone I can’t sue.” I want there to be a trusted authority who can revoke / reverse transactions if the need comes about. I want someone to verify the identity of where my money is going. Basically, I want a credit card without the fees that are imposed on merchants. I also want a settling time so that if someone says they mailed something to me, we can wait until it shows up before giving them the money. I want to send money only to people who have been vetted to be real and where my laws can defend me. If someone steals my credentials, I want protection against them sending it off to a foreign country.
Then on top of that, I like the benefits of using distributed networks for voting. Don’t need to bother going to a voting booth, vote yourself using your pre-verified trusted ID and have it recorded where it can’t be reversed. Does it have to be blockchain tech that accomplishes this? Probably not, something lightweight where you simply broadcast your vote and your signature should be sufficient.
Finally, the cryptocurrency needs some sort of intrinsic value. Maybe you could have exchanges which take other stable currencies and put them in a bank account prior to minting fresh cryptocurrency. This way, you aren’t printing money but instead are trading a thing of value for another, the way currencies are supposed to function. This is kind of where governments are needed, because a private entity could just abandon the cryptocurrency, take their assets and run. Perhaps all currencies need to be backed by an organization of some sort, where the honesty and good faith of it is what gives it value.
My fear is that more isn’t being done to isolate this play-money gambling from our real banking system. By allowing bitcoin futures and soon bitcoin ETFs, we are legitimizing bitcoin when we should not be. Cryptocurrencies are play money, an inefficient solution to what is mostly a non-problem, and are just an alternative to casinos, and should not be “invested” in by major institutions.
A real useful cryptocurrency could exist. It would be based on actual items of value you could trade it in for. It would be efficient and run without wastefully consuming electricity and essentially provide everything banks, credit cards, paypal, trusts, escrows, etc. provide but intrinsic to the system and at much lower costs. Maybe it would allow people to ask others for credit in an efficient manner. There’s lots of things it could do, since its all just software after all.
We’re in the 21st century, voting should be done with distributed records, but the records do not need to be blockchain based to be trust-worthy. There’s way more efficient ways to spread knowledge securely. The same goes with any other blockchain application idea I’ve seen floating around. Data can be partitioned across various nodes of various trust and done in a moderately redundant manner and more or less accomplish the same effect as what blockchain accomplishes, without requiring a nuclear power plant to maintain.