Tuesday, November 15, 2022

The Whole Crypto Thing

There isn't much to say about Crypto other than I told you so.

A reader writes, asking me to comment on the recent Crypto meltdown.  But why bother?  It would just be me repeating what I have said before during the previous Crypto meltdowns and exchange thefts.

I covered this succinctly in my five myths about Bitcoin.  As if to respond, Coinbase has their own Seven Myths about Bitcoin which is almost laughable.  Did you know if you write something in bold it means it's true?  It is laughable - except to those who "invested."  In debunking the "myth" that Bitcoin has no real world uses, they just say, in all bold letters that "many people" have paid for things with it and then go back to its use as "hedge" against "inflation" (this, written at a time of 2% inflation!  How's it doing today in the era of 9%?  Not so good.)

It would be laughable if it were not so cruel.  It is like a car dealer posting "seven reasons you should buy a new car!" and then explaining that your monthly lease payments are going to be less than "all those pesky repairs!"   Or maybe a payday loan place explaining why payday loans are a good deal!  You should get one too!

The difference between me and Coinbase, is that I am not selling crypto - or indeed, anything.  And yet, people look for validation for poor decision-making.  And the people helping you make poor decisions (and taking your money) are always willing to provide that validation.  Something to think about, right there.

But when I saw that "myths" posting, while searching for my own, I thought, "what ever happened to coinbase, anyway?"  And the answer is troubling - rumors of bankruptcy have been swirling around the company all year.  The company decided to close for a week every month to "give the employees time to relax" - no word on whether you could withdraw your money during those down times.

In addressing the "myth" of Bitcoin security, the Coinbase people argue that any hacking was not of Bitcoin itself, but of the exchanges. Ding! Ding!  Coinbase is an exchange.   The fundamental problem with Crypto is that it is not a closed ecosystem.  Crypto "coins" must always be converted to local currency to spend, and thus some sort of exchange is needed. None of the exchanges are regulated, insured, or monitored, and many are offshore.  Several - starting with the Mt. Gox fiasco (that was a while ago, wasn't it?) simply went bust.  FTX is just the latest - who's next?

Crypto cannot exist without exchanges.  Exchanges are unregulated, and as such, we will see future insolvencies, hackings, and outright thefts going forward.

Crypto Bros argue, "Well, you should keep your crypto in your own hard drive" but as I noted in my "five myths" posting that doesn't work, either.  A guy in the UK is still digging through landfills trying to find his old hard drive which now has millions of dollars of Bitcoin on it.  Maybe with the crash in crypto, he'll stop looking.  All it takes is a hard drive crash to destroy your Bitcoin.  Even printed out, you can lose or have stolen your "coins."  It is no safer than conventional money and in fact, far less so.

One Crytpo Bro commented online (which illustrated how stupid they are, if not just trolls) that the run on FTX was no different than a run on the bank.  We haven't had a run on the banks since 1929. Well, correction, we had a run on Savings and Loans back in the 1980s, but that was because they were not property regulated back then.

My Grandfather, as head of the New York State Bar banking section, used to fly down to Washington from Idlewild airport on Ford Trimotors or DC-3's, to help with the drafting of new banking regulations to prevent a repeat of the 1929 market crash.  Republicans have been trying to unwind them ever since.  Those "pesky regulations" have kept our banking system largely solvent in the intervening years.  Why spoil a good thing?

For some reason, some people just hate regulations in general - these so-called "Libertarians" who think being off-the-leash is a great deal.  I suspect they just got one-too-many bounce fees or ended up in bankruptcy - or bought into this whole "tax denial" thing.  If only I didn't have to pay taxes!  My life would be 15% better!  Or you could just find a better paying job and spend less money on guns and survival food.  Just a thought.

The number of crypto exchanges that have gone under and left investor high and dry is hard to parse.  I found one site that listed six, as of January 2020.  But in the two years since then, well a few more have bit the dust.  Coinbase is publically traded and their stock has soared since the FTX bankruptcy (only game left in town, besides Binance?) but then again, they lost $1B last year and have resorted to desperate measures such as expensive Superbowl ads, to attract new customers.

Quite frankly, I think you could devise an investment algorithm based on flashy Superbowl ads for dot-com type companies.  It seems most of them, from Pets.com to FTX, end up in bankruptcy court in short order.  Ditto for expensive "naming rights" for stadiums.  When someone desperately tries to buy respectability while losing millions of dollars a day, you have to wonder what the end-game is.

"But Bob!" you say, "Bitcoin has gone way up in value!  If you bought it several years ago when it was only worth a few thousand dollars, you'd still be ahead today!"  And that, in short is the gold-bug argument as well.  The problem with this argument is that it could be applied to nearly anything, from collector cars to real estate to certain stocks, bonds, or gold.  Things go up in "value" and sometimes they go down.  Yes it is possible to make money by buying low and selling high.  The problem is, these are backward-looking "time machine" investments.  "If only I had...." - but that's a crappy investment strategy.

If you could go back in time and invest that way, why not cut to the chase and buy winning lottery tickets?  The rate of return is much greater - $2 invested yields hundreds of millions of dollars. I know that sounds stupid, but it is the same stupid argument made about gold and bitcoin and stonks.  "If only" you had bought back then, you'd be rich!  That doesn't mean buying now makes you rich.

Timing markets is for chumps, and I say this as a grade-A number one chump - at least in the past.  I thought I could "beat the market" when I was younger.  After a few beatings, I realized that pigs get fat, hogs get slaughtered and while some people make out like bandits (and the people hyping these investments highlight those winners) most people lose.  Casinos work the same way - and gambling is not investing.  For ordinary people, their net worth isn't something they should gamble with.

A lot of little people will lose a little money (and a few a lot) in these sort of investment schemes - and they are schemes.  Meanwhile, the people behind them will rake in millions, if not billions.  Where do you think all that missing crypto went off to in the FTX debacle?   The guy running the place isn't facing personal bankruptcy - at least not yet.  And I hear the weather is nice in the Bahamas right now....

UPDATE:  This fellow on Reddit explains it so that even a "mook" can understand it:

Ironically enough, Sam Bankman Fried explained it correctly and with a remarkable level of accuracy.

Imagine you have a box. It doesn't do anything, but the exchange pretends it does some magic finance shit that gives you some stupid 25% or 15% interest if you fill it with dollars.

So you empty your pockets and fill the box with dollars. The exchange hands you an IOU(the shitcoin) that always tracks how many dollars you can ostensibly take out of the box at a future time of your choosing, ie. you give back the IOUs, and the exchange hands you back dollars in a value equivalent to the value of IOU.

The exchange says that it does some magic shit with your dollars inside the box that multiplies it, so your IOU (your shitcoins) are accurate (backed). But you don't actually know that, since the exchange prints the IOUs(the coins), and you can't see inside the box(no audits!), and you are actually brain damaged so you didn't learn anything from the terraluna or celsius shit.

So you believe it! Number go up on your IOU(shitcoin), so you dig deeper in your pockets for more dollars to put in. Worse, multiple other cretins put in dollars in the box, and you do not want to be the last ngmi, right? Everyone can be rich!

Ocassionally some mook is gonna withdraw a small portion of the dollars in the box according to the IOU they hold. The exchange serves them promptly, and the mook goes and spreads the good word! It is a magic box! The box is solvent! The box is backed! Huraaah, praise the lord it is a miracle, toss more dollars in!

And then, a wobble happens. Some shit somewhere else breaks. Some big fish needs dollars NOW, and they go rummaging in the box. Maybe they take out a bunch, in return for their IOU. Rumor starts spreading that hey...that dollar filled box looks kinda empty for what the IOUs say should be left... The exchange steps in! "No! The box is magic and full, and due to entirely unrelated circumstances, no one can take dollars out of the box anymore, no matter what the IOU says. Please put more in it, though."

So the cretins are spooked now. Ok, no one can take dollars out of the box (except exchange's boss, friends and 'hackers'), but maybe they can sell the IOU on the open market? Yes, let's ALL do that. Only problem, everyone is spooked and not buying the IOUs, so their value collapses, everyone being desperate to sell at ANY price, no matter what is written on their face value.

Only, problem! Somewhere else, some other exchange reveals that they also had a magic box filled with dollars! Only their box had a fake bottom, and they took fistfuls of dollars from it, and stuffed first exchange's IOUs instead so no one could see the box is kinda empty. Only, now those IOUs are worth fuck all, and the box starts looking pretty light on value regardless. Also, for entirely unrelated reasons, they also halt withdrawals of dollars.

And now you got contagion. When shit like this happened in the real world, the feds said. "Ok, this is retarded. You shitters played stupid games behind my back, but in the interest of keeping this house of cards from collapsing, I am gonna loan you money from ME, do you can ACCURATELY stuff your boxes back, take all the shit papers out, and we'll discuss punishments neverlater, after you pay me back."

But there are no feds in the crypto space. Oh no, what do as a CEO cryptoboss of a exchange? Break open the fake box, stuff your pockets with dollars and run to Cambogia.

Got a little bit carried away there. The exhange printing their own shit IOU is pivotal to the entire scheme though. They gotta print large numbers of IOUs, so that mooks put dollars in, and NOT take them out. So long as that happens, they can write any number of them they want of their shit IOUs, and everyone pretends to believe it because line go up. This is, in essence, a Ponzi scheme. It's fake. There is no magic box (duh).

In the real world, when banks give you interest, they basically loan your money to other people, and they give you back a cut of the increased economic activity as interest. Also, they pay your interest in money that you give them, not in money that they invented and control but it's totes real and is valued at a bajillion USD(tm), because of regulations. It works, but the cut is SMOL. Like, not even joking. But in crypto? There is no increased economic activity. There is NO economic activity at all! It is worse, crypto is negative sum, so the economic activity should be negative. Bitcoin is deflationary, where the fuck do these exchanges pull 20% interest on your bitcoin from? (Are they running a reverse kind of Erdogan-o-nomics? What is even happening?) Insanity. It's a game of musical chairs and not being the last one holding the bags full of worthless papers when the music stops.