Tomorrow, all crypto is worthless

This is my attempt to work through my mixed emotions, concerns and wonders about this new dynamic that is dominating the news feeds and yet seems to be nothing more than a speculative bubble of hype. Today, it’s is everything. Tomorrow?

ICO, blockchain, crypto… I can’t go a day or even a few hours without someone mentioning one of these words. I’ve even bought and sold some crypto, watched the prices and wondered about this new-yet-ironically-old market. “Don’t miss out! This is the new world!” Somehow reminds me of Gordon Gekko and Wolf of Wall Street.

All this stuff has become the default speculative investment product (“let’s trade some crypto tonight”). The best way to raise capital from investors while giving them no recourse, no voting rights. It has become the new “dot.com” way to reinvent everything from loaning yourself money to ownership rights on games to HR software.

And it works. Companies are raising millions via ICO. Crypto traders are making money on the spread. It’s an excellent way to launder money if you can work out the dynamics of finding the right exchange, etc. Crypto has made it easier for criminals to do business that they would have likely done anyway.

It doesn’t seem right… Because it’s new?

Maybe it shouldn’t bother me. It’s very much a middle-upper-class and 1% market. Poor people aren’t gambling in ICOs (normally a threshold of 5,000 to 20,000 USD to participate). It will eventually be regulated just like every other financial product.

“If they have enough money to put into the market, they are responsible for what they do with it,” one person remarks to me when I mention the risks of putting money into such a market. I also have to agree that the global financial system has issues. It’s easier for a billion dollar company to get financing (it doesn’t need) than a small startup (which needs it). Investors don’t mind dumping money into flashy companies that lose money every day rather than funding stable, slow growth companies.

Yet with all the greed, selfishness, monolithic thinking within the world of finance, I don’t see how encrypted transactions will somehow change all of that. We are imaging this technology as a solution to the problems we see in the world. That world isn’t a pretty, logical system.

A new way to raise capital

If you have a startup and need capital, riding the hype-wave of blockchain is appealing. For a relatively minor cost, you can issue coins or use a blockchain method to encrypt or manage part of your app or tool.

Except that if you were building a company that has such a great product that will serve this amazing market niche, why do you need so much capital to make it work? The hype-fueled ICO fundraising craze seems to be driven more by the obsession with growth-hacking, growth-first, network-dominate focused business.

The business narrative has become that you need to dominate, be the first and no one is as good as you. This plays well to the pitch you need to sell your coins. It doesn’t bode well for the long-term real value of your company or business.

You do have the next big thing… If only you had 25 Million to make it a reality?

A new way to gamble

It’s also a great way to gamble. Humans love to speculate, gamble and guess. Trading coins or crypto is an almost seamless process once you get setup. It also feels different than trading stocks. You can easily lose yourself in the abstraction. Trading stocks of real companies involves an awareness of the underlying company. Crypto is an almost perfect abstraction of value.

What is a coin? The value that other people perceive it as having at any given time. Well kind of… There are some coins tied to the value of things — like power plants or other assets. You could argue that those coins have real value, but so would stock certificates, or other encrypted digital signatures. That it’s a digital coin doesn’t really mean anything.

This is all happening as part of these massive markets. Markets which are influenced by transaction volume and value. So anyone can manipulate the market. And are likely manipulating the markets in considerably more dramatic ways than stock markets because crypto markets aren’t regulated (yet-ish) and are relatively much smaller and much more siloed than public, regulated markets.

So, we are gambling without knowing the house advantage, the rules or the odds. Sounds scammy… Scammy like the libor, junk bonds, subprime and every other manipulation of global markets by wealthy, entitled people. Yet this time it is different. The market being played isn’t really connected to the whole financial market (yet-ish), which could be a good thing.

When something has no inherent value, volatile price and dependence on the whims of a minority, I will argue that that thing is effectively worthless. If anything, that thing should have negative value as there is a cost to deal with it. That is the same appeal of a lottery ticket. The ticket itself is completely worthless. Yet if the stars align it might be worth millions. What you paid for the ticket doesn’t matter.

The anonymity of the market is the appeal yet it also creates the same risks of past deregulated financial markets. Highly speculative markets are volatile and easy to manipulate and abuse. This time, maybe the collapse will only hurt those inside the market.

Another way to encrypt

Blockchain offers another way to encrypt transactions that is appealing enough that many intercompany/interbank transactions will likely eventually all be transacted using a blockchain enabled system.

There are likely many other situations where blockchain based encryption will offer a better value, service and solution than other encryption. There are also likely many situations where building the system or app on blockchain is a horrible idea. Well at the very least an inefficient idea.

I can imagine a hypothetical future where blockchain has replaced everything as the default encryption for anything with a network of nodes. Yet, I can equally imagine a future where quantum computing has made the blockchain obsolete.

Blockchain (like every other encryption method) has trusted-party and end-point security issues. Great everything on the blockchain is perfectly secure. What about the people/technology/dogs which actually push stuff to this perfect record? Bugs, errors, mistakes. The same problems don’t disappear when someone stands up, raises their hands and yells “crypto save me!”.

Looked at from the horizon of time, blockchain is just another interesting encryption technology that caught fire on the news feeds.

Connor’s Personal Blockchain Dictionary

This is a summary of the different definitions I’ve found myself using. They are not entirely accurate, but they serve my own purpose.

  • blockchain: a method for securing transactions with a type of encryption based on networks of computers which cross-check each other and automatically accept or reject changes by the majority.
  • blockchain based apps, tools, sites: a normal website/app/tool which uses a central database which is encrypted using a blockchain method.
  • initial coin offering: a type of fundraising where investors receive no-recourse, non-voting stock (see “coins”) in a company that may-at-some-point-in-the-future build something using a blockchain encryption method.
  • coins: a type of virtual credit which is encrypted using a blockchain method. Coins are sometimes seen as equivalent to stock, investment instruments, securities, currency or gambling credit.
  • exchange: a virtual marketplace where buyers and sellers can trade coins and fractions of coins.
  • listed and unlisted: more than 90% of the coins sold via an initial coin offering are not listed on an exchange. Listed coins can be traded on that exchange with other buyers/sellers. Unlisted coins are largely seen as valueless. Some unlisted coins may be used as an alternative to traditional virtual credit within a single app.
  • cryptocurrency: originally, coins based on blockchain were seen as a potential virtual alternative to hard currency. Due to the instability and lack of clear regulatory controls, crypto is unlikely to be an acceptable legal-tender currency any time soon.
  • crypto: the short form for cryptocurrency. Normally people who invest and trade cryptocurrency refer to it as “crypto”.

Duct Tape