What the Crypto Crowd Doesn’t Understand About Economics

I still don't see how you get to a cryptocurrency that's broadly useful as a currency without enough price stability for it to be a unit of account in some sense. Tesla may have accepted BTC for payment, and it might do so again, but is it really going to commit to pricing its next model at (say) 1 BTC and just let the dollar-denominated price swing wildly? Probably not - its competitors price in dollars, so if BTC goes up it would become less attractive, and its suppliers price in dollars and other fiat currencies, so if BTC goes down its marginal revenue could fall below its marginal cost.

On top of that, BTC-denominated debt is potentially toxic for the holder. Imagine if you bought a house for, say, 1000 BTC in 2016 and your mortgage was denominated in BTC. Gradual devaluation of debt is one reason that central bank inflation targets in developed countries tend to be small positive numbers. Monetary policy is hard, and despite (totally valid) criticisms of central banks' monetary policy decisions in recent years, I'm still skeptical that anyone can do it purely algorithmically and have better results than the Fed.

I still think Libra was the only token (besides explicitly fiat-denominated stablecoins) I've seen that had a real shot at being broadly used as a currency, though I'm glad that FB won't be the ones to "own" a global currency. The "problem" is that any token that's stable enough to use as a currency is inherently too stable to have potential for large speculative gains (except if you lever it to the hilt as FX traders do today) - and IMO demand in the crypto space is still predominantly driven by speculative potential.

I'm an author cited by the original bitcoin paper. I considered becoming an economist rather than a mathematician.

Cryptocurrencies are a carbon-load environmental crime. Figuring a way around this is the major unsolved problem in the field. Are you a vegetarian in the crypto-crowd? You'd be doing the planet a favor to start eating meat and abandoning cryptocurrencies.

National currencies used to be backed by gold; now they're backed by the nation's resolve to support the currency. Cryptocurrencies are not Ponzi schemes; they can stabilize, while Ponzi schemes collapse. Cryptocurrencies however are backed entirely by convention. One could argue that nations are conventions, but they are bound together by a constellation of motives beyond their currency. Cryptocurrencies are isolated conventions. That is their appeal and their vulnerability.

We are a cripplingly conventional species. Our ability to organize allowed us to scale past the Neanderthals. However, many of us don't trust convention enough to trust cryptocurrencies.

The fact that having a deflationary money supply is bad, is even debated in cryptocurrency forums is the clearest indication that they have no idea how economics works.

...also, the point of a currency is to act as a STABLE unit of exchange, not some speculative moon-shot.

Once these money supply and stability issues are ironed out, and once the scalability problem is solved, I think we might really have something.

One thing I like about crypto is you can simulate economics experiments with funny money online. Ponzi Scheme? There are plenty of these going on. Want to investigate Harberger's triangle/deadweight tax loss? Create a small game. Prediction markets? See auger.

As long as you approach it from the perspective of 'this money is probably worthless' it's all just a fun learning experience about economic theory.

The only problem is some people "invest" more than they are comfortable losing. And that causes some tragedy.

> A second point, oft neglected in the crypto community, is that crypto prices won’t continue to go up forever at high rates.

The True Believers expect and want this to happen. It has to level out to be a currency. Cryptocurrency is useless as a currency with the current volatility as a result of ignorant and rank speculation.

Both things are well understood by the bitcoin community, at least. Bitcoin's utility doesn't depend solely on inflation or replacing the dollar as the global reserve currency, though that's a popular topic, since the collapse of the dollar would prove Bitcoin's place. For the second point, HODLing seems like it's forever, but it's only for the next decade or two; the expected growth comes from getting in early - just like if you bought an Warhol painting while he was still active.

So I agree, but the author of the article is using these arguments to strawman the crypto community, which is full of really smart people as well as idiots.

The problem with cryptocurrencies is very simple.

At some point X-COIN will reach a maximum price, $MAX. Why would anyone buy X-COIN at $MAX? By definition it will lose you money. You can repeat this argument with any amount, because ultimately you're just going to subject someone else to the same situation.

Regress this to its logical extreme and you see there's no point of buying it at all, unless crypto itself has some meaningful value beyond its converted price to fiat. That itself has yet to be proven.

This is about cryptocurrency, NOT crypto. The article name, at least, should have "sic" to indicate that it's a copy of something which is incorrect.

Given the somewhat clickbaity headline, this piece is straight to the point and surprisingly sober.

I found this to be the central thesis:

> If anything, crypto is more likely to hurt the currencies of countries that are doing very poorly, such as Venezuela. Fiat currency won’t just go away, so over the long run crypto could actually boost the value of the dollar by stifling the rise of potential competitors.

...and the author is absolutely correct: much of the crypto crowd, whether or not they understand this, seems wont to ignore it.

I view blockchain tech - and even crypto assets - as a wonderful, peaceful, transformative technology in the long-term. But I also think that the need for calm analysis, thinking about much, much longer timeframes, is sorely needed in the 'crypto crowd' today.

> A second point, oft neglected in the crypto community, is that crypto prices won’t continue to go up forever at high rates. It doesn’t matter whether money supply deflation is built into a crypto system, or that new and valuable uses will be discovered each year.

Here I again I agree, but I do want to add something important:

New and valuable uses are very important right now. I work at NuCypher, and we are very proud of having deployed proxy re-encryption as an access management tool. But nobody is using it, for two reasons: 1) gas prices, 2) there are no other "new and valuable uses" which make access management worthwhile at the moment.

Whether or not you see a rich future for blockchain tech, I hope we can all agree that solid uses - especially those which advantage groups marginalized by yesterday's internet - are the real driver of the eventual equilibrium the author describes here.

It is sad that the biggest influencers in crypto are like Pomp + Ran Neuner who constantly say shit like the "dollar is collapsing."

You go be pro cryptocurrency and still hate cryptocurrency

lol here comes the FUD

Most people in crypto do not understand anything about economics. They understand ponzi/ greater fool theory and how to obfuscate to the public and regulators to pull the wool over someone's eyes.

Is there a workaround for this paywall?