Friday, December 9, 2022

Cryptocurrency: Maturity, or the End?

When historians look back on 2022, they will see, along with the midterm elections, the recession that wasn’t, the shifting of Covid-19 from a pandemic to another bug, and Aaron Judge’s steroid-free 62 home runs, the rise of a new medium of exchange.

I start with the entire March 20th New York Times Sunday Business section.  That’s right – except for a Square ad on the back, the entire 10-page thing had nothing else in it.  The first article’s title, “CRYPTO IS HERE TO STAY” (all capitals in the balloon-like letters used), set the tone.  The second one, “THE BASICS” also by Kevin Roose, told us that cryptocurrencies “involve blockchains,” the “public, permanent databases that nobody owns” which are “distributed ledger systems” “allowing people to send and receive money over the internet without needing to involve a central authority.”  The blockchain databases generate new units of Bitcoin and 10,000 other currencies by allowing “crypto-mining,” “a process… played by computers all competing to solve cryptographic puzzles in order to add new information to the database and earn a reward in return.”  So more of these currency units are created, and their value is determined by supply and demand.  At the time this piece was written, one Bitcoin was worth “about $40,000.”

Since then, what has happened?  On May 22nd, Justin Baer related in The Wall Street Journal, reprinted in MarketWatch, that “Wall Street reluctantly embraces crypto,” as “many banks are moving towards storing and trading cryptocurrencies,” some in effect creating mutual funds where investors can buy and sell Bitcoin or others without dealing directly with the blockchains, while others consider that “the opportunity today is not big enough to take the reputational risks of being early.”

On the regulatory side, Clive McKeef reported on August 20th in MarketWatch that “’There’s no reason to treat the crypto market differently from the rest of the capital markets just because it uses a different technology’: SEC chief Gary Gensler.”  Per McKeef, “across decades of cases, the Supreme Court has made clear that the economic realities of a product – not the labels – determine whether it is a security under the securities laws.”  Accordingly, total freedom from government involvement is not realistic for cryptocurrency.  That was also the point of Will Gotsegen’s September 9th The Atlantic “Crypto’s Core Values Are running Headfirst Into Reality,” which chronicled legal wrangles between regulators and those in the cryptocurrency industry.  Although the federal government is dominating, the matters are clearly not all resolved.

After more time, and further Bitcoin price drops, Paul Krugman asked “Is This the End Game for Crypto?” (The New York Times, November 17th).  He cited the bankruptcy of FTX, “one of the biggest crypto exchanges,” caused when, most likely, “the people running it simply made off with billions of depositors’ money.”  He said that “after 14 years… cryptocurrencies have made almost no inroads into the traditional role of money,” because “they’re too awkward” and “their values are too unstable.”  For most, they have become another item bought through “exchanges like Coinbase, and, yes, FTX, which take your money and hold crypto tokens in your name,” requiring trust, meaning that “the crypto exchange has basically evolved into exactly what it was supposed to replace:  a system of financial intermediaries whose ability to operate depends on their perceived trustworthiness.”  Krugman concluded that “even if the value of Bitcoin doesn’t go to zero (which it still might), there’s a strong case that the crypto industry, which loomed so large just a few months ago, is headed for oblivion.” 

In the November 23rd Economist, Buttonwood explored “How crypto goes to zero.”  The person or group behind this pseudonym concluded that it wasn’t at all likely, as its distributed technology would make hacking all of it almost impossible, and while “unravelling,” or dropping demand and hosts not wanting their systems, would still leave some investors remaining, especially as “crypto’s reputation has been undermined before” and “has collapsed in value repeatedly throughout its lifetime.”  As of December 8th evening, one Bitcoin, per, traded at $17,219. 

But the chance of all value going away is not the only, or even the primary, measure of evaluating investments.  Cryptocurrency has the same problem as Uber, Lyft, or Airbnb – its regulatory situation is unsettled.  If Uber and Lyft were held to the same rules as traditional taxi companies, they would be greatly reduced or extinct altogether.  If Airbnb was subject to the same regulations as true hotels, it would similarly suffer.  The same may or may not be true for Bitcoin and the others, but it is a real exposure not shared by buyers of Walmart, Amazon, or PepsiCo.  That is the problem, and how it is resolved will tell whether cryptocurrency is just taking another punch, or, this time, going down for the count. 

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