I appreciate the author sharing his views, especially because he does a good job of distilling them. If cryptocurrencies are truly novel, however, it's not clear that one should be able to draw a direct analogy to an existing product. That they don't 100% resemble money, or commodities, or stock, or art, isn't necessarily a problem.
My argument for owning Eth is that it's like buying real estate (yes, I'm making another loose analogy). Why does a person invest in land? Because they expect something to flourish in the vicinity of their land, and they'll be able to capture some of that increased productivity in the form of rent (or appreciation).
Ethereum is a programmable ledger, and Eth is its unit of capital. A programmable ledger is a tool that can be used to create things like a money supply the author describes. The next question here is "why would someone prefer to use an analogous system created on Ethereum over whatever exists today" and that answer can be some combination of transparency, usability, and legitimacy. If we want something like the elastic-supply currency the author describes, we can create one for ourselves. We can do so without providing limitless power to a centralized authority (i.e. the Fed). To some, the resulting currency will be more legitimate as a result. (checkout Rai or Liquity for examples of elastic/"algorithmic" stablecoins on Ethereum).
In this view, today's value of Eth is largely speculative. On the other hand, this gives a way to fund development. New protocols like the ones I mentioned are able to capture the value they create only because there's already so much $ in this ecosystem, and that money's eager to pay a 0.1% fee for the benefit of this new product.
There's a lot of circular activity going on, sure. Deflationary rewards, leverage, etc. If you haven't seen an 80% drop in crypto yet, be ready for it (seriously). But as long as the influx in capital facilitates some level of actual new products -- as it does appear to me to be doing -- then what really is the issue here? Maybe we can be satisfied in viewing it as a rather complicated machine for capital allocation? My biggest worry is that impending 80% drop: crypto is notorious for its volatility, but still each bull run draws in newcomers who think we're past all the drops and find themselves surprised when they lose 80%.
> Why does a person invest in land? Because they expect something to flourish in the vicinity of their land, and they'll be able to capture some of that increased productivity in the form of rent (or appreciation).
Most people buying land are not doing it as a speculative investment. There are many who buy real estate as an investment, but most people buy real estate for personal use. Even those who buy real estate as an investment they typically make money from improvements whether that’s farming or residential.
Maybe they wouldn’t articulate it as speculation but that’s still what they are doing (even if they are living in the property). They are speculating that the value will not decrease, or that rents will increase. Otherwise they’d rent.
ETH does have a return currently of ~5% through staking.
Most people wouldn't pay the exorbitant interest, taxes, mortgage paper fees if they didn't think they'd get appreciation on the property — "like always!".
The old joke is that you invest in land because they're not making it any more.
That's not the case with cryptocurrencies. Not just that they're still mining them, but that new cryptocurrencies are invented every day. You can hold a unique hold on a land, because there's only so much of it, but you can clone Etherium in a heartbeat. Or design your own that works better for something.
The hope is that one of these blockchains will get so many people behind it that it becomes the natural monopoly of whatever blockchain is good for, and then the money you spent mining/investing won't be wasted. You'll get network effects, a la Facebook -- everybody wants to be in the same place. But I don't see anybody really wanting to get behind giving money to those who got there first, not when they can make up their own.
What people don’t understand, even intellectuals like the author, is that money transmission is heavily regulated in the United States. This fact is why cryptocurrencies have such a seemingly difficult time finding grounding to the marketplace. It’s not transaction times or energy usage. It’s the BSA Travel Rule, it’s KYC, AML, OFAC, and a regulatory minefield designed to maximize the government’s ability to track and curtail financial flows.
> This fact is why cryptocurrencies have such a seemingly difficult time finding grounding to the marketplace. It’s not transaction times or energy usage.
Don't you think it's overly simplistic to claim there's only one reason?
Transaction times (or ETH gas costs or whatever) have made them infeasible to use in a bunch of cases.
But isn't part of it also that every fiat currency has a baked in demand, in that if you don't pay your taxes in that currency you go to jail? As a US citizen, even if every business I frequent accepted BTC, I would still need USD. Using cryptocurrencies by contrast is entirely optional. And to the degree that you believe in the usefulness of cryptocurrencies, would you really spend it on a regular basis?
Look, you don’t need to trust or believe me, but every major country central bank is evaluating switching to cryptocurrencies and real-time instant payment settlement systems. Google keywords “Central Bank Digital Currency”.
Central Banks, FIs, and FinTechs are hyper aware of the value of distributed ledgers.
If crypto's only advantage over the traditional finance sector is doing an end-run around regulations, it's no surprise that this advantage won't be sustainable.
No one in the business of connecting the US Dollar market to the cryptocurrency domain wants to “do an end-run” around any regulations. That’s a bad take. In the compliance space, people don’t “move fast and break stuff”.
Uhh, right? The FBI isn’t going to suddenly give up on fraud investigations and the IRS isn’t going to disappear if Bitcoin were to replace USD. You still have to follow the laws or you go to jail.
"To fight this recession the Fed needs more than a snapback; it needs soaring household spending to offset moribund business investment. And to do that, as Paul McCulley of Pimco put it, Alan Greenspan needs to create a housing bubble to replace the Nasdaq bubble."
It's been a while since Krugman said this, but it illustrates a basic fact about how many western governments do economics today: it's bubbles all the way down.
I like the article, but I think its charge of intellectual incoherence could be applied to a broader category of financial products than just beanie babies, tulips, and bitcoin. Many things, like houses, have simple explanatory narratives for why they have some value, but progressively more complex (and more incoherent) narratives for why they have their actual value.
In an essentially nihilistic economic model, where growth consists of stacking bubbles upon bubbles and hoping to inflate new ones before old ones pop, bitcoin is only marginally more demented than everything else.
I like this point. Bubbles all the way down. If one becomes fixated on the troublesome qualities of crypto its intellectually dishonest to ignore the similarities in every other non-crypto investment vehicle.
The difference is that for some assets you can calculate value based on fundamentals. IE, humans need shelter, hence estimate future value of shelter (real estate) based on migration trends and other factors. How do you estimate future value of bitcoin? Lack of predictability is probably why serious investment funds don't go into crypto
There are plenty of articles every day talking about how crypto is a scam or w/e. Anyone that's worried about one more on the pile is being irrational.
No amount blog articles is going to materially impact the long-term outlook of web3/crypto projects that aren't the actual scams/cash-grabs. =)
I observe a similar thing in HN. I suspect HN gathers a specific type of techie-crowd, who has missed out on the crypto-scene while working hard on "conventional" tech projects. I have been and I feel the sentiment.
HN is not exactly an early-adopter community for a specific time period (say 5 years of early inception of a new tech). It is a busy-working community.
It's not X, it's not Y therefore it must be Q. It can also be a different asset class, a new one. Keeping an open mind is paramount in the super fast tech lane.
> Nobody full understands (in reference to crypto)
We'll if you frame it that way no one fully understands anything. Nobody fully understands equities markets. Surely nobody even comes close to understanding all of the millions of dark scary corners of the derivatives markets. I would say bitcoin is much more of a known quantity than many of these markets.
> As we know from the history every of every other speculative mania, popular delusions based on the madness of crowds cannot sustain themselves indefinitely.
Madness such as governments printing trillions of dollars of fiat to artificially prop up the stock market and in the process dilute the salaries of the world's entire productive workforce while rewarding incompetent executives by pumping up their stock prices? I agree, such popular delusions based on the madness of crowds cannot be sustained. Not to mention the ridiculous, over-sized, multi-billion dollar government contracts which are repeatedly handed out to big corporations and which add no value at all to society (how many trillions did the government waste on Afghanistan again? How many billions did they then award to Microsoft to build military VR gizmos?)... And what about the huge superannuation/401K funds which invest other people's retirement savings, without their explicit approval, into inefficient, frothy, zombie corporations (run by their friends) which are going to collapse once people actually start retiring and start cashing out their pensions in mass... And the government will then print more money to (yet again) bail them out and keep screwing over the average salary earner and taxpayer. That's why we need cryptocurrency.
If you think cryptocurrency is mad, if you think Dogecoin and SHIBA INU coins are mad, you don't understand the fiat monetary system.
I get where you're coming from, but two wrongs don't make a right - pointing out that the fiat system is broken is a red herring of sorts.
Having said that, I think the author is far too pessimistic in his outlook. The fact that cryptocurrencies are physically intangible does not simply mean it is invaluable. One can speculate that digital assets are like tulips, but what the dot com bubble taught us is that tech is here to stay. And who is to say that humans will not ascribe value to digital coins to last into the next millennium? This is coming from a believer in the gold standard.
Readit News
https://www.stephendiehl.com/blog/crypto-scams.html
https://www.stephendiehl.com/blog/destroy-bitcoin.html
https://www.stephendiehl.com/blog/non-innovation.htmlhttps://www.stephendiehl.com/blog/ransomware.html
https://www.stephendiehl.com/blog/banbitcoin.html
https://www.stephendiehl.com/blog/ponzi.html
https://www.stephendiehl.com/blog/chernobyl.html
https://www.stephendiehl.com/blog/gamestop.html
https://mobile.twitter.com/smdiehl
My argument for owning Eth is that it's like buying real estate (yes, I'm making another loose analogy). Why does a person invest in land? Because they expect something to flourish in the vicinity of their land, and they'll be able to capture some of that increased productivity in the form of rent (or appreciation).
Ethereum is a programmable ledger, and Eth is its unit of capital. A programmable ledger is a tool that can be used to create things like a money supply the author describes. The next question here is "why would someone prefer to use an analogous system created on Ethereum over whatever exists today" and that answer can be some combination of transparency, usability, and legitimacy. If we want something like the elastic-supply currency the author describes, we can create one for ourselves. We can do so without providing limitless power to a centralized authority (i.e. the Fed). To some, the resulting currency will be more legitimate as a result. (checkout Rai or Liquity for examples of elastic/"algorithmic" stablecoins on Ethereum).
In this view, today's value of Eth is largely speculative. On the other hand, this gives a way to fund development. New protocols like the ones I mentioned are able to capture the value they create only because there's already so much $ in this ecosystem, and that money's eager to pay a 0.1% fee for the benefit of this new product.
There's a lot of circular activity going on, sure. Deflationary rewards, leverage, etc. If you haven't seen an 80% drop in crypto yet, be ready for it (seriously). But as long as the influx in capital facilitates some level of actual new products -- as it does appear to me to be doing -- then what really is the issue here? Maybe we can be satisfied in viewing it as a rather complicated machine for capital allocation? My biggest worry is that impending 80% drop: crypto is notorious for its volatility, but still each bull run draws in newcomers who think we're past all the drops and find themselves surprised when they lose 80%.
Most people buying land are not doing it as a speculative investment. There are many who buy real estate as an investment, but most people buy real estate for personal use. Even those who buy real estate as an investment they typically make money from improvements whether that’s farming or residential.
ETH does have a return currently of ~5% through staking.
Most people wouldn't pay the exorbitant interest, taxes, mortgage paper fees if they didn't think they'd get appreciation on the property — "like always!".
That's not the case with cryptocurrencies. Not just that they're still mining them, but that new cryptocurrencies are invented every day. You can hold a unique hold on a land, because there's only so much of it, but you can clone Etherium in a heartbeat. Or design your own that works better for something.
The hope is that one of these blockchains will get so many people behind it that it becomes the natural monopoly of whatever blockchain is good for, and then the money you spent mining/investing won't be wasted. You'll get network effects, a la Facebook -- everybody wants to be in the same place. But I don't see anybody really wanting to get behind giving money to those who got there first, not when they can make up their own.
Dead Comment
Don't you think it's overly simplistic to claim there's only one reason? Transaction times (or ETH gas costs or whatever) have made them infeasible to use in a bunch of cases.
But isn't part of it also that every fiat currency has a baked in demand, in that if you don't pay your taxes in that currency you go to jail? As a US citizen, even if every business I frequent accepted BTC, I would still need USD. Using cryptocurrencies by contrast is entirely optional. And to the degree that you believe in the usefulness of cryptocurrencies, would you really spend it on a regular basis?
Central Banks, FIs, and FinTechs are hyper aware of the value of distributed ledgers.
"To fight this recession the Fed needs more than a snapback; it needs soaring household spending to offset moribund business investment. And to do that, as Paul McCulley of Pimco put it, Alan Greenspan needs to create a housing bubble to replace the Nasdaq bubble."
It's been a while since Krugman said this, but it illustrates a basic fact about how many western governments do economics today: it's bubbles all the way down.
I like the article, but I think its charge of intellectual incoherence could be applied to a broader category of financial products than just beanie babies, tulips, and bitcoin. Many things, like houses, have simple explanatory narratives for why they have some value, but progressively more complex (and more incoherent) narratives for why they have their actual value.
In an essentially nihilistic economic model, where growth consists of stacking bubbles upon bubbles and hoping to inflate new ones before old ones pop, bitcoin is only marginally more demented than everything else.
In some sense it is funny that those are the same people that rave about perceived anti-censorship properties of crypto.
No amount blog articles is going to materially impact the long-term outlook of web3/crypto projects that aren't the actual scams/cash-grabs. =)
HN is more skeptical of crypto than the general tech audience in my experience (compared to my SWE coworkers).
HN is not exactly an early-adopter community for a specific time period (say 5 years of early inception of a new tech). It is a busy-working community.
No such thing as bad publicity, or so they say.
It's not X, it's not Y therefore it must be Q. It can also be a different asset class, a new one. Keeping an open mind is paramount in the super fast tech lane.
We'll if you frame it that way no one fully understands anything. Nobody fully understands equities markets. Surely nobody even comes close to understanding all of the millions of dark scary corners of the derivatives markets. I would say bitcoin is much more of a known quantity than many of these markets.
Madness such as governments printing trillions of dollars of fiat to artificially prop up the stock market and in the process dilute the salaries of the world's entire productive workforce while rewarding incompetent executives by pumping up their stock prices? I agree, such popular delusions based on the madness of crowds cannot be sustained. Not to mention the ridiculous, over-sized, multi-billion dollar government contracts which are repeatedly handed out to big corporations and which add no value at all to society (how many trillions did the government waste on Afghanistan again? How many billions did they then award to Microsoft to build military VR gizmos?)... And what about the huge superannuation/401K funds which invest other people's retirement savings, without their explicit approval, into inefficient, frothy, zombie corporations (run by their friends) which are going to collapse once people actually start retiring and start cashing out their pensions in mass... And the government will then print more money to (yet again) bail them out and keep screwing over the average salary earner and taxpayer. That's why we need cryptocurrency.
If you think cryptocurrency is mad, if you think Dogecoin and SHIBA INU coins are mad, you don't understand the fiat monetary system.
Having said that, I think the author is far too pessimistic in his outlook. The fact that cryptocurrencies are physically intangible does not simply mean it is invaluable. One can speculate that digital assets are like tulips, but what the dot com bubble taught us is that tech is here to stay. And who is to say that humans will not ascribe value to digital coins to last into the next millennium? This is coming from a believer in the gold standard.