On Cryptocurrencies

I'm late to the party. I've been continuously postponing writing about my take on Bitcoin for years, and now, with the whole crypto-market crashing through the floor, it will look like I'm just projecting hindsight wisdom back in the past.

But on second thought, religions never really die out. And Bitcoin has had crashes before and always bounced back stronger. It might not be the end yet.

So, why do I think that when the end comes, it won't be pretty?

I owe my antipathy towards Bitcoin at least as much to gutfeel as to rational argument. The former can be summarized quickly. Every second crypto-advocate I stumbled into on Youtube or in real life came across either as a second-hand car dealer, or a fresh convert to a cult - where the leader is an ex-second-hand car dealer. With all the unbearably irritating mixture of smugness and ignorance.

That was the gutfeel part. On the rational side, I never understood what exactly cryptocurrencies are good for. What problems do they solve? They are inferior substitutions to fiat money in almost every respect. According to Economics 101, money has three functions. Medium of exchange, store of value, and unit of account.

A bitcoin is a unit of account, that's alright, but as a medium of exchange, cryptos have very limited use. With Bitcoin, I could buy almost nothing I need on a daily basis. Food, books, petrol, clothes, paying the bills - I need local currency for all of these. As a store of value cryptos would need to be stable. They are anything but. If I had converted my savings to Bitcoin half a year ago, I would have lost half of them. If to Terra, they would have been just wiped out.

I've heard two main arguments from crypto fans. One, cryptos are anti-cyclical, two, their built-in scarcity prevents inflation. 

Anti-cyclical means that in times of financial turmoil, cryptos would be safe havens - like traditionally gold has always been. That theory has been just crushed, along with the markets. Everything is in free fall now, but nothing falls faster than cryptos. I have no idea why, but even if I knew it wouldn't make me feel better, had I invested my wealth in them.

The scarcity argument is not convincing either. Whenever I heard someone extolling Bitcoin's virtues, they were always depicted against an apocalyptic view of today's financial world. "Governments will start printing money any day now and we are accelerating toward a new Weimar!" Yeah, sure. 

One, governments don't print money, central banks do. 

Two, independent central banks and fiat money are actually two of the great inventions of humankind. The amount of money in circulation has to be aligned with the size of the economy. The ability of central bankers to control the money supply can be misused, but that possibility doesn't automatically turn a country into Zimbabwe. Rather, it provides tools to mitigate economic turmoils, which central bankers have used quite effectively during both the Great Recession and the pandemic. And didn't use during the Great Depression - hence there was a Great Depression.

So, contrary to libertarian fanatics, who see crypto as a way to freedom from government tyranny, central bankers are not bloodsucking monsters whose only purpose in life is to rid you of all your savings, but professionals whose job is to keep the economy running. They make mistakes, but the last 70 years were, by and large, the most stable and prosperous period in human history. 

Three, the general wisdom is that deflation is even worse than inflation. I'm really out of my wheelhouse here, but if the money supply was constrained and in the growing economy constant amount of money chased a growing number of things, that would lead to deflation. I guess.

But leaving all theory aside, babbling about the inflation-resistance of an asset that loses 10% of its value in a day of its value whenever Elon Mask wakes up on the wrong side of the bed? If a South-American country's currency had this kind of volatility, it would be a laughing stock even in the region. Who are these guys kidding?

Even if cryptos didn't have these shortcomings, I'd have a long list of doubts. What if I invest my savings in Bitcoin, then it falls out of vogue, and another crypto takes its place (which might allow for more than 3-7 transactions per second - just for comparison, for Visa, the number is 1,700)? What if I forget my master password? Normal banks will never seize my money even if I lose all my papers. Speaking of safety, is my money insured by the state? Who I go to complain if I'm the victim of fraud? If I accidentally sent money to the wrong place? What about the unknown unknowns that would manifest only once we moved to a crypto-based financial world? 

Long story short, I think cryptos are Ponzi schemes. You make a profit if more people buy into it after you than the ones before you. The rest is techno blah-blah, hype, FOMO, and libertarian fever dreams.