Babies and Bathwater: Is Crypto Done?
We aren’t active as crypto investors.
While valuations and hype here grew exponentially, we stayed on the sidelines. The primary reason for that is core economics. Any currency of true value must be backed by real assets. Wood. Water. Land. The economic activities of millions of people. When that isn’t the case, when a currency’s only true value is the belief in those who hold it that it has value, the situation is inherently dangerous. I would call that pure speculation. If the underlying belief falters, the unsupported currency can plummet to its fundamental value, which is zero.
Also, being purely belief-based, speculative currencies — in which I would include all current digital currencies — are exposed to limitless manipulation. If self-interested grifters can get people to believe, they can push valuations up to unrealistic levels, jump out at the top, and leave the rest of the holders to hurtle earthward with nothing to break the fall.
All this has happened in recent days with the collapse of the FTX exchange and dark rumblings of dirty dealings across the crypto countryside.
History says that what is likely to happen next in crypto is a period of rejection, recrimination, and reduction.
Rejection, as those who overreacted on the way up, over-react again on the way down. “Crypto is dead.” “Crypto is evil.” “Let’s move on.”
Recrimination and maybe even criminalization as governments and other oversight authorities step in to try to cauterize the current bleeding and provide the structure that has been so lamentably absent so far. Not only is crypto dead, but it is also toxic.
Reduction in size, value, participation, belief, and support for crypto derives naturally and inevitably from all this terrible news.
So, given all this gloom, is crypto done?
Hardly. Don’t throw the baby out with the bathwater here.
What often gets lost in these kinds of collapses is the phoenix-like nature of fundamental new ideas. They appear, they rise, they overrise, and then they collapse. It is out of that collapse that the core elements of long-term success get forged.
I think that is the case with crypto. The world, the internet, and society need responsive, private, trust-focused systems for translating beliefs and behaviors into value. As disasters pile up, so does learning, both among crypto proponents and those who control and direct economic activities.
The emergence of real digital currencies, backed by real value, is inevitable and essential.
For now, we’ll remain on the sidelines. Crypto isn’t ready for its moment yet. And we aren’t speculators.
But it is coming, everyone. It is coming.
By Managing Partner Mike Edelhart
@MikeEdelhart
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