Campos quotes from one of the many stories floating around regarding ridiculous cryptocurrency scams.
I’m not saying it should’ve been obvious in retrospect that crypto was a scam, just that (a) it always seemed that it could be a scam, and (b) for awhile there have been many prominent people saying it was a scam. Again, prominent people can be in error; what I’m getting at is that the potential scamminess was out there.
The usual way we think about scams is in terms of the scammers and the suckers, and also about the regulatory framework that lets people get away with it.
Here, though, I want to talk about something different, which is the role of outsiders in the information flow. For crypto, we’re talking about trusted journalistic intermediaries such as Michael Lewis or Tyler Cowen who were promoting or covering for crypto.
There were lots of reasons for respected journalists or financial figures to promote crypto, including political ideology, historical analogies financial interest, FOMO, bandwagon-following, contrarianism, and plain old differences of opinion . . . pretty much the same set of reasons for respected journalists or financial figures to have been crypto-skeptical!
My point here is not that I knew better than the crypto promoters—yes, I was crypto-skeptical but not out of any special knowledge—; rather, it’s that the infrastructure of elite journalism was, I think, crucial to keeping the bubble afloat. Sure, crypto had lots of potential just from rich guys selling to each other and throwing venture capital at it, and suckers watching Alex Jones or whatever investing their life savings, but elite media promotion took it to the next level.
It’s not like I have any answers to this one. There were skeptical media all along, and I can’t really fault the media for spotting a trend that was popular among richies and covering it.
I’m just interested in these sorts of conceptual bubbles, whether they be financial scams or bad science (ovulation and voting, beauty and sex ratio, ESP, himmicanes, nudges, UFOs, etc etc etc), and how they can stay afloat in Wiley E. Coyote fashion long after they’ve been exposed.
Crypto is different from Theranos or embodied cognition, I guess, in that it has no inherent value and thus can retain value purely as part of a Keynesian beauty context, whereas frauds or errors that make actual scientific or technological claims can ultimately be refuted. Paradoxically, crypto’s lack of value—actually, its negative value, given its high energy costs—can make it a more plausible investment than businesses or ideas that could potentially do something useful if their claims were in fact true.
P.S. More here from David Morris on the role of the elite news media in this story.
I thought the lure of crypto was that it might let you avoid taxes. That’s value of a sort.
Most of these bubbles take a “long” time to burst (unfortunately, for the attention span of the media, a few years are considered “long” these days).
So when some experts raise the possibility that they are bubbles and they still do not burst for a while, their expertise is discredited (“if crypto is a scam, how come so-and-so made millions on it” etc).
People who have no training in statistics are notoriously bad when it comes to reasoning about “rare” events. The following would be an interesting experiment: “failure” happens every day with a probability p, independently. Our prior on p is Uniform(0, 0.001); so on average the first time to failure is about 5 years (all of this is assumed to be known). Given 2 years without failures, what percentage of respondents would say that there is a 90% chance that p < 0.0001, p < 0.00001, etc? Compare this to the Bayesian result.
i was a crypto-skeptic throughout the whole of the last decade, never owned any, cautioned friends who did to buy a mix of bonds and low-cost index funds instead, and felt delicious schadenfreude every time the price of BTC fell off a cliff. yet i’m not sure it makes sense to conclude in 2023 that crypto as a whole was a scam. many people who participated in it (and many who still do) are idealists who truly believe in it as a decentralized technology with potential to blah blah blah zzz. i don’t think all of these people are merely “talking their books” (the fact that many will continue to proselytize after losing a fortune could be evidence against it). even if the technology were truly as amazing as the idealists say, there would still be a huge amount of scammers who would attach themselves to it. it was obvious at any point in time that a substantial share of crypto was scams, but i would say it’s still unknown whether the enterpreise as a whole was a scam or if there was some core of long-term value somewhere. my guess is that value is likely quite small, but it might not be zero
i also think it’s a mistake to talk about crypto in simple past tense. the price of bitcoin is lower than it was at its peaks in march or november 2021, but higher than at any point before december 2020. some parts of crypto have nestled themselves into the architecture of mainstream finance in a “boring” way that seems plausibly stable, and blockchain contracts and crypto securities are studied by finance academics in a standard paradigm. we definitely seem to have passed a significant episode in terms of the cresting of a decade-long media wave about crypto, but that doesn’t necessarily mean it’s “over” in any meaningful sense as a financial instrument
It’s interesting you felt schadenfreude, I was also advising my roommates not to buy Ethereum back in 2017 when it was ~$200CAD. I imagine they’re all very happy they didn’t listen to me if they did buy and hold on to their Ethereum haha
lol good point. fortunately i don’t know anyone personally that got rich off crypto, so my schadenfreude is purely vicarious
I’ve been saying Apple is overvalued for the past 20 years. Luckily (for many), nobody paid attention to me. Yes, at least Apple produces tangible products – but so much of their value is tied up in intangibles.
Apple was trading at less than ten times earnings 10 years ago (one third of the current valuation!). It was at a discount to the broad market rather than a substantial premium as today.
Out of curiosity, why do you say Apple is overvalued? Its P/E ratio is low, and its technological advantage over every other general purpose computing company seems to be increasing over time.
> Its P/E ratio is low
Compared to what? It’s higher than it was at any point in the 2010’s.
Sorry, meant that it has generally been lower than the broader tech sector. That was extremely true from 2010-2020, though it looks like it’s changed somewhat since then
I have an analysis of Apple in two of my books – using a simulation model, it is very hard to generate enough sustained revenue growth to justify its market valuation. It would need to keep growing at rates similar to its past rates and this becomes increasingly difficult to sustain once it becomes so large. Another take is provided by Damodaran, a more respected expert than me (https://aswathdamodaran.blogspot.com/search?q=Apple). His analysis is more nuanced and focused on financial matters, but I believe his results are similar – it is hard to develop scenarios where Apple’s net revenue growth is sufficient to justify its market valuation. I believe in my analysis, but I offer this as an example where the fundamentals are not sufficient to understand valuations. Crypto is similar I think. And, as many people have pointed out, trading in crypto has been immensely profitable for some, Let’s face it – some Ponzi schemes are quite successful (until they aren’t, but who knows when that will be?).
> Another take is provided by Damodaran, a more respected expert than me (link). His analysis is more nuanced and focused on financial matters, but I believe his results are similar
Are they? The point of the Damodaran’s analysis was the systematic undervaluation at the time, the gap between price and value:
“In January 2011, the value that I obtained for Apple was $385 about 13% higher than the price as of that date ($339). Between January 2011 and July 2012, my intrinsic value estimates continued to climb to hit a peak of $686 in July 2012, reflecting primarily the success that Apple was showing in overcoming scale, i.e., managing to grow its revenues and maintain margins, in spite of its size. While the price initially lagged my estimate of value (with the under valuation increasing to 21% in September 2011), it surged thereafter closing the gap in July 2012. In September 2012, the stock price ($667) exceeded my value estimate ($639) for the first time during this period and that represented the pricing peak, as momentum shifted dramatically in the weeks after. The lower revenue growth and margin pressure also reduced my value estimate to $595 in April 2013, but the price dropped to $385 by April 2013 (creating a percentage under valuation of more than 25%). In the months, since there has been a slight uptick in my value estimates to $627 in January 2014 and about $675 in April, partly because of improvements in market mood (a lower equity risk premium) and partly because of reduced share count (due to Apple’s buybacks). The price-value gap has closed a little since April 2013, albeit in fits and starts, with the gap standing at about 19.6% just before the last earnings report.”
Carlos
You are right – thanks for checking. It’s funny has selective (and wrong) memory can be. Damodaran did turn less optimistic about Apple’s valuation in later years (https://aswathdamodaran.blogspot.com/search?q=Apple+valuation), but nowhere close to my assessment. I selectively recalled some of the arguments he presented, which mirrored my own, but managed to lose the bigger picture. Just one of the (many) reasons to trust his advice more than mine.
I was following bitcoin since the early 2010s. I remember being in IRC chatrooms with bots that would periodically quote the bitcoin price. I saw a couple of the first waves of excitement when it crossed the $1 threshold, then crashed back down to $0.30. If I had a way to make online purchases back then, and more than my $0 a week allowance, I might have bought some for shits and giggles. By the time I got a bank account, I was convinced it was idiotic, and didn’t out of principle. For some reason, I have no regrets. Though I am rooting for it to fail.
Andrew, let us at least agree on what you define as crypto. In fact, I have the concern that you equate crypto with Bitcoin, because your remark that “its negative value, given its high energy costs” 1) sounds like an argument an uninformed econonmist/politician would make about Bitcoin. But 2) centralized crypto coins that are the ponzies you or the post talks about run on simple computers and do not need especially large amounts of energy whereas 3) Bitcoin requires quite a lot of energy, but this is the security feature of the decentralized network. Hell, miners even contribute to quite a lot innovations and sustainable developments in the energy sector (e.g. use of flaregas or methan gases from dumping grounds). 4) Current monetary system is an equally large ponzi scheme, that my co-commentator rightfully called out as bubbles that take “a “long” time to burst”.
So what we are even talking about here? I am not complaining, but this post mingled a lot of stuff together in more or less careless manner.
Please explain how the current monetary system is an equally large ponzi scheme.
I could not do it better than Lyn Alden in her new book “Broken Money”. Just give an example: The interest payment the british government ist currently paying each year is higher than their annual spending on education. Basically, all around the world – through elaborate book keeping tactics – debt levels are increasing mainly to the fact that governments have to pay off debt from the past.
Money is (primarily*) created by commercial banks issuing loans that must be paid back with interest. There is no money in existence to pay off the interest on the new loan. It would be a zero sum game, but instead new money is loaned into existence to pay off the old interest. That is why the debt must always increase.
* To some extent the federal reserve prints money into existence, but this is only about ~$10 trillion right now. The total public + private debt in the US is ~$100 trillion. Then there are the overseas “Eurodollars” (internationally issued dollar-denominated loans), which the IMF et al have been attempting to measure for awhile but no one really knows how much exists. It is at least $10 trillion, possibly $1,000 trillion, but most likely around $100 trillion.
New debt must be issued to pay off the old debt, or the system collapses. Just like a ponzi requires ever more investors.
Sort of. Imagine I borrowed $1000 from you with interest I currently owe you $1100. Suppose you owe $1000 to third party Bob, and I just provided $1000 of services to Bob so he owes me $1000. Bob pays me $1000, I pay you $1000, you pay Bob $1000 and now I owe you $100 and no-one owes anyone else anything.
So we went from “total debt” of $3100 to total debt of $100 and nothing happened other than I provided $1000 worth of services to Bob.
That is roughly how it would work in the zero sum case. Your example glosses over dynamics like the principle then interest of what I owe Bob. Anyway, I would end up with $100 while you and bob have none…
Just look at what is happening in reality (keeping in mind that is not the full picture because it ignores the eurodollars): https://fred.stlouisfed.org/series/TCMDO/
Think about it like this. Say DNA can be copied 3 times before becoming degraded.
So original stem cell divides, we have:
Generation 1
Ncells = 2
Then one of those Gen-1 cells divides while the other doesn’t. So we have:
Generation 1
Ncells = 1
Generation 2
Ncells = 2
Then one of those Gen-2 cells divides, we have:
Generation 1
Ncells = 1
Generation 2
Ncells = 1
Generation 3
Ncells = 2
So we get two usable Gen-3 cells, which get used up. Then we have a reserve of one Gen-1 and one Gen-2 cell.
So then the single Gen-2 cell divides again, which gives us two more Gen-3 cells. After they are used up, the Gen-1 cell can divide to get two more Gen-2 cells (ultimately four Gen-3 cells).
So the pattern is 2 cells, 2 cells, 4 cells. My point is only going one layer deep in this type of exponentially growing system can be very misleading.
The point of my example was just to show that the relationship between the amount of economic goods and services owed and the total of all debt instruments is not in any way 1:1.
> Just look at what is happening in reality
That exploding amount of nominal debt is quite less spectacular in the context of other things happening in reality like inflation, demographic growth, economic growth per capita, etc.
For example:
https://fred.stlouisfed.org/graph/fredgraph.png?g=18RWI
The problem is that “inflation, demographic growth, economic growth per capita” are all a function of the total debt (ie, money supply).
Sure, you can normalize total debt to those things. It is a mathematically valid manipulation of numbers, but what does it mean?
Or you can see the total debt must always increase, or there is a crisis. That is what we observe.
Anoneuoid: when you divide total debt (dimensions of amount of money) by GDP (dimensions of amount of money / time) you get a quantity which is in dimensions of time, it’s roughly the number of years it would take to pay off the debt if you sent all GDP to paying off principle. Or, if you multiply by interest rate (dimensions of amount of dollars / amount of dollars / time) you get a dimensionless ratio which is roughly the fraction of GDP that goes to paying interest. If that gets near 1 then you have an unstable situation, where debt grows without bound because you aren’t making enough money to pay the interest on the debt even if you use all your income. Right now it looks like that quantity is more like 15-20% ish it’s a bit high, but not terrible.
That isn’t to say that our monetary policy is good. it’s not. but that has more to do with distorting wealth inequality and investment than it is the absolute level of money supply etc.
Let’s try continue in chat: https://tlk.io/combprob
If you want to go off blog to avoid off topic stuff here I’d much prefer you @ me on mastodon, that’s what it’s supposed to be for, a global conversation not controlled by any one organization.
@[email protected]
OK, I bothered to make an account and tried to DM you. I have no idea how this works.
I’ve found that journalists/news magazines are either unaware of the role they play in perpetuating these hype cycles (very unlikely) or they’re just plainly dishonest about it. NYT opinion columnists regularly bemoan the fact that Donald Trump has such a hold on American politics. yet I can’t remember the last day the NYT hasn’t ran multiple pieces about him. They’ll similarly bash social media sites or 24/7 News Stations for their data-driven approaches to increase “engagement”, but never seem to mention that the organizations they work for make use of the same techniques for the same purpose. While I don’t fully blame the columnists or even the NYT (the market incentives are what they are), to a certain extent I find the believers somewhat more admirable.
Blackthorne:
Are “the believers somewhat more admirable”? To me, it depends not just on what people believe, but on what they do. For example, consider political and academic figures who promote bogus theories of election fraud. They may be pure hacks, knowing what they’re doing; they may be true believers; or they may be some mix of the two, for example a true believer in Trump who feels that promoting bogus theories is a benefit for the greater good, or who believes that somewhere the Democrats are cheating so it’s ok to “fight fire with fire” with some crappy statistics of their own, whatever. I think these sorts of true believers are dangerous, in part because they provide raw material to pollute the public discourse. I’m thinking here also of the people who promoted false claims about suitcases full of ballots or whatever. Somewhere there are people who are making the fake videos, advancing already-discredited theories, etc. There’s a whole information ecosystem in which out-and-out fakers coexist with deluded fools and all sorts of people in between.
I have almost enough anecdotal data to constitute a data set on attitudes toward money. I taught for decades, and part of my philosophy was to have students express what they think they know about a topic before I begin teaching it. Like, “pull out a sheet of paper and, in one paragraph, tell me what you already know or might know about x.” This was extremely useful, especially compared to the tabula rasa assumption most teachers start with.
Now, I often taught a bit of monetary theory and history, so I got a lot of paragraphs about the circulating folk wisdom on this stuff. What I saw was fascinating. Lots, and I mean lots, of people think that the rottenness of the monetary system is at the core of everything they hate about the economy, on the left as well as the right, but especially on the right. I heard that government-issued money is a pyramid scheme that will come crashing down sooner or later. Or that the Fed is an instrument of a secret cabal that manipulates who can borrow, invest, etc. Or that the system is at the root of a tyranny that masquerades as democracy. Many lefties felt that the single most important thing we need to do in order to liberate ourselves is to get rid of the capitalist monetary system or money itself. I assumed that, when I heard this from 20 yr olds, in many cases I was indirectly hearing from their parents.
On a more rarified level, government issued and regulated money was regarded as a central problem by libertarian/Austrian economic thinkers. You could have a free market in everything else, but what about money and banking? Some went the whole route and endorsed “free banking” (which is really a pan-technological version of crypto); others thought you needed the state, but it had to be tightly constrained, as in Friedman’s monetary rule.
On both levels, crypto must have appeared as a techno marvel that would allow us all to escape the clutches of state sponsored lucre. The promise of getting rich from it made it irresistible.
Crypto “was” a scam? Does it not exist anymore? I’m under the impression it still has a quite high capitalization. For legitimate use cases, it does help to look outside of places like the US with a relatively functional financial system though:
https://www.astralcodexten.com/p/why-im-less-than-infinitely-hostile
> Crypto is different from Theranos or embodied cognition
I missed the news that embodied cognition is/was a scam… I guess the Stanford Encyclopedia of Philosophy needs an update: https://plato.stanford.edu/entries/embodied-cognition/
Could it be that you meant effective altruism?
Tom:
I was referring to the now-discredited ideas of embodied cognition in social psychology, such as the famous elderly-slow-walking experiment; see here for context. I wasn’t aware that there was so much else that went under the same name.
I’m sure that the Stanford Encyclopedia of Philosophy can use some updating. This entry, for example, on “The Ethics and Rationality of Voting,” has some errors. But I have no opinion on the entry on embodied cognition.
out of curiosity: what’s the error in the encyclopedia entry on rationality of voting?
Section 1.1, “Voting to Change the Outcome,” is misinformed. First, they’re heavily pushing the ignorant-voter model, kinda stacking the deck by offering arguments that voters don’t know what they’re doing. Second, they cite innumerate estimates of the probability of a decisive vote based on the binomial model which makes no sense. They do cite the work of my colleagues and myself on empirical estimates of the probability of decisive vote, but they erroneously label these estimates as “optimistic.” Third, they say, “some claim even these assessments are optimistic. One worry is that if a major election in most places came down to a single vote, the issue might be decided in the courts after extensive lawsuits.” This is wrong because a vote can still be decisive in sending an election the courts. We address that particular point in the appendix of this article.
Section 6 of that article is kinda weird too, in that they’re pushing various anti-democratic arguments. They can make whatever arguments they want—it’s a philosophy book, after all, and there’s a long tradition in philosophy of making extreme arguments—; my point is just that the article as a whole seems pretty hostile to democracy, which is kinda weird for an article on the ethics and rationality of voting. But I wouldn’t say Section 6 is in error; it’s just evidence of a strong slant in the article which I don’t think is so appropriate for a review article on the topic.
There have certainly been crypto scams, but I think the jury is still out on whether all cryptocurrencies are scams. Or…maybe I should rephrase that. Cryptocurrencies are not all scams. They might be bad ideas, maybe no current cryptocurrency will be in use in twenty years except as curiosities, maybe no new crypto will be either, I really don’t know. But they aren’t all “scams”.
And they don’t all have high energy cost. Bitcoin has a high energy cost by design, and I think it’s something very close to immoral to use Bitcoin. When I read a detailed article about it…must have been about ten years ago, maybe in Ars Technica…and learned about the energy usage I thought ‘this is ridiculous, it can never handle more than a tiny fraction of transactions’…and that’s true (unless it changes to ‘proof of stake’ rather than ‘proof of work’.) But that’s not an inherent problem with cryptocurrencies. Etherium is much less energy-intensive. I don’t have a problem with people using Etherium.
There’s nothing stopping Etherium or other similar cryptocurrencies (by which I means ones that aren’t stupefying energy-wasters) from becoming a standard way to make transactions. But there’s no real reason for that to happen, either, which is why I’ve never owned any crypto and I suspect twenty years from now none of the existing cryptocurrencies will be in common use. In the case of Bitcoin I dearly hope I’m right. But I wouldn’t call any of them a ‘scam’.
I think Phil is talking about Ethereum 2.0 with proof of stake, which is supposedly able to do something like 100,000 transactions per second, compared to say Visa which does something like 1700 (note I’m getting these numbers from whatever I can google up so they may be inaccurate).
Proof of stake itself doesn’t have any particular relationship to transaction throughput. Ethereum is already on PoS and its transaction throughput is like 30. Transaction throughput is transactions per block / time between blocks, but those settings are limited by how long it takes for blocks to get accepted by most of the network through the gossip protocol. The more nodes, the longer you need to make it and the slower the blocks need to be, or else you start getting lots of contention issues
somebody: my understanding is that the cryptographic hash breaking or whatever it is that Bitcoin uses for proof of work is the limiting speed for bitcoin transactions. In proof of stake + sharding there is no heavy computing required. The limiting rate of transactions in theory should go up. Of course if not that many are demanded, then not that many will happen. My understanding is that sharding is not fully implemented at the moment, but I think the idea is that groups of stakers would come to local consensus in parallel increasing limiting throughput.
I admit this isn’t an area I have spent a lot of time on, I was just interested in the transition to proof of stake with Ethereum 2.0 and read up a little on it a year ago or so.
https://ethereum.org/en/roadmap/danksharding/
has a discussion of the roadmap to much more parallel ethereum validation.
Proof of work is *a* problem, but in theory adding more computing power should increase the solve rate. In practice, the difficulty is adjusted to keep a relatively constant block time.
The real trouble is more fundamental; getting new blocks to all the nodes. Each node that stored the blockchain communicates new blocks to nodes it’s directly connected to. Those nodes then send them to other nodes until it’s the network consensus. How long it takes for a new block to reach x% of all nodes in the network can be called the block propagation time. Naively reducing the block time to a similar scale as the propagation time leads to consensus problems; it makes it more likely that some transactions are to be built against old blocks and need to be restarted, that transactions get committed to a valid block that gets beaten, makes everything generally less usable. Increase the transactions per block increases the propagation time. Notice all this is after a valid, signed block is produced; this all happens after the cryptographic hash problem or lottery or whatever. The problem is more fundamental than the validation protocol.
The block size limit and time are both probably conservative for bitcoin. But the higher the size limit and lower the block time, the more incentive there is for more faster and bigger computers, with more bandwidth, and more collocated; in the limit, you get a stock exchange, at which point the whole thing is pointless.
The parallel sharding idea is also difficult. If you store state stored on side chains, someone only has to take over a side chain to be able to do whatever transactions they want. So security is a problem. The idea of blockchain generally is that you maintain the integrity of a distributed database by consensus; whichever version of the database has more computers is right, under the logic that one malicious actor can’t outvote everyone else with computers. The problem is getting all those computers to communicate is slow. When you shard, you reduce the number of computers communicating on a single given transaction, but that also reduces the number of computers a malicious actor has to outvote.
Layer-2 is something else entirely, but it has its own problems.
Basically, the technology does not actually work for the problem of being a global-scale payments network. Speculation is obviously something different; it doesn’t necessarily have to do anything at all to be a good investment.
Ethereum is only doing about 20 transactions per second but I don’t think that’s anywhere near the limit.
FWIW Bitcoin is substantially lower. https://www.miamiherald.com/software-business/article274817896.html
I don’t want to get involved with championing or defending any of these, although I am very happy to _anti_-champion Bitcoin, which, as I mentioned, I think is pretty much immoral. I don’t own any crypto and don’t have a dog in this fight. (I abhor dogfighting).
Thank you for your honesty, but this is truly a “tell me you do not understand Bitcoin without saying you do not understand Bitcoin.” I think the new book by Lyn Alden “Broken Money” might educate you a bit, but I doubt it. The current level of morality in our monetary system has generated roughly 2 billion people worldwide without a bank account, what is so morale about that. Truly stunned by your statement. No problem if you do not get it, but at least put some effort in to justify such claim when swinging the sword of morality. Troy Cross from Reed College might educate a bit, he is a Professor of Philosphy and I guess slightly more informed about the “moral case for Bitcoin” (Jimmy Song).
Jeff,
I can’t follow what you’re saying, other than that you think I “don’t understand bitcoin.”
Bitcoin transactions consumed about 130 TWh (Terawatt-hours) of energy last year, in spite of nearly nobody actually buying anything with Bitcoin. The energy cost per transaction is extremely high compared to any conventional method and compared to some other crypto.
If you think there is something in the paragraph above that I haven’t ‘understood’ or that I have wrong, please correct me on the facts.
You may not consider the energy cost per transaction, or the energy cost per dollar transacted, to be a moral issue, but I do.
As I said above, I see this as a problem with Bitcoin and some other cryptocurrencies; it’s not inherent to cryptocurrencies in general.
+1
There are real problems some crypto attempts to solve. And there are pure scams. And there is everything in between.
Bitcoin attempts to create something like gold, a necessarily limited commodity that can also be used as a currency. It doesn’t really work that great, there are lots of issues with it, like egregious energy consumption and inefficient transactions, but it’s not correct to call it a ponzi. Ethereum seems like a better solution, but is aiming for the currency role more specifically. These things only have value insofar as people AGREE they have value, but that is also true of both currencies and things like gold.
On the other side there was the proliferation of alt-coins, NFTs, etc. I think there’s no debate that these were at least mostly scams. SBF and all of the coins FTX made are a great demonstration of this: buy this coin and you’ll get rich -> profits were paid out of investments coming in. This is literally a ponzi, and it could have been shares of stock just as easily as crypto.
The role of the media is interesting, but I don’t think crypto is especially unique here. Off the top of my head I can think of 3 salient examples (Gamestop stock, beanie babies, pokemon cards) where there was a crazy speculative bubble that seemed very tied to media attention. It’s not clear to me whether this is the fault of media exactly, or whether they were just covering something that people were interested in for their own reasons.
I think what made crypto scams convincing is that there actually are real use cases, and it seems likely to persist in some form going forward. It’s also complicated, which makes it easier to trick people.
I’m not sure if proof-of-stake raises the number of transactions Etherium can make per second, a quick Bing search shows Etherium still processing ~10 transactions a second and Visa processing ~1000. And as getting paid in money other than the money you pay rent and taxes in will always have risks around fluctuating exchange rates.
Are you talking about the number of transactions Etherium (or Visa) are processing, or the number they are capable of processing? Those are very different. I think the numbers you’re giving relate to the former, but your language — the number of transactions Etherium CAN MAKE per second — implies that you’re interested in the latter.
I’m saying that my base expectation for how many transactions a second Etherium can process is “about 10 like Bitcoin” and actually existing Etherium seems to process that many. I’m not sure what to think of claims that Etherium will one day be able to process 100.000 transactions a second since this is an area with a lot of lying, oversimplification, and wishful thinking. Bing shows me press releases from February and July 2022 promising that this would happen one day but its easy to issue a press release.
I like stablecoins. You give them a dollar, and they guarantee that they will give you a dollar back when you get around to it. Three month treasuries are paying 5.32% right now. I need to get people buying about ten million dollars of oncodoc stable coins.
My basic attitude towards crypto has always been “it’s an ingenious idea that probably won’t work out in the long run.” That’s a far cry from being a “scam.” Even if all crypto becomes worthless, I’m not sure if “scam” would be the right word. Plenty of perfectly legitimate companies have gone bankrupt just because their ideas didn’t work out very well. (Would you say GM was a scam just because it went bankrupt and its stock became worthless?) Risk is part of investing, and there’s always a risk things won’t succeed. No one can predict the future with certainty.
Anyway, though I’m certainly bearish on it, I’m not prepared to say crypto has already failed. At the moment, bitcoin is down about 60% from its peak in November 2021. It’s had similar percentage declines in the past that it recovered from. (For example, it was down almost 80% from December 2017 to January 2019.) For such a volatile investment, I’ll want to see it down 95% from its all-time peak before I regard it as a proven failure.
If anyone is absolutely certain that crypto will fail in that way, it’s pretty easy to take a short position.
The point is you can prove ownership of a unique type of digital property, which you can (in principle) use buy things with no risk of chargebacks. The amount of waste due to chargeback fraud is enormous. At least in the US, everything you buy is ~2% more expensive just to fight this. Its probably a trillion dollars per year worldwide.
Now, if the customer doesn’t trust the merchent then chargebacks are great. So don’t use crypto for those, or do and use an escrow service. But for 99% of transactions where the buyer and seller trust each other this cost is completely unnecessary.
And this past-tense phrasing is strange, even dogecoin is still over 6 cents. And now G20 just agreed to release their own government-controlled cryptos, which *will be a scam* so they will have to force people to use them.
A very good take on the connection between crypto and scams is https://www.youtube.com/watch?v=YQ_xWvX1n9g
Thanks for the link. Excellent. And hilarious. Proof of stake turns out to be worse than proof of work (only accessible to very early adopters and the very rich), which was terrible. ROFL.
“The whole thing operates by buying worthless assets on the hope you will be able to sell them to a bigger fool”. Yep.
But what’s weird is that all this was known years ago. Why are people still arguing that crypto isn’t a scam? Very strange.
Another very strange thing: crypto has humongous transaction costs. Yet at least one person here complained about the transaction costs in ordinary financial systems. Go figure.
@Phil: I was not able to reply directly (there was no field), hope this finds the recipient: Phil, I have to be honest, I do not understand everything about Bitcoin as well, which is a feature of Bitcoin, or knowledge in Hayekian sense (the more we know, the less we know). There is so much to learn about this new thing in parallel to our professional lifes and usual pathways thinking about mediums of exchange, that one is easily overwhelmed. But your remarks are strikingly naive as you are equating morale with amount of energy needed to process transactions. Is using Aluminium immorale? Or is steel factory immorale? I would be pleased if you can elaborate in this relationship a bit more. Equating morale with amounts of energy needed to process transactions (while here, it is indeed required to secure the network/ledger so it remains decentralized and immutable to ensure the scarcity and mathematical features inherent in the protocol, e.g. 1 block every 10 minutes) is a strikinly narrow view on such an achievement encompassing cryptography, mathematics, game theory and social science. You can do better, everybody can, even myself. So go ahead, I am truly curious…
I’m not ‘equating moral[ity] with the amount of energy needed to process transactions’, things can be immoral for lots of reasons other than using too much energy! But excessive energy use is bad, especially energy that comes from burning fossil fuels. The negative impacts of energy consumption are not all internalized, i.e. are not represented in the dollar cost of the energy. The thing that makes Bitcoin so egregious — to the extent that I consider it borderline immoral to use it — is that the benefits it supposedly provides are so small compared to the energy used. I’m not interested in debating this. I think wasting many terajoules of energy per year is bad, you evidently don’t agree, what can I say other than I think you’re wrong.
By the way, here’s a basic description of how Bitcoin works. https://arstechnica.com/tech-policy/2020/12/how-bitcoin-works/ It is certainly not trivial, but it’s also not too complicated for you or me to understand.
Can you explain to me how stablecoins (to name one example) are “a scam”?
https://en.wikipedia.org/wiki/Tether_(cryptocurrency)?wprov=sfti1
Before February 25, 2019, Tether Limited’s terms claimed “Every tether is always backed 1-to-1, by traditional currency held in our reserves. So 1 USDT is always equivalent to 1 USD”,which was and remains false…Tether Limited continues to refuse to allow an independent audit to verify its claims of full backing.
But you CAN always redeem 1 usdt for 1 usd, that’s why it keeps it’s peg until today. Because people are constantly reedeming. But I asked if “stablecoins are a scam” in general, so answering about Tether in particular doesn’t make much sense. But following that same line of reasoning, given that, for example, USDC *is* independently audited, then that would be enough to contradict your argument and conclude that stablecoins are not necessarily a scam.
Pyme: per Wikipedia, even Tether no longer say that they have a reserve of 1 USD for each stablecoin token, so clearly not everyone who holds their stablecoins could cash out. They have not let anyone independently verify their reserves either, so even if they are honest and well-meaning, someone may have stolen or embezzled some of them. And operating a fractional-reserve bank without accepting the restrictions and oversight which other banks have to accept is what Dan Davies calls a market crime: getting an advantage in business by breaking the rules which other businesses agree to follow (eg. insider trading or serving undersized pints).
“Pyme: per Wikipedia, even Tether no longer say that they have a reserve of 1 USD for each stablecoin token, so clearly not everyone who holds their stablecoins could cash out. They have not let anyone independently verify their reserves either, so even if they are honest and well-meaning, someone may have stolen or embezzled some of them. And operating a fractional-reserve bank without accepting the restrictions and oversight which other banks have to accept is what Dan Davies calls a market crime: getting an advantage in business by breaking the rules which other businesses agree to follow (eg. insider trading or serving undersized pints).”
It doesn’t make sense to have a reserve of 1 USD for each USDT because that’s not a viable business model. What they do is have a part of their reserves in T-bills to earn yield (same as USDC does). So no, the fact that not everyone could cash out immediately doesn’t make it automatically “a scam”, same way as a traditional bank is not “a scam” because of the fact that not everyone would be able to retrieve their USDs from them. Also, “Shadowbanking” is outside most normal banking regulations, so it could also be called “a scam” or “a market crime” by your definition, which is obviously nonsense (and again, you are conveniently ignoring USDC, which is audited. Is it also a scam?).
Pyme: fascinating how the anonymous commentator on the Internet is more definite about what traditional assets Tether actually holds than Tether actually is. Of course, Tether has had to pay large fines in traditional assets for making false statements to the public.
People selling discounted goods outside a bar on Saturday night are not necessarily scammers either, but assuming they are scammers or fences is a good place to start
Well, you are also pretty definite about Tether being “a scam”, despite the empirical fact that it has maintained it’s peg for years. But if you are so sure of what you say, you can always short it. I mean, it HAS to collapse eventually, right?
And, unsurprisingly, you keep ignoring examples like USDC. Is it also “a scam”?
And any service which offers to convert between cryptocurrency and traditional money becomes a tool for crime unless it asks lots of questions about where the cryptos or the traditional money come from. I mean crimes like extortion, fraud, and theft not just buying a party’s worth of drugs.
Maybe you can see it that way if you live in a first world bubble. But for others, they serve a legitimate purpose: https://en.cryptonomist.ch/2023/08/18/argentina-finds-refuge-stablecoins/
A lot of the argument above comes down to the distinction between the following questions:
1) Is cryptocurrency *necessarily* a scam?
2) Is cryptocurrency *de-facto or primarily* a scam?
I think (2) has been true so far. I don’t think many people argue (1) is true. it’s logically possible for some cryptocurrency system to be not a scam. That’s not very interesting or controversial. It’s just that there have been so so so many scams involved in cryptocurrency that (2) is kind of irrelevant until non-scammy systems become much more widespread.
I would suggest it is actually worse than that. Because there is no legitimate and legal business case for “crypto”, all crypto tends toward being a scam.
The antecedent is a strong claim, but I think that it is supportable. “Crypto” is useless as anything like money (medium of exchange, store of value, or unit of account), and its “decentralization” makes it orders of magnitude less efficient than any other (centralized) database.
There could be an argument that its value is that it is “trustless”. The problem with this argument is that pretty much no one has the knowledge and skill to manage the trustlessness of crypto systems. Consider all the “whales” and even crypto businesses that have been compromised. The result is that pretty much everyone involved in crypto ends up trusting some party – and these parties are almost invariably less trustworthy than state (or state-adjacent) actors.
Thus, because people “invest” in crypto, they desire a return on their investment. This means a constant tendency toward scams.
I told the main use case above. It is a way of transacting online without chargeback fraud.
But that is hardly the only use-case. Almost surely within ten years we’ll have is entire gaming ecosystems on (or associated with) various blockchains in a way where you can trade items with other players across games and have real markets. Eg, of course within-game trading but also trade someone a battlecruiser for a top athlete.*
This would otherwise not work because the game developers have centralized control and would just issue more of the valuable items to themselves and associates. I mean it is not unlimited, eventually people would get fed up, but they could unfairly skim for quite awhile unless they get too greedy.
Which brings us to the next major use-case, because that is a microcosm of the centralized power that distorts our real economy, contantly breeding wealth inequality and incentivizing wasteful consumption.
* let me know if you want to actually try it out to see how it works. This already exists in beta phase.
But cryptocurrencies are a terrible way to transact online (volatility, complexity, etc.). What possible benefit is it to a purchaser to go through the difficulty of cryptocurrency transactions rather than using some centralized payment system? It only adds complexity and risk.
Your argument here makes no sense to me. If the buyer and seller trust each other, then there is no reason to worry about potential chargebacks. But as a buyer, if I do not the seller, then I want the ability to chargeback if the seller fails to deliver, for example.
Your “[a]lmost surely” seems to me to be entirely without foundation.
Finally, your “brings us to the next major use-case” comment seems to be lacking any reference to a use-case.
You’ll just have to look into the amount of fraudulent transactions and the energy/time our society spends on this issue. I mean, the way things work is you tell someone the password to your money when you buy something then you can cancel the transaction weeks to months later. We all pay extra on every single transaction due to this ridiculous system.
It does require some minimal effort on your part to understand how things currently work before you can discuss new ideas.
Anon, yes there’s some additional cost. How much do you think it is as a fraction of GDP? I Won’t throw out a number so as to bias you but I’ve got an estimate, still I’d be interested as to your estimate.
Prices of everything are 1-4% higher to pay for credit/debit processing fees (usually, even if you don’t use a card). And the biggest expense in “processing” is dealing with fraud. Ie, both reimbursements and implementing/maintaing fraud prevention measures.
So it’ll be around there. Looking it up, I found this:
https://www.cleveland.com/opinion/2023/09/vance-legislation-would-increase-competition-and-reduce-consumers-swipe-fee-charges-mark-lyden.html
From those numbers we get 70% of 160B ~ $110 billion per year.
So GDP is about 27e12 and swipe fees are then 0.4% of GDP
Certainly the volatility risk in using Bitcoin vastly exceeds charge back fees by multiple orders of magnitude. So the only thing that makes any sense is something like a stablecoin, and one that through improved technology can handle 10000 transactions a second or so. Maybe we will get there thanks to innovations in ethereum or maybe we won’t. But until then there is no actual benefit we can realize.
There are services that handle the volatility for merchants, and they only charge about half the swipe fee rate:
https://bitpay.com/pricing/
So volatility risk appears to be about half the fraud risk, rather than multiple orders of magnitude larger.
Anoneuoid: I think you should read chapter 1 of Dan Davies’ “Lying for Money” which walks through how these issues work as a dynamic system (the example he picks is a cryptocurrecy market for recreational drugs but the principles are universal). If the buyer pays on arrival, then the seller has to pay the cost of money and the risk of a few weeks’ fluctuation in exchange rates (and the buyer can take the goods and not pay). If the buyer pays on order, the seller faces less risk so can change less, but then the seller can take the money but never send the goods. As the rules of the market change, one side or the other is more likely to cheat.
Anoneuoid on September 20, 2023 6:36 AM at 6:36 am said:
“You’ll just have to look into the amount of fraudulent transactions and the energy/time our society spends on this issue. I mean, the way things work is you tell someone the password to your money when you buy something then you can cancel the transaction weeks to months later. We all pay extra on every single transaction due to this ridiculous system.”
In my view, you are just wrong in this. The “system” is not in any way “ridiculous”. As a purchaser, it is a positive benefit to me to be able to reverse charges if the seller does not deliver. Not being able to do this seems to be a benefit to no one. It is why people no longer send cash (which would work). It may be of benefit to a seller, but why should I act for the seller’s benefit and my own risk?
No, the “system” is fine. What is not fine is that US banking and competition laws are stupid, meaning that credit card monopolies can charge outrageous fees. Here in the Netherlands, the maximum charge for credit card transactions is 1.5%, and that is online. In person it is 0.3%. If one uses Maestro/”pinpas” (or “Ideal” for online), the max charge is EUR 0.25 – and it can be as low as EUR 0.10.
As I said upthread, there are times when you do want the ability for chargebacks/escrow. And in that case you will pay extra, which is fine.
But when I go to the corner store where we know each other, or even the big grocery store where I am walking out with the items, this is just a waste.
And I am about to pay my electric bill online. To do so means I literally enter in all the information required for someone to else to make purchases using my account. Ie, to buy something you need to tell the password to your money.
This is ridiculous. It is asking for fraud which then requires all sorts of mitigating measures.
Because they are able to sell at a lower price. You can see this clearly in markets where the cost of fraud/processing is transparent rather than added on for everyone. Eg, to buy a 1 oz gold coin:
(e)Check/Wire: $2,063.35
Crypto: $2,084.84
Card/Paypal: $2,149.32
https://www.jmbullion.com/1-oz-american-gold-eagle/
I looked into the caps on swipe fees in the EU (including the Netherlands), it appears that other fees have been introduced to compensate:
https://www.linkedin.com/pulse/chargeback-fee-increases-new-headache-merchants-samuel-appleby
Essentially, as a result of the cap the cost of preventing fraud has been placed directly on the merchant. So likely, you are still paying the same extra amount to deal with the fraud. I also saw that in the Netherlands you need to pay a monthly fee to have a bank account, which is required for the debit card.
Perhaps fraudulent transactions are also rarer in the Netherlands as well?
Anoneuoid on September 20, 2023 5:03 PM at 5:03 pm said:
“As I said upthread, there are times when you do want the ability for chargebacks/escrow. And in that case you will pay extra, which is fine.
But when I go to the corner store where we know each other, or even the big grocery store where I am walking out with the items, this is just a waste.”
Why are you using a credit card to pay at the corner store? I don’t know what debit transactions cost in the USA, but they should be minimal. (As I said earlier, here they are EUR 0.25 or less.) Also, if it was not obvious here we have “Ideal” which is a debit method for online payments, and the costs are the same. We can also easily do a direct transfer. And indeed, some online merchants charge extra if one uses a credit card (as opposed to Ideal or direct transfer) because the costs are higher.
“And I am about to pay my electric bill online. To do so means I literally enter in all the information required for someone to else to make purchases using my account. Ie, to buy something you need to tell the password to your money.”
Unless something is wrong, this should not be the “password” to your money. Don’t confuse ‘identification’ with ‘authentication’.
But to the point: if I want to pay online for things like electric bills, then I have two options. I can authorize the company to take payments from my account automatically, or I can do a direct transfer each month upon receiving my bill. In this case, ‘direct transfer’ means that I go to my bank and say “pay X to account Y”.
Having lived in the USA, I realize that banking there is stupid in many ways. But all of them can be solved in much easier and more efficient ways than to try to use crypto.
I stand by my original comment that there are no use cases for crypto. Even if you can come up with something for which one could use crypto, there are much better solutions.
The problem with your argument, Gregory, is that it’s made by your inability to abstract yourself from your first world bubble. And because of that, you can’t see why it’s useful to people in other parts of the world:
1) https://en.cryptonomist.ch/2023/08/18/argentina-finds-refuge-stablecoins/
2) https://twitter.com/LynAldenContact/status/1529084598268968962
I think he has just never used crypto and isn’t really familiar with how the usual payment schemes work “under the hood”.
As I learned from a little research, the EU put a price cap on swipe fees, so then mastercard/etc added in a new “Dispute Administration Fee” to compensate. This only further obfuscates the fees. The merchants then have to raise prices to pay these new fees (or eat the fraud).
He is paying for unnecessary fraud protection without realizing it.
Likewise, if I am going to spend $20 somewhere bitcoin itself has far too much security (which is reflected in the transaction fee). So in that case I would use something cheaper like dogecoin. Alternatively, some transactions are not very time-sensitive so I can simply set a lower transaction fee and wait for hours to even weeks for it to finally get confirmed.
But if I am going to make some $500k transaction, then we do want to make sure the transaction goes through and cannot be reversed. So then I would pay the higher fee.
Hearing those arguments is like someone telling me ice doesn’t float on water when I have a glass of ice cubes floating on water in front of me. It is like: “ok, you simply have no experience with ice I guess…”
And that is hardly the only use-case. Besides those already mentioned above, there is also counterparty risk. All the time we see countries mismanage their money supply then resort to bail-ins and similar. That means the bankrupt banks will use your funds to make themselves solvent. In fact the laws were changed in the US after 2008 to allow this.
I’m sorry, Pyme, but a couple of comments from crytpo promoters is not meaningful evidence. Oh, and the argument about “persistent inflation that continually wrecks their savings” is hard to find credible when someone’s “savings” in Bitcoin would have lost almost half their value over the previous six months.
Anoneuoid, though I have never had any interest in “using” crypto,I am somewhat familiar with how various systems work “under the hood” (both traditional and crypto).
Yes, I know that there are costs for fraud protection. But what you don’t seem to understand is that I – like most people (like everyone I know, really) – WANT fraud protection. If I purchase something online and the seller does not deliver, I WANT to be able to reverse the charge. The same is true of everyone I know. I’m sure that there are others like you who want to live in some sort of ‘caveat emptor’ dystopia (IMO), but I do not.
In short, fraud protection may not be “necessary”, but it is certainly desirable. Of course, for the vast majority of my transactions (locally, or with vendors I have good reason to trust) I do not use credit cards, and thus no one pays credit card fees (many vendors do not accept credit cards, but do accept direct transfer cards).
As an alternative, you suggest that one must have a raft of different cryptocurrencies, sorting out what is the “best” choice in some given situation, or perhaps waiting “hours to even weeks” for payment to be made. I am sure that there are others who enjoy this sort of thing, but I am not one of them (nor is anyone I know).
And if I were to make a $500K transfer, then I would do a direct bank transfer. This may be non-trivial, but hardly more effort than dealing with cryptocurrencies.
As I have already said, I do not claim that what you are suggesting is *impossible* – certainly it is possible – but that there are better solutions.
Finally: if you want to make ideological arguments about corrupt governments, banks, and so on, then you are free to do so. But you also need to recognize that these are ideological arguments, not practical ones about use cases.
“I’m sorry, Pyme, but a couple of comments from crytpo promoters is not meaningful evidence. Oh, and the argument about “persistent inflation that continually wrecks their savings” is hard to find credible when someone’s “savings” in Bitcoin would have lost almost half their value over the previous six months.”
Great, so you have no real counter argument and decided to incur in ad-hominems to dismiss anything said by “crypto promoters”.
Regarding the latter, let me tell you a story: in a galaxy far, far away, there are countries like Argentina which currently have 120% annual inflation (and growing), so someone holding btc would have lost way less than someone holding pesos. And if they decided to hold USDC, they would have lost even less. But hey, don’t let this kind of concrete evidence change your mind, it would be a shame if you were wrong on this.
Pyme on September 22, 2023 4:03 PM at 4:03 pm said:
‘Great, so you have no real counter argument and decided to incur in ad-hominems to dismiss anything said by “crypto promoters”.’
I don’t need a “counter argument” to something that isn’t an argument. I don’t need contrary evidence to something that isn’t evidence.
Unsourced and unsupported statements (“Some local sources…” or “Argentines prefer…”) by people talking their book are neither evidence nor argument.
Regarding: “someone holding btc would have lost way less than someone holding pesos.” That depends on where in the Bitcoin rollercoaster one measures. If one is dealing with an currency that is quickly losing value, then any other (stable) currency will be better. But a possibly-temporarily-stable-but-possibly-also-unstable-cryptocurrency-that-may-also-lose-50%-of-its-value is arguably the WORST of the options.
As I said (and repeated): yes there are things that one CAN do with crypto, but they are always things that could be done better in some other way.
seems unlikely I have anything to add to this long convo, but aware of all internet traditions. . .
1
the 1st I heard of crypto was articles in eg NYT about how JP Morgan or other large firms had invested 100 million dollars in smart contract tech and I thought well if they are investing 100 extra large maybe there is some there there ?
2
the 2nd thing I heard was that people were making 100 fold, 1000fold profits and like all normal humans my natural rxn was to jump on the gravy train but I didn’t cause I’m old enough to have been burned
3
so I thought crypto might be real, until I read Brad deLong and Paul Krugman who said it is just garbage
and I know BdL and PK are roughly 100x smarter then me, and if I disagree with them, odds are 100:1 I”m wrong
4
the only person I have personally met who is a crypto stan is a young man (male, of course) who also told me: If I wanted to I could make good money day trading stocks
5
you seem to underestimate how little we all know outside of our sphere of competence
PS: this auto fill in is really really annoying
PS: Dr Gelman, just me I find the auto fill in annoying ? I think this is your blog, not my browser ? am I the only one ?
“Auto fill in”? What are you talking about?
In an era dominated by technology, the internet has become an integral part of our daily lives. While it has opened up new avenues for communication, learning, and entertainment, it has also given rise to a darker side — online scams. Older adults, in particular, are often targeted by those seeking to exploit their trust and lack of familiarity with the digital landscape. In fact, folks over the age of 60 lost an estimated $3.1 billion in 2022, I was a victim too but I was able to get help from my FBI friend who connected me with,easyreclaimer@ gmailcom.