Crashing Crypto

The latest crash in the crypto markets has unveiled yet another multi-billion dollar scam, and another overnight billionaire has just taken investors for literally billions in now stranded / lost assets. 

 Now, I’m not writing this as a “see I told you so” piece. I’ve already documented my reasons for being skeptical of cryptocurrency. It’s trivial, almost lazy to write an “I told you so” every time Crypto takes another nosedive. Over the last year, BitCoin has shed 75% of its market price. Any company that sheds 75% of its market value is already at death’s door.  

No, today we’re going to talk about something a little different. There’s a reason Crypto keeps crashing, and it’s really little different than what happened in the lead-up to what came to be known as “Black Thursday”.

Markets have “ups and downs” all the time.  These massive swings are not “ups and downs” - these are the result of “markets” which don’t have meaningful boundaries. The so-called “free market” that capitalism relies on actually exists within the greater context of society, or as Rousseau would have referred to it, “The Social Contract”.

Cryptocurrency, in particular, is alienated from the social contract. Aside from its proponents - who are largely strongly libertarian, and inclined toward some fairly radical interpretations of how the world should work - few people understand cryptocurrencies well enough to even begin to consider how those currencies play in society and what boundaries need to exist on that market. 

Think about it for a minute.  Back in the early days of “Town Markets”, there were boundaries. Merchants would hawk their wares in the town square, and people would buy them after haggling over the price, quality, etc.  Back then, what we would call a scammer today, would have to “get out of town in the dead of night” if they were selling dodgy product, or risk facing the wrath of the people or the town watch. 

Cryptocurrency exchanges, hedge funds, etc. are all operating in the relative shadows. There are no real boundaries on what they do once you turn some cash over to them in exchange for a few cryptocurrency bits. In theory, you should be able to reverse the transaction later, but the blunt reality is that these exchanges frequently haven’t got the “cash on hand” to enable you to exchange bits for actual currency you can use. 

The collapse of FTX is very revealing. Cash goes in via FTX, and your account is “credited” with however many units of cryptocurrency you bought.  BUT … after that, it disappears into a labyrinthine maze of “in-house” cryptocurrency tokens, and other holdings that are held by a hedge fund.  In short, the exchange itself is barely a shell - a front if you will. 

Most of us are basically honest people, and will be shocked by that. We think - quite rightly - that the exchange should have bought BitCoin, Ethereum, or whatever else we wanted on our behalf and be holding it in reserve for us.  Or, perhaps operating a bit like banks do, and investing it while holding enough “cash on hand” to deal with normal cash transactions.

Clearly that isn’t what’s going on. 

For years, we’ve heard from the so-called “Free Market Fundamentalists” that less regulation of markets will allow for greater growth, and will be a “good thing” for everybody. The cryptocurrency markets are about as utterly “free” as you can get. You are literally buying and selling “bits”  awarded from solving mathematical puzzles. They are not connected to any real world entity, and the value is utterly arbitrary (like seriously, how is 1 bitcoin worth $16,000USD???)

Herein lies the problem. Cryptocurrency markets are fundamentally not bounded. There is limited transparency at best, and it is rife with “fly by night” scammers as a result. Overnight billionaires spring up, and in the warped bubble of Silicon Valley think, they’re amazingly successful geniuses … at least until the bubble pops and their scam is revealed for what it is. Don’t feel too bad for Sam Bankman-Fried - I’m quite sure that he’s skimmed off enough to live comfortably for the rest of his life, even if he has to spend some of it fending off civil and criminal actions. 

We’ve been down this path before.  Whether it was with the development of currency, or the evolution of the stock markets, or more recently junk bonds and derivatives.  In every single case, they have been incredibly volatile until the government steps in and starts to impose some degree of regulation on the “market”. Usually that is in the form of laws requiring a certain level of transparency and disclosure, limits on the creation and trading of the “security” - be that cash or other forms of, and a number of other things ultimately designed to ensure that dubious schemes don’t get too far. 

Markets have limits, and they work best when they are bounded - and the boundaries have to be established collectively by people. Money and automation are intrinsically divorced from the concepts of morality and ethics - those are human constructs that we must impose on our use of them.