Monday, November 21, 2022

MindBlog in Crypto-Land Part II - Is the crypto industry headed for oblivion?

In late spring of this year, I was seduced by my son's having made a six hundred-fold return on an investment by virtue of being one of the first cohort to stick little black boxs (Helium miners costing ~$1,000) on their window sills earning HNT (Helium blockchain tokens) for transmitting and receiving signals in an 'Internet of Things" that piggybacks on existing wireless systems of cell towers and cable providers. I decided to take a sip of the koolaid and set up two Helium miners which to date have earned ~ $10 for a 0.01 % return on investment! Fortunately I decided not actually own a significant amount of any of the cryptocurrencies such as BitCoin or Etherium, and didn't face financial damage of the sort mentioned below.  I persist in liking the idea that block chain ledgers and their associated cryptocurrencies offer the promise of being a monetary system that doesn't require trust in financial institutions that are potentially intrusive or corruptible.

Krugman does not agree, and has issued his latest screed against the whole crypto context in a NYTimes Op-Ed occasioned by the recent implosion of Sam Bankman-Fried and his cryptocurrency exchange FTX:

Crypto reached its peak of public prominence last year, when Matt Damon’s “Fortune favors the brave” commercial — sponsored by the Singapore-based exchange — first aired...people who bought after watching the Damon ad have lost more than 70 percent of their investment.,,falling prices needn’t mean that cryptocurrencies are doomed...More telling than prices has been the collapse of crypto institutions...Most recently, FTX, one of the biggest crypto exchanges, filed for bankruptcy — and it appears that the people running it simply made off with billions of depositors’ dollars, probably using the funds in a failed effort to prop up Alameda Research, its sister firm.
After 14 years, however, cryptocurrencies have made almost no inroads into the traditional role of money. They’re too awkward to use for ordinary transactions...[they] are largely purchased through exchanges like Coinbase and, yes, FTX, which take your money and hold crypto tokens in your name...These exchanges are — wait for it — financial institutions, whose ability to attract investors depends on — wait for it again — those investors’ trust. In other words, the crypto ecosystem has basically evolved into exactly what it was supposed to replace: a system of financial intermediaries whose ability to operate depends on their perceived trustworthiness.
But if the government finally moves in to regulate crypto firms, which would, among other things, prevent them from promising impossible-to-deliver returns, it’s hard to see what advantage these firms would have over ordinary banks. Even if the value of Bitcoin doesn’t go to zero (which it still might), there’s a strong case that the crypto industry, which loomed so large just a few months ago, is headed for oblivion.

1 comment:

  1. I liked this explanation of bitcoin:

    It's like if idling your car 24/7 occasionally produced solved Sudoku puzzles that you could then exchange for heroin. (@VessOnSecurity)