Does crypto expose the emperor's clothes of the financial services industry?
Published: 2023-01-10 23:54:23

_Originally published [on my blog](https://robinwinslow.uk/crypto-house-of-cards)._

I really believe at this point that crypto is over. All of it. NFTs, Web3, smart contracts. The awareness about its flaws hit critical mass sometime towards the end of last year, and now it's got nowhere to go but down. It'll still have a long tail, of course.

I just watched [Crypto: The world's greatest scam](https://www.youtube.com/watch?v=ORdWE_ffirg), a video by James Jani. It's been making a bit of a stir. It's very good, informative and accurate, but since I've already heard most of the criticisms of the Crypto world out there, I was interested in what new arguments it makes, if any.

This is my summary of the main narrative of the video:

> When Bitcoin was created, it may well have been out of a genuine desire to decentralise finance, but it quickly became a speculative asset instead. Once it became a speculative asset, it could no long hope to become a real currency, as speculative assets are always volatile. The one thing cryptocurrencies have proved great for is financial speculation.
> 
> All crypto (all the thousands of coins & ICOs) is therefore a decentralised ponzi scheme, with people only buying it with a hope to sell it for a profit later on.
> 
> Having bought into an asset whose value they don't understand, most investors then have a strong incentive to prove that their asset is valuable. This led to innovation upon innovation, through smart contracts, "play to earn" games, NFTs, Web3 etc.
> 
> But since the fundamental reason anyone is buying into any of these is *always* to simply make more money later, each of them ends up having no value.
> 
> The whole Crypto world is a ponzi scheme running out of control.

This is the main narrative. Along the way there's an interesting subtle accusation in there that A16z knew all along what Crypto was: A way to make quick money, with short several-month turn arounds, on mini ponzi schemes that the law has no way to regulate yet.

## What makes a ponzi scheme?

The video mentions the case of [Bernie Madoff](https://www.google.com/url?sa=t&rct=j&q=&esrc=s&source=web&cd=&cad=rja&uact=8&ved=2ahUKEwijyfTHlr78AhXxgv0HHepAD68QFnoECBUQAw&url=https%3A%2F%2Fen.wikipedia.org%2Fwiki%2FBernie_Madoff&usg=AOvVaw1YAry5Ykz3r_mAwxW84MPV) as the difinitive Ponzi scheme. I've always found the ponzi scheme accusation thrown at crypto a bit hard to swallow.

There's another related accusation thrown at cryptocurrencies since the early days: that it holds no intrinsic value. I've always considered this to be such obvious nonsense. Not because it's not true, of course it's true, but because it's the same with all money. A dollar has no intrinsic value, all that matters is what you can buy with it. Most of the "financial instruments" that get conjured out of dollars are far more abstract and faith-based than Bitcoin. To take the argument further, "intrinsic value" is internally inconsistent when it comes to markets, since value is only about what you can get for something. There's nothing intrinsic about it. My house could be worth £10 or £10m depending on what someone will pay.

Similarly with the ponzi charge.

A working definition of a ponzi scheme, based on this video, might be:

> An asset where its value is based on the idea that people buy in hoping to sell for more down the line, and that the value is propped up by more people buying it, and if they all sold the value would collapse.

Yes, crypto certainly is that. But of course, crypto is so obviously equivalent to stock markets that I barely need to say it. Stock markets also therefore quite obviously also fit the definition. As do any speculative assets at all. In fact, the word "ponzi scheme" might as well be replaced with "speculative asset" in the definition above. Are all speculative assets harmful in exactly the same way as ponzi schemes? That is to say, some people get rich based on other people, usually poorer people, losing a lot of money? I suspect so.

So I think the problem here is not that crypto *isn't* a ponzi scheme, it certainly is. But if so, then what part of the financial services industry can claim that it isn't also?

## The impact of value

Something else I got from the video was that profit corrupts. Bitcoin was an interesting idea for a decentralised currency, until someone thought they could profit from it. There were interesting games that people enjoyed in the crypto space until people inevitably turned them into a pure profit making ventures. And the one I personally feel most bitter about: the decentralised web is a real movement that really fucking matters. Web3 ate up that movement and fucked it up for years.

Again, this seems like a purer illustration of the toxic effect of chasing profits on anything of real value than we normally get to see in the world. It's just as true in the wider world, but crypto throws it into sharp relief.

## When does the house of cards fall?

I think there are many systems in the world that are fundamentally inconsistent or broken at their core, but they persist. Then there comes a moment where something happens that exposes the lie at the heart, and everything comes tumbling down. An emperor's new clothes story of social systems. Like the broken idea of the divine right of kings at the heart of the monarchy.

For example, I'm very confused by venture capitalists investing in nuclear fusion research. How can anyone possibly think about the return on investment here? If nuclear fusion is solved, then pretty quickly energy will become so abundant that you can't possibly charge anything at all for it. It will really immediately break the idea of charging money for energy. I think it's possible GPT might do something similar to the concept of copyright. But that's another post for another time.

What I'm saying is, crypto has taken the idea of financial speculation and turned it up to 11, and everyone is waking up to how fucked up it is. The world of modern finance is a global ponzi scheme that extracts value from most people ever upwards. In the case of Bernie Madoff, they were able to define a way that what he did was very wrong but what most of finance do is totally fine. With crypto I feel it might not be so easy to explain away.

I don't know where this leads.