Creeptocurrency

One of hundreds of stickers pumping up Hex cryptocurrency on a traffic pole in San Francisco.

One of the great advantages of technology is that it moves faster than regulatory bodies, or most average human beings for that matter, can keep up. That Wild West window of time, when there is rapid growth and, essentially, no rules, is when fortunes are made—and when bad actors can exploit the chaos for their personal gain.

Bitcoin, Ethereum, and the thousands of other cryptocurrencies that exist have flourished under an unusually long period of technological confusion and regulatory ambiguity. Their astonishing appreciation in value, as well as extreme volatility, have already created multiple cycles of digital booms and busts for those early enough, bold enough, and reckless enough to dive head first into a market that is nearly indistinguishable from crowdsourced gambling.

I will be the first to admit that my understanding of cryptocurrencies is relatively rudimentary, and my current opinion may be proven wrong over time. I own a minimal amount of cryptocurrency, just enough to have a toe in the water. I’m definitely not an expert or active trader. But I recognize abnormal market behavior, if not outright fraud, when I see it. This isn’t to say that everyone who trades crypto is a criminal, just that many criminals trade crypto. When you see stickers on street poles, rabid emoticon-laden posts on Reddit, and warnings of scams getting posted by the SEC faster than the Winkelvoss twins can scoop up new ICOs, it’s safe to say some bad actors are in the water.

Contrary to most tech people, who have an unshakable belief that Libertarianesque market freedom is the answer to everything, I happen to believe that unregulated and decentralized currencies are not an inherently good idea. This opinion is grounded in centuries worth or macroeconomics. Countries with strong and stable currencies, like the U.S., have enjoyed decades of prosperity. Countries with wildly inflationary currencies have left the majority of their populations impoverished, holding on to worthless paper.

Crypto advocates love to talk about it in utopian terms—as if it’s self-evident why decentralized blockchains, digital ledgers, and coin mining will somehow hasten a future of frictionless commerce, free of manipulation by nefarious financial institutions, corrupt central banks, and profligate governments. We’ll all just pay each other directly from our digital wallets without the inefficiencies of “middle men” siphoning off transaction fees. That the cyrpto future will enable financial equality, unlock borderless commerce, and thwart hyperinflation. The reality is that this promised future bears no resemblance to the current state of the cryptocurrency market. The more appropriate financial comparisons are to Ponzi schemes, lottery tickets, and stock memes.

Any “currency” needs to serve two main purposes: 1) a means of paying for goods and services; and 2) a vehicle for preserving wealth. Today, the vast majority of cryptocurrencies satisfy neither purpose.

For the first case, high-profile examples of companies accepting Bitcoin notwithstanding, cryptocurrencies are virtually useless as a form of payment—both for buyers and sellers. They are not widely accepted. Try buying your morning latte with Dogecoin. Most sellers won’t even accept a Canadian Dollar, let alone cryptocurrencies. Sellers need to be paid in currency with a known and predictable value for their good or service—not pick from a laundry list of obscure currencies nobody has ever heard of. Even if cryptos were widely accepted, they don’t make sense for buyers either. Why would you buy a pizza with an asset that could be worth millions of dollars someday? Whether it’s seashells or shitcoins, any highly volatile asset is entirely impractical as a form of payment. Neither buyers nor sellers know if the deal is fair, which locks up markets and paralyzes economies. Paying for anything with cryptocurrency is so rare and suspicious, that the FTC warns, “One sure sign of a scam is anyone who says you have to pay by cryptocurrency.”

Cryptocurrency scams by quarter. Source: Federal Trade Commission.

For the second case, crypto enthusiasts will bend your ear off about how much money they’ve made investing in their coin of choice, and it’s easy to feel like you’re missing out on the investment opportunity of a lifetime. But any asset that can appreciate 93,000% since its inception (as Ethereum has) and then crash to a fraction of that value in days is unusable as a method of wealth preservation. It may be great on the upswing, but, if an asset has the potential of declining to zero, only an idiot would hold any more than a fraction of their wealth in it. The various crypto marketplaces run promotions telling us to “invest over time” into crypto, as if they are federal savings bonds. What they fail to mention is that money could be going down a rat hole. The give-away that nobody considers even the leading cryptocurrencies to be true investment vehicles is the fact that all their digital gains are still measured by the one currency we all understand: the U.S. Dollar. Rampant speculation is not a wealth preservation strategy.

So, if cryptocurrencies are not useful for payments nor for wealth preservation, what is their purpose? Frankly, cryptocurrencies today are mostly a domain for technocratic elites and online criminals. Which are sometimes the same thing. Reported losses from cryptocurrency scams increased over 1,000% last year from the previous year, according to the FTC. Actual losses are certainly many multiples greater. Use of cryptocurrencies to purchase illegal goods and services on the dark web has been rapidly increasing for years. According to a report by Chainalysis, dark web cryptocurrency sales grew 70% in 2019 to over $790 million. And an estimated 1.1% of all cryptocurrency flow is for illicit transactions. That’s a lot of illegal activity.

Crypto defenders say these examples are outliers. That a few fraudsters are hurting the legitimacy of cryptocurrencies. Maybe... but the more I learn about cryptocurrencies, the more shady the entire ecosystem seems. Pump and dump schemes are rampant. So common that they have their own name, “rug pulls”, in the crypto world, this is when buyers pump up a cryptocurrency (remember, anyone can create one) to drive up the price, then sell at the peak leaving the sucker investors who were late to the party holding the bag. In some sense, almost every cryptocurrency is a pump and dump scheme, since the only thing driving up their value is the hype.

A Bitcoin kiosk at a gas station in Santa Rosa, CA.

Memes that twenty-something male gamers find hysterical are a particularly effective way to drive that hype. There is an entire crypto sub-category of so-called meme coins, of which there are more than 5,000 according to CoinMarketCap. These concocted cryptocurrencies exploit some trending meme as an engine to drive awareness and demand for their coin. Although talking up meme coins on Reddit or Discord may be a fun game to play with your buddies, let’s recognize it for what it is: entertainment—no different from a roulette spin or a lottery ticket—not a legitimate form of payment or investment, and certainly not the utopian financial future that crypto advocates promise. Not yet, at least.

More than twelve years after the creation of Bitcoin, it has yet to establish itself as a legitimate asset class. Indeed, it still feels possible that the entire cryptocurrency market will collapse and my little digital wallet will be worthless. But a potentially promising future for cryptocurrencies is government-issued ones, called Central Bank Digital Currencies (CBDC). China launched its digital currency earlier this year and many other countries, including the U.S., are interested in cryptocurrencies of their own. Of course, CBDCs are antithetical to the original idea of cryptocurrencies, which were designed to be decentralized and free from government manipulation and control. But whom do you trust more? The Federal government or a bunch of dark web cyber hackers?

Crypto converts may put their faith in the latter. They may call me a luddite for my skepticism. But until this market feels more like a well-regulated, trustworthy sector of the economy, and less like buying lottery tickets at a 7-Eleven, I will proceed with caution. Maybe, someday, USDs will be available as CBDCs, but, until then, I'll continue to just have a toe in the water.