A STRONG DOSE OF BAD MEDICINE
Crypt’s got all the Symptoms; Count Em’ 1, 2, 3…
As Boom-GREAT as I’m feeling lately, I'm writing this because I felt a bit bad last night after commenting in a well-meaning “devil’s advocate” kind of way on two of @meno’s recent posts: We Need a Stronger Placebo – One that Actually Works, and Trying to Slay the Dragon.
I love Meno dearly... He ain’t heavy, ...he’s my brother!
That said, I was indeed a bit forward in my comments, (my apologies, brother) and was definitely not in keeping with the eternally optimistic flavor of the threads. Since I have more than 20-years on him, I communicate with Meno in this way more like an Uncle, I suppose. I do so because for one, I know a fair bit about financial markets, and two, I care very much about the financial well-being of Meno and the rest of the community too.
Another reason that prompted me to draft this post was an article I stumbled upon earlier today penned by one Kenneth Rogoff, a former Harvard University Professor and Chief Economist at the International Monetary Fund. (Two institutions that I care very little for btw...)
He titled the piece Betting on Dystopia. Now granted, though he’s written critically of the numerous financial missteps of " the powers that be" in This Time is Different, and The Curse of Cash, - at the end of the day, this guy is more likely than not - very much in favor of centralized governments maintaining their monopolistic domains over currency creation.
Although I am adamantly NOT AT ALL in favor of government-issued fiat – I sadly must admit that I agree implicitly with some of his arguments, namely that at the end of the day, no matter what happens, that an all-powerful government will indeed step in to regulate and appropriate when and if necessary. I alluded to such in my comment to @meno when I referred to the “Fiat Beast” being so utterly entrenched.
Though I haven’t read the book, in perusing a brief paragraph on the back cover, I suspect the “Curse of Cash” touches quite sufficiently on the Crypto markets. Here is the snippet:
Even if governments take better control of paper currency, perhaps by phasing out large-denomination notes, cryptocurrencies raise old and new issues. Looking to the future of public and private digital currency, The Curse of Cash cites the lesson of history: when it comes to currency, the private sector may innovate but eventually, the government regulates and appropriates.
In my view, the best we can hope for within the crypto realm is an effective/alternate payment system along the lines of PayPal or some form of a digital contract application – that, however, particularly the "currency aspect," is contingent upon the government leaving the private sector alone to do what it does best, and doesn’t ultimately regulate and appropriate the space to death.
So, yeah – I hate to be the source of buzz-kill in anyone’s comment threads or with a post like this, especially with everything and everyone so down. The only two upsides are that it appears that a large majority of Steemians have already left dodge – and that no one will read this anyway. The only authentic people that still seem to be left are the real die-hards, several evangelists’, and “sensations” that have followings of actual people commenting with relevance to what they post.
Comments and real authentic engagement seem to be down nearly as much as the market! If you’re not one these evangelists or “Steemit Sensations,” it’s more likely than not – no one is seeing, listening to, or reading your shit.
In wrapping up this buzz-kill post, even though I have a link to the article above, I’ll transcribe it here (with some bold annotations) for the convenience of readers – if there are any… If you are here reading this, get ready to swallow a reality-based dose of some very bad medicine.
Betting on Dystopia
Dec 10, 2018 KENNETH ROGOFF
"The right way to think about cryptocurrency coins is as lottery tickets that pay off in a dystopian future where they are used in rogue and failed states, or perhaps in countries where citizens have already lost all semblance of privacy. That means that cryptocurrencies are not entirely worthless."
CAMBRIDGE – With the price of Bitcoin down 80% from its peak a year ago, and the larger cryptocurrency market in systemic collapse, has “peak crypto” already come and gone? Perhaps, but don’t expect to see true believers lining up to have their cryptocurrency tattoos removed just yet.
At a recent conference I attended, the overwhelming sentiment was that market capitalization of cryptocurrencies is still set to explode over the next five years, rising to $5-10 trillion. For those who watched the price of Bitcoin go from $13 in December 2012 to roughly $4,000 today, this year’s drop from $20,000 is no reason to panic.
It is tempting to say, “Of course the price is collapsing.” Regulators are gradually waking up to the fact that they cannot countenance large expensive-to-trace transaction technologies that facilitate tax evasion and criminal activity. At the same time, central banks from Sweden to China are realizing that they, too, can issue digital currencies. As I emphasized in my 2016 book on the past, present, and future of currency, when it comes to new forms of money, the private sector may innovate, but in due time the government regulates and appropriates.
But as I also pointed out back then, just because the long-term value of Bitcoin is more likely to be $100 than $100,000 does not necessarily mean that it definitely should be worth zero. The right way to think about cryptocurrency coins is as lottery tickets that pay off in a dystopian future where they are used in rogue and failed states, or perhaps in countries where citizens have already lost all semblance of privacy. It is no coincidence that dysfunctional Venezuela is the first issuer of a state-backed cryptocurrency (the “Petro”).
The ultimate obstacle for any cryptocurrency is that eventually there has to be a way to buy a range of goods and services beyond illicit drugs and hit men. And if governments ever make it illegal to use coins in retail stores and banks, their value must ultimately collapse.
Many crypto-evangelists insist that Bitcoin is “digital gold,” in part because the long-term supply is algorithmically capped at 21 million. But this is nutty. For one thing, unlike gold – which has always had other purposes and today is employed widely in new technologies from iPhones to spacecraft – Bitcoin has no alternative use. And even if Bitcoiners manage to find a way to lower the phenomenal energy cost of verifying transactions, the very nature of decentralized ledger systems makes them vastly less efficient than systems with a trusted central party like a central bank. Take away near-anonymity and no one will want to use it; keep it and advanced-economy governments will not tolerate it.
The evangelists dismiss such concerns: Bitcoin can still be incredibly valuable as long as enough people "perceive" it as digital gold. After all, they argue, money is a social convention. But economists (including me) who have worked on this kind of problem for five decades have found that price bubbles surrounding intrinsically worthless assets must eventually burst. The prices of assets that do have real underlying value cannot deviate arbitrarily far from historical benchmarks. And government-issued money is hardly a pure social convention; governments pay employees and suppliers, and demand tax payments in fiat currency.
But it is too soon to say how the new world of digital currencies will play out. Central banks will get into the game (their reserves are already a form of wholesale digital currency), but that is not the end of the story. US Treasury Direct, for example, already offers retail customers an extremely low-cost way to hold very short-term Treasury debt for amounts as little as $100, tradable to others in the system. Still, heavy security makes the system relatively cumbersome to use, and just maybe governments might adopt one of today’s private digital technologies.
For the moment, the real question is if and when global regulation will stamp out privately constructed systems that are expensive for governments to trace and monitor. Any single large advanced economy foolish enough to try to embrace cryptocurrencies, as Japan did last year, risks becoming a global destination for money-laundering. (Japan’s subsequent moves to distance itself from cryptocurrencies were perhaps one cause of this year’s gyrations.) In the end, advanced economies will surely coordinate on cryptocurrency regulation, as they have on other measures to prevent money laundering and tax evasion.
But that leaves out a lot of disgruntled players. After all, many today – including Cuba, Iran, Libya, North Korea, Somalia, Syria, and Russia – are laboring under United States financial sanctions. Their governments will not necessarily care about global externalities if they encourage cryptocurrencies that might have value as long as they are used somewhere.
So, while we shouldn’t be surprised by this year’s cryptocurrency price bust, the price of these coins is not necessarily zero. Like lottery tickets, there is a high probability that they are worthless. There is also an extremely small outside chance that they will be worth a great deal someday, for reasons that currently are difficult to anticipate.