This article originally appeared on LinkedIn Pulse.
Cryptocurrency criticism seems to come in cycles, and we’re at the tail end of the most recent wave. A scan of the news over the last few months reveals constant celebration over the demise of cryptocurrencies and ICOs. While I have an undeniable contrarian streak in my blood, this jubilation is both unfounded and premature. Don’t believe me? Then let’s place a blockchain-based bet on it. Only a tiny portion of this criticism is coming from informed observers, while the overwhelming majority is propagated by people with almost no functional understanding of cryptocurrency, blockchain, or their interconnected ecosystem.
For my part, I’m in a precarious position. My data science and agile market research firm, Emperitas, has been living between two worlds. The first is traditional businesses (B2B & B2C) and the second is cryptos. It’s been incredible to see the differences between these worlds, and what each thinks of the other. While cryptos are eager and willing to learn from businesses who’ve already cracked the economic code for turning a profit, the feeling isn’t mutual and traditional businesses treat cryptos like leapers. As someone who bridges the divide between these worlds, and as an economist, I’ll explain what I’ve seen and what’s at stake since crypto is our collective future.
But beyond the boardroom, I’ve also been an academic and my comrades of higher learning aren’t a fan either, even though the CFA exam just added questions about crypto and blockchain since they’re not a “passing fad.” This negative academic sentiment is best exemplified by Joseph Stiglitz, aka “The Bitburglar,” since he wants the government to take all your Bitcoin away. He’s hardly alone in his desire to ban cryptocurrencies, though as a Nobel laureate he’s possibly the most prominent voice. Yet he’s shouting to the wind at the very same moment respected higher eds scramble to be first movers in teaching all things crypto in the next battle of their unending, accelerating, intellectual turf war.
A key lesson I’ve taken away from a decade of teaching and conducting data science and agile market research projects is that to predictably describe something you need to break it down into five parts. This is certainly true with crypto, and virtually all current criticisms focus on either its claimed use by criminals, a fictitiously fraudulent nature, a lack of any real “intrinsic” value, the failings of its founders, and/or its inevitable death as an emerging technology (by force from the government if necessary). This article will metaphorically murder each of these five claims with ample evidence in broad daylight in front of their theoretical families.
#1 It’s only useful for criminals
A hyperfocus on crypto’s use in black markets, unofficial markets, and illicit markets is an immediate red flag for me. To these individuals, Bitcoin and other cryptos have a monopoly on financing global crime. These same people will inevitably mention the “Silk Road” and the “Dark Web” with little understanding of what each is (or was). While a large portion of this criticism can be blamed on media coverage and pop culture, it has more to do with intellectual laziness and just a touch of good old fashion hypocrisy.
These individuals rarely have any data to support their beliefs and are shocked when I point out that cash money, and specifically USD, is still the preferred method of payment for global criminals. But you don’t have to take my word for it, according to very recent testimony in the US Senate (by the same Treasury officials who oversee the Mint’s production of USD) criminals prefer the dollar to crypto for money laundering and financing illegal enterprises. In fact, analysis by the leading government-contracted blockchain insights firm Chainalysis found less than 1% of recent Bitcoin transactions have any connection to criminal activity.
This isn’t hard to see with other similar data about money laundering, and even the UN has pointed out that at least $800BN is laundered globally each year. Given that the entire market cap of cryptocurrencies oscillates between $200BN-$300BN, if we assume EVERY crypto trade was money laundering it leaves more than half a trillion dollars unaccounted for. Assuming you want to take a zero-tolerance approach (since 1% of BTC’s market cap is still more than $1BN) then Stiglitz’s beloved USD needs to be similarly banned, because 90% of the bills contain trace amounts of cocaine since paper currency’s second most popular use case is delivering drugs to brains via noses.
Any economist worth their salt will tell you zero tolerance is a terrible approach, instead, you need to look at the net benefits (pros minus cons). The reason Chainalysis can even do its analysis is that every single transaction in Bitcoin, like most cryptocurrencies, is traceable through a publicly available ledger. This is one of the (many) reasons crypto is superior to traditional FIAT, aka paper, currency. And while you may not know the individual who controls a specific Bitcoin, you can see that a transaction took place. This is a HUGE step up from paper money. So cryptocurrency isn’t only used by hardened criminals, but whatever remains in the market is just a bunch of fraud, or so the second fallacious point of wisdom goes…
#2 It’s ripe with fraud
Speaking of money laundering, a closely related scam is counterfeiting currency. Again, an immediate indicator of crypto-ignorance for me is when someone equates hacking with the ability to counterfeit crypto. This is practically impossible given cryptography and the distributed, decentralized, nature of the blockchain technology that cryptocurrencies like Bitcoin are built on. That’s not to say hacking isn’t possible, but the crypto equivalent is closer to financial theft (something I’ll get to shortly) and not making fake money. Counterfeiting is, however, a genuine problem for FIAT currencies and it’s estimated that about 2% of all USD in circulation is fake, with the best “superdollars” coming from North Korea, a nation-state I refer to in all my economics classes as Earth’s version of the Hutts since they’re gastropod-like government gangsters.
Hacking is an undeniable problem of the digital era we live in, and with the acceleration of digital transformation it’ll only become a larger issue. Most of the “hacks” reported with crypto are because users aren’t taking proper precautions like using a cold wallet or ensuring sites they visit are legitimate before providing a private key. These problems are easily solved by returning to the Roman notion of “caveat emptor” (buyer beware), but that doesn’t stop people from pretending like the issue is unique to cryptocurrency. This same advice would have equally served those recently scammed by fake social security representatives or IRS agents.
In fact, the financial market equivalent of a digital hack is good old fashion fraud: you think you’re getting/doing one thing, only to find out later that wasn’t the case. According to a recent study by Reuters, the financial cost of traditional financial crime is $1.25 TRILLION, or 3 times the market capitalization of crypto. Even looking at relative comparisons, crypto seems safer than traditional finance, and the 5 largest crypto scams range from hundreds of thousands to hundreds of millions. Compare that to the billions scammed by Bernie Madoff’s Ponzi scheme alone, and you’ll get an accurate sense of where the real danger of financial “hacking” resides.
But at least financial markets are regulated, right? WRONG! Regulation isn’t a badge of honor, it’s a sign that an industry can’t be trusted. And an unforgettable lesson of the 2008 Great Recession is how susceptible the system of human oversight was to corruption and fraud, bringing me to another of my favorite Latin phrases: “quis custodiet ipsos custodes?” (who will watch the watchman?). Crypto’s response to this is decentralization, commonly referred to as a “trustless” system since there’s no central power to corrupt. I personally don’t like the term “trustless” that cryptocurrency enthusiasts throw around because blockchain creates a highly trustworthy system by fundamentally changing the very nature of trust. This fact is lost in translation for the crypto illiterate who hear “trustless” and immediately picture the Wild West.
Should we be worried about scams in crypto? Absolutely, but this is hardly a concern that’s unique to digital currencies, and crypto is better situated to deal with it than traditional finance or even government regulators. As one of my close friends at a large payments company says about their constant counter-fraud activity, “it’s like pushing on a balloon that never pops…you just shift the fraud from one place to another.” The typical response to this is, ok fine crypto isn’t just for criminals and fraudsters, but that doesn’t change the fact that it still has no real value…
#3 It’s a bubble (because it has no real value)
This one has to be my favorite of the 5 common criticisms of crypto because it’s the most ridiculous. Leaving aside that FIAT money has no intrinsic value either, the real red flag for me here is when I hear “tulips” and Bitcoin in the same sentence. This is a reference to the 17th-century Dutch mania that saw the price of Tulips rapidly rise and fall (at its height 10 tulips were proposed in exchange for a house). The reason this comparison is absurd is that tulips were a luxury good of the richest global trading nation on earth at the time, and the ensuing mania had no noticeable impact on their economy. Compare this to the transformative power of a global digital currency that can’t be counterfeited and which changes the nature of trust in human exchange. No amount of tulips will ever be able to do that.
But the claim persists based solely on the expeditious rise and fall of Bitcoin’s price in late 2017. If that’s the only standard necessary for such a comparison, then Google was a bubble in 2007, as the first visual below shows; the search giant’s stock value climbed rapidly over the course of months peaking at ~$350 to precipitously plummet to a low of $130 a few months later (this was a 62.5% price fall for Google, pretty close to the price fall of BTC from its December 2017 high to its current value of ~$6,700 in late August 2018 as I write this article).
Such a claim about Google would be rightly dismissed as ridiculous, because when you actually zoom out and look at its entire historical stock value this “bubble” is an almost indistinguishable blip on its march to a ~$1,250 current value per share based on the search engine’s very real utility and popularity (see the second image below). The point of my comparison is this: cryptocurrency, like Bitcoin, is early in its product life cycle and to write off a price swing, absent of an analysis of its accelerating utility and popularity, is short-sighted at best and dishonest at worst. Further, all the discussions of crypto as a bubble assume it has to go back to zero in the future. A similar bet on Google in 2008 would’ve been a terrible predictor of its long-term stock value.
Cryptocurrency isn’t tulips, and beyond transforming the nature of trust in human exchange, an immediate use case where it’s proven superior to every other alternative is international payments. In fact, my entire crew at Emperitas is regularly paid for their work on behalf of, and transacted in, crypto. These clients are halfway around the world, our payment is received instantly, and NONE are fraudsters (though you could consider a few of them smooth criminals). This brings us to the next claim against crypto: its founders are young, dumb, and full of compulsion…
#4 Crypto’s founders are young and dumb
We’ve finally reached a criticism of crypto that has some feet to it: a few founders generally lack business sense, and if you invest in them you’re burning cash (caveat emptor). The bad ones simply don’t know what they don’t know, but the worst among them are genuinely delusional about themselves and with investors/users. The scariest are immediately identifiable by their unrelenting hype and their MC Hammer-esque spending habits. But they’re a tiny minority, and with trial and error the rest of the crypto founders (sustained by their passion for cryptocurrency and a team of good advisors) will learn everything they need to know about running a successful business and ultimately dominate a niche based on the superior product-market fit of their vision.
To return to my previous example, the story of passionate youngsters struggling to turn a profit with their world-changing dream is indistinguishable from the story of Google. It’s founders once opposed making ad money from their cutting-edge search engine, and it took learning from a competitor’s strategy along with hiring Eric Schmidt, 18 years their elder (and a transplant of my Utah homeland), to jumpstart the monopoly monetization machine that’s become the world’s most popular search engine. Larry Page and Sergey Brin are hardly unique in the successful young founder’s club, nor is their story a strictly modern Silicon Valley phenomenon.
Another example, and possibly the most important of the late 19th and early 20th century, was Richard Warren Sears who as a 23 year-old railroad employee rando-blasted a call to action to other railroad telegraph operators (in true irony, this isn’t far removed from crypto founders who are currently using the Telegram app to share every detail of their project with the world). The gold watches Sears was reselling were sent to his office as part of a common scam: ship someone a product they didn’t order then act like the costs to return it are higher than the product’s worth and offer a deep discount. This fraud-turned-opportunity gave birth to the largest retailer the world had seen to that point, along with the tallest building (a title it held for almost 25 years).
These are just two of the most prominent success stories. There are others. But for every triumph, there are hundreds of founders who ran their visions into the ground, and none of that is unique to cryptocurrencies; I’ve met plenty of terrible traditional business people. This struggle to monetize a vision, and the corresponding failure rate that’s experienced in the process, form the basis of our next and final false critique…
#5 Cryptocurrency is D.O.A.
The ultimate claim put forward by naysayers is that even if crypto isn’t worthless fraud propagated by criminal founders with useless tech, it’s already dead on arrival so we should all just move on. These people love to tout a single statistic that’s been making the rounds on the mainstream media: half of the 2017 ICOs already cease to exist. Before I dismantle this narrative (which is based on pretty good data and analysis by the way) there are 3 reasons any business can fail:
- It was a bad idea.
- The team couldn’t execute on a vision.
- Fate wasn’t on their side.
I learned this list from the Lassonde Center, a startup incubator at my alma mater the University of Utah. The dirty little secret of startups, whether they’re spun out of an accelerator or funded through venture capital, is that 19 out of 20 (95%) will fatally succumb to one of these three issues.
This isn’t just a startup problem either. Failure to create something new, like data science teams at existing organization, are failing 85% of the time according to the research giant Gartner:
Another related and oft-repeated statistic from former Cisco CEO John Chambers is that 2 of 3 existing enterprises will die in the next few decades. This is because the competition is stiff in the globalized economy, and it’s hard to carve out your niche. So while a lot of ICOs suffer from the first problem listed above, existing organizations are having a similarly hard time dealing with issue #2, and it’s mostly because they’re too big and too slow when responding to market changes.
Yet comparatively, cryptos are failing less than traditional businesses or startups, and when a startup does fail it’s the “friends, family, and fools” closest to the founders that bear the losses. Cryptocurrencies (despite being startups) share more in common with the larger enterprises in this regard: when they fold it’s the faceless mass of holders across the market that foot the bill. This means it’s easier for crypto founders to fail fast and move on to their next iterative approach (a key mantra of the startup world). And that’s exactly what they’re doing.
Cryptos are moving at a lightning pace compared to traditional businesses. I personally missed being involved in the most successful Australian ICO to date because I was corporately-numb and took weeks to decide to join their team. By then they’d moved on. Compare this to a conversation I had with a CMO of a traditional company who said “I was on crack” because we estimated a project would take only 6-months. In the end, the CMO was right, and it took them years to do it. So declaring cryptos dead on arrival shows a fundamental misunderstanding of how different they are from existing businesses and the far more beautiful future they represent…
Crypto Isn’t Failing, Your Imagination Is
All five of the common criticism of crypto I’ve outlined, and refuted, are based on an almost wishful desire to see cryptocurrencies fail. But it isn’t going to happen. While crypto faces a massive uphill battle against the strange bedfellows of government, academia, and traditional business rooting for their demise, I have an unshakable faith in crypto’s ultimate victory. They’re our future and here’s why:
- Cryptos are driven by, and for, good people who want to build a better tomorrow
- Cryptos dream bigger than any traditional business dares
- Cryptos are more transparent, democratic, and decentralized
- Cryptos are monetizing utility in specific, measurable, and testable ways
- Cryptos love data and are using it in ways other organizations haven’t imagined
- Cryptos know failure isn’t fatal and are iterating their way to viable solutions fast
- Cryptos are tech-focused and aren’t subject to technological lock-in
- Cryptos are using economics in entirely new and powerful ways
- Cryptos are more inclusive domestically and internationally
- Cryptos are excited about being underestimated (it’s like rocket fuel for them)
- Cryptos are just getting started
If you want to eradicate your ignorance and learn the truth about cryptocurrencies, I created a free Crypto Economics Crash Course that will take you from novice to armchair expert in a few hours. If, however, you’d prefer to remain a part of the camp claiming crypto is dead, it says more about you and your imagination than it does about the current state of cryptocurrency.
About the Author:
Luciano is an economist, data scientist, and futurist. In addition to being a highly loved professor at multiple higher eds, he’s the founder and CEO of Emperitas a business intelligence solution that combines data science with agile research and economic modeling.