You, Yes You, The Crypto Investor, Are Killing Crypto
Whenever I speak to someone who is new to the world of cryptocurrency and they’re asking me how it all works, I always begin with the same introduction.
“It’s a great technology that would be super useful for the world, were it not completely buried under an incredibly stupid market.”
The basic premise that makes it such a great technology is very simple. I should be able to send you money as easily and cheaply as I can send you a text message. That’s it. Everything beyond that, to do with “blockchains,” or “smart contracts,” or “decentralized apps,” or whatever else, is technical nuance that isn’t important for the every day user. But it doesn’t matter how great that kind of service would be in principle if we can’t ever get it off the ground.
And why can’t we? The technology is right there. It’s been around now for over a decade, which in technology years, is ages. It should have been perfected by now to the point where it’s as easy to use as watching videos on your phone.
The problem is the market. The over financialization of the crypto market is preventing it from becoming a usable tool.
But why? Lots of things get bought and sold in stock markets or wherever else trading happens, and it doesn’t prevent them from being something usable. Stocks in Apple go up and down, but their value at any one time doesn’t make any one iPhone more or less usable.
I’m sure the stock price of a company like Apple ultimately effects how their products are made or sold in some way, but the connection is indirect and a little hard to know or care about for the average consumer. Effects of secondary market influence on Apple’s ability to make and support products probably wouldn’t be felt until years down stream.
Cryptocurrencies, though, are not like most products. Because their utility and value are the same thing. The whole point of crypto, at least originally with Bitcoin, is to move value around. Ideally, like with any currency, that value is stable and predictable enough that I can know if I sell someone some thing I made, or some service I offered, I know how many coffees or carrots I can buy with what I receive as compensation.
If I sell my services, and have no idea whether or not the currency I received could be worth zero within moments after I get it, it’s useless to me. Sure, it could go up, too, but, I’m trying to lead a life where I can buy food at regular and stable intervals. I’m not interested in riding boom and bust cycles where I feast or famine. Gambling on investments is for my discretionary income that I can afford to lose, not my base income on which I depend.
On the other hand, the whole point of trading is to change values. Buy low and sell high, as the deliberately ironic and simple trading advice goes. There’s no point at all in buying stock in something if you don’t think the value will change. Hopefully, it will go up. Staying the same is not as bad as going down, but in any case, a stock is kind of pointless if it’s value doesn’t move.
These two fundamental premises are diametrically opposed to each other. Which creates a significant problem since a crypto’s use is not siloed from its trading price the way an iPhone’s ability to serve you is separate from Apple’s stock price. The moment someone trades a crypto, it’s usability is immediately affected, changing the value in my wallet.
Its utility and its trade are the same domain. And like matter and anti-matter, the combination is volatile and generally destructive.
Which means the entirety of all the market heat around crypto is exactly why Bitcoin, or any other crypto, is not taking the world by storm. It’s not that no one has found a use case. If people could send money around at a fraction of the rates they get from banks or online services, they would absolutely be doing it regularly.
They just can’t right now. None of the obvious utility is accessible because crypto is currently buried under an entirely irrational market.
Not just “irrational” in the hyperbolic sense that the market is frustratingly volatile and subject to herd mentality. I mean “irrational” in the sense that there is no justifiable correlation between any price of any crypto and any measurable real world value, utility, or significance.
There was a point in time when you could say ten thousand Bitcoins are worth exactly one pizza. But, that was a fleeting moment of genuine adoption, lost to the ages. Now, no one talks about Bitcoin except in terms of it’s current trading price relative to US dollars. Or whatever your home fiat currency is.
Does this really matter? People trade fiat currencies all the time, so why is the impact of trading more impactful on cryptocurrencies?
Simply put, government intervention. Governments and central banks, imperfect as they are, considered by many crypto enthusiasts to be the root of all evil, take action on fiat currencies to ensure that there is some level of reliability. I’m not here to advocate that this is necessarily good or bad, just that it is a reality. A reality that makes fiat currencies usable as units of exchange.
Crypto has its value completely determined by the market. And as a result, we’re seeing exactly why central banks are so afraid of deflation.
Governments would be fine with a zero percent inflation rate, where markets had perfect stability. But, the problem with zero inflation is that the world does not stand still. If something like a global flu pandemic throws the markets off, you’d be at risk of having deflation. And, according to central bankers, deflation is a disaster. So, it’s better to have a little inflation as a buffer above zero. That’s why they target around two or three percent inflation a year. They know inflation sucks, but two or three percent inflation is a minor annoyance compared to deflation.
But why is deflation considered so bad? The problem, as I’ve had it described to me, is that if your money increases in value because goods are going down in price, then you might not decide to spend right now, because it always makes sense to wait until things are cheaper. If enough people start making this decision, money and goods stop moving, and economies can grind to a halt.
For a long time, this premise sounded very dubious to me. Or at least, overly exaggerated. I feel like there would always be a breaking point where eventually I will want the things I want, regardless of whether or not the price will go down further. If I’m hungry, I’ll buy food now, I won’t wait until tomorrow. If there’s a luxury good I want, like some new smart phone I have my eye on, at some point I want to actually have and use the phone, not wait forever until its price hits zero. Especially since new and better phones are coming out every year anyway, so I’m already faced with choosing between current wants and future improvements, and that doesn’t stop me buying a phone when I want one.
I viscerally experienced this with the crypto market during one of its bull runs where I saw my personal holdings explode in value. I felt like buying more things, using it more, because it felt like I had almost bottomless resources to draw from. So, shouldn’t a deflationary market be a good thing, where people feel more freedom to be frivolous?
But, what I see now with the state of the cryptocurrency market is that all the old school economists who fret over deflation are right. My little personal microcosm of anecdotal experience is not representative of the realities of market movement under deflationary conditions.
In a small part that’s because crypto represents only a fraction of my discretionary income, and so my choices with it aren’t really indicative what my choices might be if it was the currency that underpinned my life. Essentially, all my choices with crypto are frivolous. The things that really matter to me, my rent and groceries and income, are generally all done in fiat. So my experience was slightly distorted.
But more importantly, my personal choices with crypto are not like the movements of a whole market. Individual choices are drowned out in the aggregate. What happens in the whole of the market when you have a currency that increases in value is what we’re seeing.
Everyone believes crypto is ultimately going up, because at some fantasy point in the future when it has utility, it will be worth so much more. It’s only a matter of time, which is always as long as it needs to be to support the belief. Which means every movement of cryptocurrency now is based on the perception that it is ultimately a deflationary economy even if the markets might push the value downwards on any particular day.
And because of this, the crypto market has ground to a halt. Not in trading, obviously. If you look at crypto in terms of all the buying and selling of money just to make money, it would seem to be thriving. But in terms of utility, the ability to actually do anything with crypto, it’s on life support.
There are no goods and services moving around via crypto. You basically can’t do anything with it, because of the volatility. You can essentially only use cryptocurrencies as gambling chips in the Ponzino of crypto markets, ultimately to cash out for fiat later.
I now see that the dusty old central bankers who worry about the dangers of a deflationary economy are right. I used to think it was a simple problem of your average consumer holding off on buying a car because the car will be cheaper next year. But that’s too simplistic. What happens in a deflationary economy is what’s happening to crypto. Lots of meaningless trading, no growth and adoption.
Which is somewhat ironic because, so far as I know, Satoshi Nakamoto specifically designed Bitcoin with a fixed global supply precisely so it would be deflationary. With a fixed supply, it’s value can only go up as it comes to be the unit of exchange for more and more goods. I wonder how he, she, or they, would feel now seeing that Bitcoin and crypto in general has become the perfect example of exactly why a deflating currency causes a functional economy, one in which people actually do stuff, to grind to a halt.
The promise of having more wealth for having done nothing becomes too tempting for the market as a whole to ignore. People move into the market with no intention other than to get rich by doing nothing. They start playing games with the market because no matter what ups and downs it has right now, the ultimate promise that one day it will all work out removes any sense of real world consequence. A day that will never come so long as the trading kills the utility.
The belief in the future value increase of crypto has been woven into the very culture of crypto. The vast majority of people getting involved in crypto have no interest in using it in any way that would contribute to its gradual adoption that would underpin any growth in value. Value measured by an actual connection to real world activity. They want to simply buy, hold, and cash out. Because they believe that is what it’s for.
And in response, most technical developers are catering to that market by creating financial instruments in order to create more ways for people to try and hedge their bets. If you look around at most smart contracts, decentralized apps, or whatever other crypto related technology and services that are on offer, they’re almost all designed for people to be able to stake holdings, create loans, diversify risk or whatever else for people to be able to play the market.
This is because people are impatient. They don’t want to merely wait until one day in the future that may come later than is convenient for them, they want to trade on the promise of far future riches for more near term gains. There’s always someone you can sell to by telling them that the future is still in front of them.
Very few, some, but very few, developers are making services with crypto that could be considered a real world use case that would actually create the kind of adoption for the one-day-it-will-all-be-worth-it reality to actually become manifest. Unfortunately, they are too few, and too divided in terms of both vision and ideology to overcome the volatility of the market.
If ninety nine people were using crypto or developing use cases, then one person who just held on and did nothing while everyone else did the work would become vastly wealthy by sitting around and waiting. Whether that’s fair or not is irrelevant. What’s relevant is that what we actually have going on right now is ninety nine people who want to be the one who rides the wave of crypto becoming valuable, and maybe one person doing anything to make that happen.
This is the reality of a currency’s value in a deflationary market. It’s not just that people might hold off on making purchases, as any beginner’s guide to economics will explain to you. It’s that in a deflationary market, price, value, and utility start to drift apart from each other because they are no longer held together by the gravity of reality.
If you’re reading this, if you’re holding or trading crypto in order to just have it be more valuable one day, then you’re part of the reason crypto is not already as valuable as it could have been. Does that make you a bad person? I don’t know, I’m nobody’s judge. Some people would argue that it’s human nature to want the most benefit for the least effort, and this struggle to find utility while under this kind of intense market pressure is something cryptocurrency will have to evolve for or die. That might be true.
And I think we need to acknowledge that this problem might actually be insurmountable, and crypto, or at least those with fixed supplies, as a real world utility, might die. I’m not saying it will, I make no predictions. Just saying, maybe. If crypto can’t find a route to being an actual currency and not merely a gambling chip, then it will probably be killed by CBDCs, central bank digital currencies. Killed, in the sense that it will probably always exist as a form of gambling for the type of people you don’t want to corner you at a party.
In the meantime, consider how your holdings in crypto have uncertain long term value because everything that is happening in the crypto market right now is exactly the problem described by old world economists who work at central banks. And you’re a part of it. Especially if you’re just here to hold and sell. Maybe you don’t mean to be holding crypto back, but it’s your actions that contribute to outcomes, not intentions. That’s how markets work.