Jamie Dimon of JPMorgan Chase has dismissed Bitcoin as “a fraud,” while Nobel Prize–winning economist Paul Krugman has derided cryptocurrencies as “a techno-mystical bubble wrapped in libertarian ideology.”
Cryptocurrency remains a paradoxical phenomenon. It was developed in the late aughts, surged to staggering popularity, waned, and then revived, all within the span of the last decade. Similar to all new markets, there’s a ton of rug pulling, money grabbing, behind-the-scenes moves that make uneven markets—some are in the know, others aren’t.
There are four different interpretations of the broader crypto narrative:
Get rich! Crypto is really just a parade of wealth, a bunch of rich people getting richer and leaving everyone else behind.
Ownership, governance, and participation. For some, crypto offers a unique proposition where users can buy tokens that enable them to own and vote on projects. The idea is that crypto is going to change how the economy functions through modifying how we work, play, and do things (however, what those things are is rather imprecise).
Technological infrastructure. Some see beyond its financial aspects, where crypto acts as an extension to the existing internet, leveraging blockchain to inject decentralization, transmutability, and transparency into digital spaces.
Diffused networks. Some lean really heavy into the lack of centralized control, with markets and interactions spread across a network of independent participants.
The narratives are always compounded by fear of missing out (FOMO). During the 2021 era bubble, this sentiment drove buyers to value assets like the nonfungible token (NFT) Golden Fur Bored Ape at $1.5 million or the EtherRock, an Ethereum Pet Rock JPEG selling for $1.3 million. Because, of course.
Crypto has always been prone to speculative activity. It’s bubbly, similar to traditional markets in a lot of ways. As with most aspects of finance, there is an element of Ponzinomics in everything having to do with it. The more money that goes into the crypto industry, the better it is for the crypto industry.
It’s all a bit…floofy. But one of the biggest complaints people seem to have with modern society is the financialization of everything—the increasing influence that the financial markets have on our daily lives. The financial sector has grown, advertising is ubiquitous, and it often feels as though shareholder rights supersede civil rights, as the Financial Times noted in 2023. That makes sense, right? Every time you turn around, some buy now, pay later company is trying to get you to pay four monthly installments for a pizza. Everything we do is a money sign, something to monetize or build a brand from.
There is a lot of debate in the federal government about the best way to approach cryptocurrency—whether it should develop its own central bank digital currency, or CBDC, and how to regulate it. (Is it a security? A commodity? Who’s in charge around here?)
One big difference between crypto and dollars is that people don’t invest in dollars. They can save them or use them to invest in other things, like stocks, but dollars are transactional agreements, not investment tools. The dollar is a government accounting device, not a speculative asset.
Tech faces a lot of issues, including centralization, data ownership, privacy concerns, and a lack of moderation. Finance grapples with similar problems, including widening wealth gaps and centralization of wealth in the top 1 percent. Crypto is presented as a solution to these challenges: decentralizing the centralized, redistributing data ownership through smart contracts, implementing privacy and moderation tools via the blockchain, and dispersing wealth.
But the problem of the rich getting richer remains unsolved. Crypto has the same problem that traditional finance has: People who have a lot of money have the greatest opportunity to make more money. And a lot of crypto solutions create more problems. There are a lot of scalability problems, and the industry is plagued by security issues, including hacks, attacks, and fraud. The high energy consumption associated with crypto is also a major concern. Cultural issues exist, too, with a focus on get-rich-quick schemes and an abundance of scams and bad actors.
Also—
It’s inaccessible. “Gas fees,” or the costs to transact on the blockchain network, can price people right out. The user interface isn’t always great. Too many people ride the get-rich-quick bandwagon, and not enough people take advantage of the underlying “get-rich” possibilities.
Crypto is a deviation from traditional finance. It was originally designed to be a way to think about finance as a culture and a representation of a community. It’s a weird, decentralized, tokenized world. Crypto is also a Swiss-type bank account (i.e., highly private and confidential) for people running from their governments who don’t want to keep a stack of gold bars in their backyard. The monetary use case for crypto is that it is largely convenient and liquid and its value goes up as financial censorship increases. It’s largely meant to shield assets from prying eyes.
But as I talked about previously, crypto has always attracted speculative activity. And there are a lot of ways to speculate in crypto: NFTs, tokens, DAOs, Bitcoin, Ethereum, SHIB coin, Dogecoin, Poopcoin. The list is endless. It’s like a never-ending game of Jenga, and if you pull a block out, you could either make millions of dollars or lose everything on a picture of a cat.
The Securities and Exchange Commission (SEC) is trying to figure out how to regulate crypto. Because crypto trading is decentralized, there really isn’t a main regulator saying, “Hey, no, don’t steal millions of dollars.”
The SEC seems to be trying to regulate the industry in the same way as securities (the courts might disagree, given what’s been going on with the cryptocurrency XRP). It judges whether cryptocurrencies are securities by using the Howey Test, which labels financial instruments as said securities if there has been “an investment of money with an expectation of profits derived from the efforts of others.” So most of the industry does tend to fall under the securities umbrella, which means that crypto issuers have a lot of paperwork to file with the SEC—which isn’t great for the ethos of decentralization.
The crypto industry has a lot of components, including the following.
Nonfungible tokens (NFTs) are kind of like digital trading cards, unique digital assets that are owned on the blockchain. NFTs are funky. They can be used for digital content; creators, as opposed to platforms, own their work. They can also be used for purchasing domains and physical assets such as real estate and cars. Most important, though, an NFT is the pointer to an asset, not the asset itself. So when people say, “I took a screenshot, this monkey JPEG is mine!,” that’s not technically true. The value doesn’t rest in the picture itself; it rests in where the picture sits on the blockchain, which is what the NFT points to.
An NFT is a function of status, identity, and belonging. It usually has one owner, and that’s the goal because NFTs work best for assets or content or art that is unique and scarce and has proven ownership. No two NFTs are the same, and their existence in the public record gives each of them verifiability and credibility.
Of course, theory and reality can diverge.
When it comes to crypto assets, it’s important to understand the difference between tokens and coins. Coins are native to their own blockchain and are often used as a form of currency or as a way to pay for transaction fees on the network. Examples of coins include Bitcoin and Ethereum. Tokens, on the other hand, are often built on top of an existing blockchain and can represent a variety of assets or functions within a network. For example, a token might represent ownership in a DAO or access to a specific application on a decentralized platform.
Shiba Inu (SHIB) coin is another example of speculation within the crypto universe, and it gets into the funky existence of a Schrödinger coin. SHIB is in the same land as Dogecoin, which is based on a picture of a dog. And it really is based on a meme rather than reality! But in 2021, someone made a bunch of money after investing $8,000 in SHIB in August 2020. By October 2021, their position was worth $5.7 billion. Gross!
This also showcases the inherent push-pull of speculation because liquidity is key to functioning markets. There is no way to pull $5.3 billion out of SHIB without causing it to crash. Much of crypto’s value comes from new investments and guesses about its future. So, Dogecoins often change in price based on trends and popular internet jokes. Schrödinger coin shows the paradox of speculation. It’s similar to the famous thought experiment of Schrödinger’s cat, which exists in a superposition of states (is it real or not?) until it’s actually observed, just as crypto exists in a superposition of states until it’s bought or sold.
But if you can’t get your money out, are you really rich? If you can’t get the money, is it really yours? Is Dogecoin alive or dead?
There comes a point when you have to open the box and see what’s inside. This means selling your crypto, right? But liquidity is key. If everyone who owns a cryptocurrency tries to cash out at once, the value of the currency will plummet, everyone will lose money, and the double-edged sword will stab everyone in the eye.
This is FOMO, the idea that if you don’t throw your entire net worth into a meme coin, you’ll never make the once-in-a-lifetime wealth that everyone else seems to be making. But ultimately, it’s a dice roll, and memes get you only so far.
The “why wouldn’t you?” is where the value comes from. But the reality is that there’s no guarantee of what you will find when you open the box.
Of course, the natural inclination with a lot of the events that happen in crypto is to shout into the wind, “well, I would never buy this stuff!” And that’s okay! Honestly, I wouldn’t buy some of it, either. But someone will. And that’s all that matters for keeping the industry alive.
I am going to touch on this briefly even though it’s a bonkers situation that represents the perfect alignment of greed and grift. It’s not quite a timeline but rather a representation of the vortex of the universe it’s in. Many people believe they understand crypto, but the reality of what goes on inside crypto companies can be more like gambling than speculation.
FTX was fraught with stupid, big bets that worked until they didn’t and financial engineering that morphed into (or always involved) fraud and beyond. There are four key things to know about FTX:
FTX was a very big player. FTX was a powerhouse in the industry—so much so that it bailed out other crypto companies such as Voyager and BlockFi a few weeks before it collapsed (this would come to haunt its directors later).
FTX’s tentacles were spread throughout the industry. It was sort of associated with a hedge-fund-venture-capital-esque firm called Alameda Research but not technically, because it was kind of illegal to be too closely associated with it. So FTX’s directors made sure to say, “No, we aren’t that closely associated with Alameda,” and everyone was like, “Sure, totally makes sense.”
FTX’s directors had no concept of risk management. They also made sure to highlight excessively that there was zero downside to any of the things they were doing! No risk at all!
Sam Bankman-Fried was the face of the industry. Sam Bankman-Fried, a cofounder of FTX (as well as Alameda, just to give you a hint of how messy this would get), was the regulators’ darling; he was called to testify before Congress to help shape regulations for the crypto industry, giving out total OhBoyFounderGeniusExtraordinaire vibes, very similar to Mark Zuckerberg when he testified about Facebook.
But those four factors became a perfect nightmare. On November 2, 2022, Alameda’s balance sheet was leaked by CoinDesk. And everyone was like, “Hey, why do you have, like, $3.6 billion of FTT and $2.16 billion of FTT collateral?” FTT is a token issued by FTX for trading fees, which meant that Alameda and FTX were very much intertwined—even though they really shouldn’t have been.
Alameda quickly tried to stem the problem by saying, “Oh, noo, ha-ha, that’s not our balance sheet, that’s a figment of your imagination” (which was somewhat true, as some of its assets were imaginary). However, Changpeng Zhao, the CEO of Binance, another big crypto exchange, was like, “Buckle up.” You see, Changpeng and Sam had a bit of beef. Sam, as the face of the industry in the United States, was helping design regulations that would hurt Binance (and the broader industry), so beef was warranted.
But their history went back farther than that. Binance had helped spin up FTX, had sold its stake about a year before, and in exchange, had received $2 billion of FTT, among other things. Changpeng said that he was going to sell his stake in FTT and opined, “I think that your firm is going to blow up.”
That was a nuclear situation for FTX, so Caroline Ellison, the CEO of Alameda Research, tweeted at him on Twitter, “Hey, we can buy all your FTT for $22,” and the market freaked out! Then a bank run happened (that was a theme of the latter half of 2022 into 2023!).
FTX was flailing, and so was Alameda. People took $6 billion out of FTX, which created a vacuum. FTX then paused withdrawals. Binance was like, “Hey, we can save you,” but then saw the pit of Hell that was the balance sheet and quickly said, “Never mind!”
Meanwhile, Sam Bankman-Fried was tweeting wildly, assuring everyone that everything was fine and trying to find $9 billion to close the deficit, which, of course, is what we all do right before our company implodes. But things kept getting worse! Imagine that you are crawling around in a sewer and shining a light down side tunnels! That is this!
As it turned out, Alameda’s directors weren’t good at trading. They had gotten too aggressive with venture investments, had a large margin position, pledged illiquid collateral (money that they really didn’t have) to do more bets—and were well-capitalized gamblers. FTX filed for bankruptcy—it and its 134 associated firms. John J. Ray III, the man who liquidated Enron, stepped in as CEO, threw his hands in the air, and let out a scream.
But then things got spookier, because it turned out that SBF had built some sort of backdoor so that Alameda could borrow an unlimited amount of money from FTX—Alameda’s $1 million was FTX’s $1 million, which is very illegal.
FTX’s balance sheet was a nightmare, a Crayola crayon copy of some other dimension of reality. It was composed of tiers of liquidity: liquid, less liquid, and illiquid. That is not at all how a balance sheet should look; a balance sheet should balance assets and liabilities. Meanwhile, FTX had less than $1 billion in assets and $9 billion in liabilities, which was not good.
The company’s most liquid asset was Robinhood shares and a hidden, internal “fiat@” account, which apparently was $8 billion accidentally sent to Alameda (who among us hasn’t sent an accidental $8 billion to a friend?) and a token called TRUMPLOSE. Its two biggest assets were FTX and something called Serum, which is also something FTX helped create. Collectively, those were worth $10 billion before the crash—at least according to the balance sheet. And that gets back to Schrödinger coin—anything is worth $10 billion if you say it is! Like yes, your toaster is theoretically worth $10 billion until it’s time to sell it—and then it isn’t.
Then contagion occurred. A lot of big crypto companies have imploded this way. The speculation came to an end. The directors of the venture capital firms that had invested in FTX were like, “whoops,” and just sort of shook their heads sadly, although they probably should have been very aware of what was happening.
The episode exposed the underbelly of the crypto universe in a really impactful way and woke everyone up to what was actually going on with FTX, the darling of the crypto universe. It likely caused irreparable harm. It also showed how important it is to pay attention to companies’ decision-makers.
Despite its potential, there’s substantial resistance to crypto. It’s meant to be an anchor of hope, yet the crypto world often doesn’t seem inclusive for everyone. Open source for whom? Collaborative with whom? Decentralized by whom?
Crypto was meant to be a reimagining of how the world works, taking things from Web2, taking other things from finance, and putting them into a hodge-podge package based on decentralization, ownership, and a bunch of other buzzwords.
Of course, governments are paying attention and have partially tolerated blockchain because it’s a useful technology. Central bank digital currencies, or CBDCs, are digital versions of a country’s regular money created and regulated by the government. In March 2021, the Bank of Japan explored a digital yen program to see how a CBDC could be used in payment and settlement systems. In April 2020, the Bank of England published a paper that talked about the monetary policy use case for a CBDC.
And of course, blockchain technology, known for its secure and transparent nature, has been considered for some CBDC projects because it could reduce fraud and enable quicker and cheaper cross-border transactions as well as make it easier for central banks to implement policies, control interest rates, and manage the money supply in real time.
In July 2023, the U.S. government established FedNow, a digital payments system, finally catching up to where the rest of the world had been ten years before. Most countries seem interested in the concept of a CBDC, which provides seamless transactions and a microscope on what people are doing, but how long they will take to implement the tech is another conversation entirely.
We want to own things. We want to build things. Crypto provides tools to do that, but it might have lost its soul in the euphoria. Either way, owning the online (how do people who use the internet benefit from the upside of the internet, versus Big Tech capturing all the value?) will be a theme as we become increasingly embedded in the digital world, and crypto is an early iteration of a solution for what that could look like.