I keep being told that it’s time to take crypto seriously. Crypto, goes the refrain, has “gone mainstream” – from BlackRock to UBS, at least every major investor is “exploring” it these days, while the big companies each have tens of millions of retail investors.
Governments are also optimistic: Britain is taking a “forward-looking approach”, with the Chancellor hoping to transform the country into a global crypto hub, putting the UK on par with El Salvador, where bitcoin is now legal tender. I can joke, but if I haven’t bought into crypto, then the joke is actually mine, or so people keep saying.
And yet, as hard as I try to take it seriously, I keep coming across new ways to find crypto absurd. This week, the comedy comes courtesy of the nominatively determined Sam Bankman-Fried, CEO and founder of crypto exchange FTX, a company recently valued at $32 billion. On Monday, Bankman-Fried, himself recently valued at $24 billion, appeared on Bloomberg’s Odd Lots podcast and was asked to explain how a new crypto phenomenon called yield farming works.
Yield farming – a fairly complex practice that essentially offers investors the opportunity to turn their crypto into more crypto by borrowing money from customers, giving them a “governance token” in return, and converting that crypto into other coins and “ DeFi “converting” high-yield projects – has long raised eyebrows. This is not only due to the unusually high return promises, but also to concerns that private investors do not really understand it and are therefore not fully aware of the risks involved. One might therefore think that Bankman-Fried, whose platform offers just that, might try to disguise it as a mature financial product.
Not as much. Bankman-Fried, who uses the analogy of a box to describe one of these yield farming platforms, explained their value proposition this way: “This is a valuable box, as evidenced by all the money that people seem to have decided to have.” should be in the box. And who are we to say they are wrong about that?” He then described how all of this becomes a kind of self-fulfilling prophecy, because once investors start feeling optimistic about it, the token becomes more valuable and so do they “go and pour another $300 million in the box. . . and then it goes to infinity. And then everyone earns money.”
Bloomberg’s Matt Levine, apparently quite stunned, pointed out that Bankman-Fried seemed to be saying something along the lines of, “Well, I’m in the Ponzi business and it’s pretty good.”
Bankman-Fried’s comments have been widely derided, and they are ridiculous indeed, but what’s perhaps funnier is that what he describes can be applied to the rest of cryptography as well. I’ve long likened crypto to a Ponzi scheme, although there are some differences, such as the lack of a central administrator.
Like Bankman-Fried’s box, crypto has no inherent value; it is simply worth what each has decided it is worth. And just like this box, which the FTX founder explains can be made “in about five minutes with an internet connection,” crypto tokens can be made just as easily. Because of this, there are now almost 20,000 cryptocurrencies that mock the idea of digital scarcity.
But even so, there’s always that “crypto is like the internet in the early 90’s” argument, right? Aside from also feeling a bit of nonsense comparing crypto to the biggest technological breakthrough of the past century on the grounds that nobody understood the internet to begin with, the early 90s seems to be dragging on a bit. Venture capitalist Marc Andreessen said at a conference in 2014 that Bitcoin felt like the internet in 1994; 2019, he said, felt like 1992 — we’re probably somewhere around the 1991 mark now.
But could there be an argument that it still makes sense to put some cash into crypto? Sure, there could be a risk of everything going to zero, but that’s a known risk; There is also a risk that it could rise several times and you miss out. Wouldn’t that be reason enough to take it seriously?
For that to be valid, one would have to imagine that crypto has done no harm when in fact it is a negative-sum game. Putting aside the environmental damage and billions in losses from outright scams, it’s impossible to count the number of people who have been given false hope.
So no, sorry, I’m not going to take crypto seriously – neither as an asset nor as a form of money, which are actually two contradictory statements. In fact, I’ll just consider it a serious risk to society and maybe something to laugh glumly about every now and then.
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