BUH BYE CRYPTO?

Here’s another something that makes me glad my BA was in “Interdisciplinary social sciences,” because a specific degree in any one would make it hard to understand this particular Fine Mess.

There’s an old saying: “If something sounds too good to be true, that’s because it is.”

This week, the lesson is being taught again.

The first time I ever heard of cryptocurrency, it sounded like a scam. Perhaps the fact that the first person to tell me about it was a guy I know who’s fun to listen to with his wild and wacky theories and stories, but I wouldn’t loan him a dime if you gave to me.

One of the reasons I subscribed to Puck was because William D. Cohan really knows what the hell he’s talking about, and he explains it clearly enough for a non-Wall Street/non financial industry person like me can understand it. Learning from him and then reading other people he vouched for, I have come to understand this well enough to know that I was right the first time I heard about it.

What. A. Scam.

Cryptocurrencies are in Big Trouble. As of this writing, 36 hours into the disaster, all the biggest ones—Bitcoin, Ethereum, XRP, and Solana—are down by double-digit percentage margins. Bitcoin is down 58 percent from its high late last December; Ethereum is down 60 percent. Reddit forums are said to be filled with stories of people who have lost their life savings and are contemplating suicide. It’s Jump Out The Window On Black Thursday In 1929 time again for the Crypto Bros.

Nayib Bukele - who is proof that someone crazier than Donald Trump can become president of a country, in this case El Salvador - tied the whole country’s economy to Bitcoin; the treasury just lost $40 million in 24 hours, down to $60 million from $100 million on Wednesday, with things still in free-fall. The country is likely to default on its debt, which will have an Actual Effect on economics outside of Nanu-Nanu-Land, er, I mean CryptoWorld. This problem will soon show up in person at the border crossing in El Paso as economic refugees are driven from the El Salvadore. I am sure Governor Whackadoodle, er, I mean Abbott, will blame it all on President Biden.

The situation lends powerful evidence for those who have been saying for years that the whole thing is a steaming pile of garbage. Crypto, NFTs, and all the rest of the “Web3” nonsense serve no legitimate financial or economic purpose other than as an object lesson in the dangers of unregulated financial speculation. They’re the tulip bulbs of the 21st century.

What’s more troubling is that the “stablecoins,” which are supposed to be “pegged” to the U.S. dollar because the companies issuing them have real assets backing them, are demonstrating they aren’t as “stable” as advertised. Tether, the most important of these, was knocked down to 95 cents for a short time on Wednesday. If Tether which is akin to what AIG was in the 2008 financial crisis - a big central institution that has spread systemic risk throughout the crypto ecosystem - were to collapse, it would take out most of the entire cryptocurrency ecosystem with it, the way AIG took down the investment bankers in 2008. According to the people who are supposed to know what they are talking about, there’s every reason to think that it’s just a matter of time before this happens.

Stablecoins are important because investors wanting to get into crypto love them. They provided a handy way to speculate on various crypto assets. Buying cryptocurrencies with dollars is difficult because regulated banks are (rightlyu) leery about working with crypto exchanges. But you can gamble all you want if you’ve purchased Tethers.

On closer examination, Tether appears to be like the famous description of Oakland - “there’s no there, there.” The company was co-founded by a former child actor whose biggest role in his resume was a minor part in “The Mighty Ducks.” Its principal bank partner is a D-tier Bahamian firm whose chairman is the co-creator of “Inspector Gadget.” An article in Bloomberg last year stated that the “bank” doesn’t produce regular, audited financial statements, certainly does not have the $87 billion in good assets to back the Tethers in circulation it claims, and it was found speculating with the assets it does have - incredibly risky stuff like Chinese commercial paper. It that’s not enough, it’s under investigation by the Department of Justice for alleged bank fraud.

This is a bank run waiting to happen. Once confidence is lost and people start trying to cash out en masse, the quick result will be that Tether will bleed through its assets, the peg will break, and its value will collapse. Tether, now slowly recovering after falling off its peg on Wednesday, looks to be at the second step in the process. Regardless of whether it actually has $87 billion in good assets, it would still be vulnerable to a run, since if one got going it would have to conduct a fire sale of its assets at bargain prices. Such an event might even cause damage to the real economy, in addition to toppling the Bitcoin Bros, since many supposedly-intelligent financial firms have gotten into the game.

Today I read about what happened to the Terra LUNA system. TerraUSD is an “algorithmic” stablecoin, meaning its inventors tried to engineer around the functional challenges of stablecoins, particularly the need for real asset backing, with computer programming. The theory behind this is that one TerraUSD will always be worth one dollar because whenever its price fell below $1, traders could erase a TerraUSD in exchange for $1 in new Terra LUNA (a totally different coin), while if the price rose they could make the opposite transaction, thus providing an incentive to keep it pinned.

The key thing here is that the TerraUSD price is kept up by printing new LUNA as necessary. The problem is that there is no reason to think that LUNA should be worth anything at all. On Monday, a classic death spiral got going: Terra broke its peg and started falling, then the value of LUNA plummeted, and both are now all but worthless. At time of writing, TerraUSD was at just 30 cents, while LUNA had fallen 99.999 percent to less than one penny. Somehow, LUNA turns out to be a perfect name, since only lunatics would think this is a system on which anyone could build anything “stable.”

I have yet to see any Crypto enthusiast manage to point to any practical benefit of all this, other than to provide a payment mechanism for hostage-takers who fuck up computer systems. We now have internet “funny money” that constantly seesaws between hyperinflation and hyperdeflation, with both enormous transaction costs and gigantic negative externalities. This is the kind of ultra-risky financial speculation that is a recreation of the pre-2008 shadow banking system except much, much worse.

Unfortunately, before it finally began circling the drain, Crypto created several billionaires, who I wrote about a week ago or so, how they are now becoming major players in politics in an attempt to prevent any of the regulation that should have been set up in the first place. Sam Bankman-Fried, the 30-year old Bahamas-residenced head of FTX known as “SBF,” currently financing the nation’s most expensive congressional primary race in Oregon to put a guy who has never been involved in politics into the newest congressional seat in that state, with the aid of Nancy Pelosi’s PAC, reportedly met last night with the Problem Solvers Caucus with a promise to max out a donation to any member who attended. Early scammers, er, I mean adopters, like SBF, are now trying to dictate regulatory policy to keep their winnings.

This mess does once again provide two salutary lessons.

First, the oldest rule in stock markets, that there is practically no limit to what people can believe if it seems it will make them a lot of money fast.

Second, libertarian schemes to engineer around the need for government and trust are always doomed to failure.

I would love it if there was somehow a way for every single person involved in this scam to end up completely penniless - all the fancy cars, super-yachts, mansions in tax havens - gone, disappeared, up in smoke.

And most particularly, no welcome mat at the door of the Democratic Party.

I also want my cats to start speaking English to me.

Once again, thanks to all of the new free subscribers who showed up this week. Your presence is deeply appreciated. I hope I can impress you sufficiently that you will join the other paid subscribers, whose support keeps That’s Another Fine Mess going.

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