Cryptocrash

Well, it turns out I haven’t written anything about cryptocurrency and that’s because I’m no expert on crypto (and frankly, don’t want to be). I’ve written about Web 3.0 purely as a way of learning about Web 3.0 because embedded in that topic is blockchain, which is something I see as being a possible new infrastructure for the digital arena. The concept is interesting, but it does use up a lot of energy – might not be good for the climate change age.

Now that I’m thinking about it, I think blockchain was developed as a way of making cryptocurrency work in a “secure” fashion without the banking intermediaries or the banking regulations. The cryptocurrency was created so that the central bank can’t maintain control over it and thus there would be no regulations. Cryptocurrencies were supposed to be the libertarians’ wet dream.

But in order to have cryptocurrency, we need blockchain as the underlying infrastructure for security purposes and for decentralization. Remember, libertarians want no one to have control over the currency.

Except, if there is ever a crash where people start losing lots of money, then the people will start braying for regulations to guard against criminals and hackers.

Have we reached that point?

I don’t know, but this year, crypto has been crashing – or at least the news earlier in the year was about cryptocurrency failing, leading a crypto exchange to sweep in and save some cryptos. Here’s where I’m weak on what has been transpiring earlier in the year: was the crypto crisis earlier in the year the result of cryptos losing their value on the exchanges or the result of crypto exchanges failing? Right now, I’m having problem pulling up old news going back to June or July; I get mostly the most recent news.

But there is one article that I found, and I’ll put a link here, that might give a good background to today’s crisis. (I’m doing this as a way of learning what is going on, so bear with me.) According to this article, the decline in the price of the cryptos (or maybe I should say bitcoins) stems from the ongoing inflation that the world is seeing. Investors, fearing that bitcoins were not really secure and stable, pulled out of bitcoin investments, thus precipitating the overall decline in values. Stablecoins, which were supposed to be more stable and safer due to being tied to a more stable underlying asset, were also declining in value. So, with bitcoins and stablecoins undergoing broad price declines, crypto exchanges such as Coinbase and Kraken started to face peril.

That is my nutshell understanding of the earlier crypto crisis.

Today’s crisis stems around the implosion of the FTX exchange. I’m not sure of the sequence of events here but one news source made it sound like FTX was having a liquidity crisis that was kept hidden until it couldn’t remain hidden any longer. Once news of its liquidity crisis got out, then the exchange really started to wobble as investors tried to pull out money out of the exchange. But the exchange did not have enough money to honor those requests, thus precipitating further liquidity crisis. Now the latest is the discovery that there may have been some malfeasance: FTX sent investors’ money over to its crypto hedge fund or research firm Alameda Research. And today, there have been mysterious movement of cryptos out of the FTX exchange or as they called it “unauthorized transactions”.

Pouf! went whatever remaining trust factor there was.

Again, cryptocurrency was created to be used without banks being involved and thus the cryptos could be exchanged without regulations. The libertarian concept of no regulations being the main selling point.

But during periods of uncertainty, like inflation or recessions, or wars such as the Ukraine-Russia war, or pandemics, investors want their money in stable assets and cryptos are not regarded as secure. They’ll move money into more secure assets and generally those are assets backed by the government (and the attendant regulations to make them more secure), You just can’t get around the fact that investors want their money to be secure and that requires some form of government regulations. There is just no way around it.

This cryptocurrency crisis is demolishing the whole raison d’etre for the cryptos. At this point in history, there seems to be no real value in cryptocurrency because it still cannot replace our current banking system. At present time, the whole crypto system seems worse than the banking system b3ecause investors really do not trust that system to maintain value and stability of their assets. Many of them are losing money.

Here’s a really good discussion and perspective from a well-known economist – you may not like him if you are of a different persuasion – but his article is a very good encapsulation of the situation. This is behind a paywall so if you subscribe to the New York Times, it’s likely you will be able to read it.

My main takeaway from this whole imbroglio is that cryptocurrency is still the Wild West. If you want to lose your hair or lose money, stay away from these investments. Also, stay away from these crackpot schemes that promote a quick money-making scheme. Just stay away.