So, I realize that it’s a little bit cheeky to come back to criticizing crypto after billions have been lost and the whole category has collapsed. But, besides wanting to sound the death-knell, I honestly think there’s a lot we can learn from the collapse of an entire category, and something I hope I can teach everyone about not only asset classes but fraud in general. Plus, I wanted to hopefully convince you guys to stay out of it overall, since crypto is still around even if much of the hype is gone (Bitcoin is still worth almost half a trillion dollars after all).
With that out of the way, let’s get into it. I’ve been known to take big losses on what many consider similarly risky plays (cough, Teladoc). I still own a lot of those companies, and the reasons for the investments are still correct in many ways, though of course, DCF calculations definitely change when your discount amount needs to go up by like 6% annualized… Regardless, this comparison is arguably the best way to look at crypto. Many people feel that growth companies are completely unreasonably valued, and that the underlying company is not worth its price. Yet, this valuation still relies on the concept of intrinsic value. Comparatively, the cryptocurrency space is mainly vague bets on the future adoption of a technology stack and the concept of decentralization. I can already hear the protests from the crypto bros, but at the end, if anyone disagrees with me, I’d be thrilled to talk about it in messages (it’s why I started the website after all).
Before we criticize it, we should look at the positive aspects, and the reasons for supporting crypto in the first place. People aren’t stupid after all, there has to be some merit. The first pro comes in the technology stack behind most coins. In particular, the most applicable real-world use is found in simply lowering transaction fees. Whether proof of work or transaction, the fees and expenses associated with transferring a payment, particularly internationally, are incredibly lower than in the banking system. The financial system, at its core, is one built with many middlemen, from card transactions, banking operators… Everyone needs their cut. Crypto, by contrast, allows for almost free movement of money, and it is this primary use-case, beyond anything else, which has the potential to make it a viable competitor for traditional currencies. After all, it is the possibility to save tons of money on remittances which convinced El Salvador to adopt Bitcoin as an official currency. The idea being that in an unbanked society, the speed and ease with which money could be transferred and received, especially from overseas, could be game-changing. Now, of course, El Salvador is now going bankrupt and is in need of a potential IMF bailout tied almost entirely to the crypto escapade - so it still wasn’t all good news.
The second major benefit that was touted is the decentralized aspect. The idea that our governments, obsessed with printing money, would be unable to touch the supply of the coins, is inherently appealing.
My problems start there though. All of these benefits are a result of the technology behind cryptocurrencies, not the currencies themselves. There is no reason why the government cannot, first regulate the coins out of business, and then simply yoink the technology. Or if not the government, the banks… Beyond that, for a currency, you can buy remarkably few things with it (we can all remember the Bitcoin conference you couldn’t pay for with Bitcoin right?). The entire segment has basically devolved into a circular pool of degenerate gambling and fraud. Alameda, Three Arrows, Celsius, Luna - they all fed into one another. The way they got 10% yields is by lending it out to each other in an ever-growing complex Ponzi scheme. Of course, given it isn’t uncommon to see the literal mentality of getting in on the ground floor of a Ponzi scheme, that shouldn’t necessarily bother everybody … Let’s not even talk about the fact that all cryptos, no matter what, are literal numbers on a screen backed by nothing but your confidence that they have value…
For those of you about to say that it’s the same thing as fiat currency, I wanted to explain why it isn’t. First, and most importantly, Fiat is backed by the respective government institution. The reason that matters is that those governments have the unique and sole ability to tax at any amount they want. Now, of course, that will never be 100%, and most nations prefer default to truly wringing a population dry, but, at the end of the day, if you value it as a company, you are investing in a nation with the theoretical earnings of its economy. Secondly, because of that first part, fiat currency is stable, and confidence already exists - with crypto you are trying to manufacture confidence.
Now, for the learning part. First, when things seem too good to be true, they usually are - I know, duh, everyone says that. But, it’s important to remember. No matter what, guaranteed 10% annual returns come with risk of some kind. If not, no one would invest in treasuries, obviously. Second, you should always try to find undiscovered value you can understand. The only way you can actually determine the value of any underlying security or opportunity is if you can totally understand exactly how money is made, and what is being brought to the table. Last, and this goes into what I always say - there has to be a powerful competitive advantage in anything you put money in (usually - debt is kind of different, but I digress).
At the end of the day, cryptocurrency gained its fame on a meteoric rise driven in large part by hype and fraud. I hope the promising technology picks up some adoption, and above all, I hope you guys all learn something from the downfall it has experienced! As always let me know of any future suggestions!
Mateo Gjinali
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