There they go again, again [pdf]

There's a high chance I'm going to be wrong about the year, but if I do get it right, I'm going to refer to myself as "the man who called the 2018 economic crisis" around here afterward.

Because it doesn't take many upvotes to push something to the front page. (I believe at the time of your comment, it had ~20 upvotes.)

To simplify, you have 2 competing philosophies about cryptocurrencies:

1) the idealists about BTC/Ethereum empowering decentralization

2) the skeptics that believe digital currencies are hype

Each side has a group of people submitting stories. And apparently, each side has enough critical mass (e.g. ~20 votes) to constantly push their opposing agendas to the front page.

E.g. for Ethereum... Whether it's a positive story ("Learn to Write Smart Contracts") or a negative story (schadenfreude about DAO meltdown), both will continue to make the front page for years. I refreshed HN front page an hour ago and it had 3 stories about bitcoin.

Or to look at it another way, BTC stories keep appearing because there are not enough upvotes for other stories unrelated to cryptocurrencies.

That said, his underlying criticism of crypto boils down to the usual ad hominem / appeal to authority kinds of attacks. I was hoping for a well reasoned critique, but there is far better criticism of the actual technology and economics on HN.

But his point isn't just that crypto is junk, he assumes that his audience will take his word on that and devotes little effort to defending that position. What he is really doing is using crypto as an example of how overheated and risk-seeking the broader market is.

Personally I think he's right about the market, including crypto prices. (Though I'm guessing that a growing number of people are hedging their portfolios with crypto speculation, and the jury is out on how the asset class will fare in a broad-based correction.) I think he's wrong on his dismissal of the technology and asset class.

Yes there was short-term fall out from the dot-com craze, but it didn't fundamentally change anything.

Crypto is absolutely in a bubble. It will pop eventually. That doesn't mean it will become obsolete or invaluable. I believe the tech is here to stay. It may not be as lucrative for the get-rich-quick-sheep, but it will get used.

Bitcoin is different, not just because of the lack of government backing but also because the way it is structured meant the earlier people got into it the more bitcoins they got. (Fundamentally because mining rewards reduce over time).

But that's irrelevant to fact you've missed the point of his quote, that most people buying other currencies are doing it with purpose (such as hedging) and considering their value, whereas people buying bitcoins are doing it for speculative reasons and aren't making a judgement on where they think the price of bitcoin ought to be.

The concerning thing about bitcoin, and any cryptocurrency is that by nature, the larger it gets (as in total outstanding coins), the more difficult it is to create more currency through reconciliation. With traditional currencies, it's relatively easy to print money. Printing money is done mainly to keep an agreed upon healthy inflation rate of around 2%. Why this is important is when deflation happens, loans are no longer attractive because it's always better to wait because items increase in value relative to the currency. In other words, why would I borrow $1000 today when that same loan amount would buy $2000 worth of stuff next week. When people stop borrowing, it has nasty economic implications. (Money Multiplier effect and all that).

That's probably a horrible explanation by me, but the short version is crypto, since it's harder to create over time leads to a natural deflation that increases over time.

FWIW: I don't know a whole lot about crypto, but the things mentioned are concerning to me. I mean it might be a good time to follow the herd so to speak, as long as you know there will probably come a time when the herd runs off a cliff.

(Assuming the product or platform succeeds rather than fails)

Currencies that are not designed to lose value over time can never be stable.

Intrinsically worthless tokens engineered to have better than market risk adjusted, liquidity adjusted, real returns compared to real productive investment will always be unstable and fluctuate increasingly wildly as they get more popular. This is a result of physical limits of production. As people hoard worthless tokens, their price increases which causes more people to hoard them instead of investing in real businesses with real production capacity.

This eventually causes production capacity to drop. That's right, when enough people do it, token hoarding displaces investment in businesses and factories and lowers global production capacity. This means token hoarding causes a drop in things available to buy with these tokens.

Eventually there will be people who want to buy real things with their stock of tokens. The tokens will be chasing fewer goods which means prices for stuff will rise (tokens will lose value). This might happen suddenly when people with large stockpiles of tokens notice that value is dropping and that there are tons of other tokens waiting on the sideline to make it drop even further. Hoarders might rush to get rid of their stockpile all at the same time before they're worthless which will cause their fall to worthlessness. This drop will bring the tokens closer to their natural intrinsic value of zero. The cycle can then start again, such is aggregate economics.

The 1920s and 1930s suffered from this type of cycle but with gold tied currencies instead of cryptocoins. It happened to a lesser extent in 2007 when western world central banks failed to keep inflation rates high enough. It's important for the world's sake to not let deflationary currencies become too popular.

When savings or financial promises are insufficiently tied to future production or to accumulation of real goods, there will be disappointment when a lot of people try to exchange them for real stuff. That is true for crypto currencies as well as government currencies (that is why the system is designed to make banks invest people's money in real businesses and minimize the proportion of money that is stockpiled idly).

That's basically just survivorship bias. I know someone¹ that won the lottery and is now a milionair. That doesn't make lotteries a sound investment.

This is why I also believe Bitcoin is an unintentional pyramid scheme. Its real value is way too low. It's too difficult and dangerous to actually use it for payments. So its only use now is speculation, and that only works as long as other people are willing to buy bitcoin for more money than it was worth in the past. Typical pyramid scheme.

¹) not really, but it illustrates the point.

The bubble was fueled by an understanding that the internet was a fundamental shift in the future of the global economy, without it being around long enough to actually do so.

I can see parallels in crypto-currencies, and I think even if there is a bubble, it won't spell the death of crypto.

As a meta-meta-comment, this is one of the things I like the most about HN : we don't see any avatar and nicknames are not obvious, so we consider arguments before considering who made them.

'[C]orrect predictions [someone] made before' = data.

Instead of discounting it, I would rather count it more heavily, esp. in a complex domain where a full principled evaluation of the evidence is beyond most people. There's a reason you can't read a review paper and then get a PhD in whatever topic. Having to establish everything in a logical chain from first principles every time you want to opine is inefficient, to say the least. Previous performance matters. It's not all that matters, but nobody is claiming that.

Edit: And if the Ponzi-like scheme is what the problem is, why isn't then the community solving for that? The easy answer is that then adoption is difficult, because if you have a Ponzi-like scheme it is much easier to attract VC money, likely the money of bad actors more easily, etc. Yes, that hyper-incentive of the Ponzi-like scheme does get people working together, more quickly, whereas having a normal or no incentive (the incentive being the value of a public ledger) then it will grow at an intrinsic pace.

Paper money initially was -- like cryptocurrencies are today -- inefficient, had interop problems and highly volatile. The main difference is the rate of experimentation/iteration today is so much faster and we have a complex understanding of economics already which we can use as a guide. Also, back then some of the experimentation was being run at national economy scales. Cryptocurrencies are great in that we can experiment with the idea without reaching/requiring a potentially economy-collapsing scale during the early iterations.

I doubt I'll live to see the if they turn out to be the "next version" vs an interesting experiment -- I can't imagine a wholly new definition of what is money taking root in under 2 generation.

I can't speak for what he means but my interpretation of what real means to him is this - When you buy a stock for a software company you believe in the software, the target segment they are targeting and maybe yourself a customer. So two things define the real-ness of the business - working software and a dedicated user base.

Let's look at crypto currencies from the same lens. Sure the software is great and holds potential for the future. And sure one might say output is as good as the dollar. But, currently there is no sustainable market. There is no urgent need for people to acquire bitcoin other than say speculation purposes.

One might argue they will catch on in the Average Joe with time. But the biggest hurdle is Average Joe likes to see and feel the money. How will one explain them what really a bitcoin is without getting too technical? The problem here is one from the Silicon Valley show. Richard builds a better platform for data management. It doesn't sell because it doesn't make sense to average people at all. So better product doesn't equal to superior returns. It just means superior product. So the biggest problem in front of bitcoin or other crypto currencies is to take it mainstream.

And certainly fights like the BTC Cash vs Bitcoin Core doesn't help. I mean sure many people weren't happy with the unlimited printing of dollars by Feds in 2008 but at least it dint threaten to break down the economy completely because one side dint want to give in to the other and float their own currency. Stability is important and unfortunately crypto currencies are not there yet.

Beyond the weak backup of his main arguments, I felt the most striking issue was his contrast between cryptocurrency and gold:

   What will happen to Bitcoin's price and liquidity in a crisis if people decide they'd rather hold dollars (or gold)?

Gold and dollars are not immune to the concerns he raises about liquidity and price. When you're starving, a bar of gold doesn't help very much.

I think his arguments about a bubble in cryptocurrency have some validity, but not without caveat and nuance - they are more of truisms as written. Of course emerging asset classes and technologies will overshoot. But that doesn't take away from the fundamental realization that, at least for now, cryptocurrencies provide value to those who use them. This might be for money laundering/black market activity as people below have pointed out, but its still valuable for them. The value might also be for easy cross-border money transfer and risk mitigation when dealing with government manipulation of currencies (see Venezuela and Argentina.)

Either way, I'm not sure cryptocurrency is really that useful of a place for a firm like Oaktree to be investing in, because they are credit guys, not macro guys. That said, former credit guy Mike Novogratz invested heavily in cryptocurrency and seems to have done well thus far: https://www.coindesk.com/hedge-fund-founder-invests-10-net-w...