Sunday, May 23, 2021

Wherein We Learn That Cryptocurrency Is About to Repeat History

 According to this article, Cryptocurrency market volatility is because they are "free"

The upshot of the argument being made here is that because the "worth" of a cryptocurrency is entirely decoupled from any measurability, that this means that the markets are "more free" (free as in freedom, in a somewhat libertarian sense of the word).

As an investor with a pretty good background in different kinds of instruments and valuation tools, I see this kind of blithe claim, and I shudder.  It brings back memories of things like Black Friday, or the collapse of Enron.  There are lessons in these events - and those lessons are important for anyone interested in investing. They are tales of how a wealthy few played the rules to their own advantage, and caused enormous harm to others in the process. 

The libertarian notion of freedom often overlooks the moral and ethical dimensions of how one's actions affect others. In the context of cryptocurrencies, that seems to mean "I can run the price up as far as I want, and as long as I make money, who cares?".  

When you have a "commodity" (cryptocurrency) that operates as if it is completely disconnected from market forces, you have a gambling instrument, not a credible investment. Even a casino game is more predictable than a cryptocurrency in this regard - a casino game operates within an established set of probabilities that can be measured, and a clever player can usually figure out where things stand. 

With cryptocurrency valuation, even the science of probabilities doesn't come into play.  The valuation literally becomes "what will the market bear" - an arbitrary number based on how participants feel about things at that moment.  While that opens the door to enormous gains to be had, it also opens the other door to enormous losses - a market that is not connected to actual economic forces is vulnerable to manipulation.  

I'm sure that in time, forces will emerge that stay the hand of the more chaotic aspects of the cryptocurrency market, but until that happens, fortunes will be made and destroyed in that market in much the same way that the old 'penny stocks' used to. Right now, the entire cryptocurrency world is hugely volatile, and it is subject to the kind of shenanigans that gave us the Wall Street Crash of 1929, or Enron's collapse in the early 2000s. 

Freedom can have a price, and as is often said about it in democratic societies, the price is eternal vigilance.  If I were playing any amount of money in cryptocurrency right now, I'd be peeling off profits when they happened, and expecting whatever capital I put in to vanish overnight. 

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