Can We Finally Admit That Crypto Was Really Dumb

Since it's all time high in October of last year, Bitcoin and all other major cryptocurrencies have halved in value. The collective market capitalization of these tokens fell from 4.4 trillion dollars to just under 2.2 trillion dollars as of the time this video is posted. And these numbers alone don't even tell the full story because, well, the US dollar has also been falling which has made things look better than they really are. If crypto was meant to be a currency, the majors have lost almost 50% of their purchasing power within the last month alone, putting them close to the technical definition of hyperinflation. If it was meant to be an alternative payment system, the network delays, costs, and fundamental scalability limits have made it very hard to justify outside of very specific use cases. If it was meant to be a store of value, then this time last year, 1 bitcoin could buy 32 ounces of gold. Today, it can buy less than 12 ounces. And most damning of all, if it was meant to be an alternative to get around the system, it isn't helping that. Most trading now takes place on centralized exchanges and the very government it was supposed to supersede has been floating the idea of a crypto bailout, which some purists might recall was the very reason why bitcoin was created in the first place. Crypto may have become a solution in search of a problem, but, well, it's not like we haven't been here before. Bitcoin, alongside other cryptocurrencies and projects, have all seen dramatic declines in the past following events like Mt. Gox imploding, the Silk Road being seized, China banning crypto, China banning crypto again, FTX imploding, and people admitting to themselves that NFTs weren't going to be the asset of the future. Every time that these assets then set a new price record, it was used as irrefutable proof to say, I told you so, normally with the help of some laser eyes. But today, crypto is facing a new challenge, legitimacy. A decade and a half of fraud, grift, and crime might not have been able to kill cryptocurrency, but it turns out that a few months of almost unrestricted compliance might. There are a few major headwinds all hitting these markets at the same time right now, and if we can properly understand each of them, we can address something really important. Is it finally time that we can all admit this whole thing was just really stupid? For the 17 years they have existed, cryptocurrencies have always been an incredibly volatile asset class. Even though today represents the largest drop in absolute value terms, the market in the past has seen much larger percentage swings. Back in the early days of 2011, a hack on Mt. Gox, the most dominant exchange at the time, put an end to the first major bull run in Bitcoin's history, and saw the coin crash over 93% from its then all-time high. Oh, and spoiler alert, this was not the last time that Mt. Gox would be hacked. Anyway, by comparison, the crash the market is experiencing today looks relatively minor. But there are four distinct reasons why even industry insiders think that this time might be different. The first reason is simply that there is no single reason behind this price slump. Most of the major market sell-downs in the past have lined up with something identifiable that caused the sell-off in the first place. In 2011, it was the Mt. Gox hack, in 2013 it was China banning financial institutions from handling crypto, in 2017 it was the fallout from the crappy ICO mania, and in 2022, the stable coin Terra Luna turned out to not be so stable and it crashed to $0 within 48 hours from a previous market cap of over $40 billion. Today, there is no single identifiable catalyst that has kicked off this correction. But there are a few headwinds, and unlike in the years before, these variables are unlikely to be going anywhere anytime soon. The second reason why a lot of people think this time might be different is because true fanatics have moved on to other, uh, opportunities. Not many people on the inside would like to admit it, but throughout its short history, the number one reason why people purchased cryptocurrencies is not because they believed in a democratic, decentralized system. It wasn't because they wanted to be part of the future of finance, and it wasn't even because they wanted to buy some stuff that shouldn't be on the internet. The real reason is because they believed they would be able to sell it at a later date for more money than they purchased it for today. Now I am sure for most of you that this is pretty obvious, and there is nothing even inherently wrong with this. The potential for future gains is basically why anybody invests in anything. But, cryptocurrency was uniquely attractive because of just how volatile it was, which meant that the opportunities to make a life changing amount of money in a short amount of time was perceived to be better and more accessible compared to more typical investments like stocks, bonds, real estate, or zero data expiry call options. It was effectively gambling on the hope that a small investment could have a much larger payoff compared to these more traditional assets. But today, people can get the same exposure to gambling by just gambling. The rise of legalized sports betting, prediction markets, and the popularization of crypto casinos have all, at the very least, provided an alternative outlet for people to yolo their savings on something that could provide them with meaningful amounts of money. Sometimes the conversion is incredibly direct. A lot of these sites use cryptocurrencies as the medium of exchange, so if regular crypto hodlers lose their money on bad bets, it has the same net impact on the market as just selling it directly. This will be partially offset by the people buying cryptocurrency to fund their accounts on these platforms, but overwhelmingly, they will statistically be net losers over time. Other people have just quietly cashed out their cryptocurrency investments to gamble on sports or prediction markets as they have become easier to access. We have spoken a lot about the growth of financial nihilism on this channel before. As people see that they are never going to be able to achieve larger financial goals with traditional slow and steady saving and investing, they are taking big risks for the small chance that a big win will give them the money that they need to catch up. Collectively, all of these people taking lots of small risks can create a very big market. It's just a question of where those risks get taken. In the past, this group was the core demographic that not only provided the market with liquidity, but also built the culture around the industry by promoting it through their social networks and aggressively defending their, uh, investment thesis against any critics. The more people who bought into the overall market, the higher prices would climb. So these unsophisticated groups had a vested interest to go along with the idea that they could all ape their way to the moon. This group obviously still exists today, but a lot of its core have slowly lost interest and moved on to other things, which has allowed for another group to rise in prominence and undermine the market in their own unique way. So it's time to learn how money works to find out why even the true fanatics are starting to admit that this whole thing may have just been really dumb. This video is sponsored by Odoo. 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If you want to see how Odoo can streamline your business, you can try it for free for 15 days with no credit card required, or even use one app for free. Check out the link in the description. So perhaps the biggest shake-up to the crypto market has been its full-scale embrace by the financial industry. Today, getting your money into and out of crypto markets is a lot easier than it used to be. Third-party exchanges with varying levels of regulation have been developed. And even if that's too hard, complete novice investors can get exposure through exchange-traded funds that track the performance of Bitcoin or other assets with institutions like BlackRock acting as the middleman. For a while, this helped to drive up prices even further as new money entered the market for the first time. But in the years since these products were first introduced, their net ongoing impact has not been what you might expect. Someone buying Bitcoin through a BlackRock-managed ETF listed on the Nasdaq is statistically not going to be a true believer in the decentralization or anonymity that crypto was first developed to provide because, well, this is about the most centralized and formal way that anybody can purchase anything. These people are just treating it like any other asset class in a diversified portfolio, so they ultimately want to see good risk-adjusted returns. To sweeten this deal even further for first-time crypto investors, financial products have been developed that pay dividends on top of these holdings. Now, if you were thinking that, wait a minute, Bitcoin doesn't pay a dividend, it doesn't produce any cash flows at all, then yeah, you have probably thought about this more than most investors have. The actual way these financial assets generate a return is by selling covered calls to other speculators for a higher price than the asset is trading at today. The speculator pays a fee to the fund for the right to purchase Bitcoin at a set price in the future, and if that price isn't reached, then that fee gets passed along to the fund investors as a dividend. It almost sounds like free money, but if the strike price is reached, the fund is forced to sell their holdings to the speculator, effectively capping the capital gains they can receive from the underlying price movement itself. The problem this creates is that in a growing number of cases, the other side of this transaction are crypto option market makers that will try to hedge these positions by selling options as well. If the price falls, there are a lot of models that rely on selling the underlying asset to maintain this hedge, further putting downwards pressure on the market price. Now maybe it should have been clear that derivatives markets on cryptocurrencies may have been problematic, but they are just one small part of a larger problem that's been plaguing the industry right now. It's lost its story. A big positive indication to a lot of early investors was that, obviously Bitcoin and other cryptocurrencies were going to be huge because it was clear how much governments and the financial powers were pushing back against it. For people with actual anti-establishment political motivations, crypto promised a way around that system. And for almost everybody else, it became a promise of what it could become when these opposing forces got on the, uh, right side of history. The cryptocurrency industry was ready to take over the world just as soon as these people stopped holding it back. When people can use credit cards to buy cryptocurrency, when major crypto users won't get debanked, when the SEC stops fighting the industry, when Bitcoin becomes available through regular investment markets, when big banks hold onto crypto as a reserve asset, or even when the final Bitcoin gets mined. These are, or were, big events that were promised to grow and legitimize the market, letting people who bought in early get rich off the new demand that each of these changes would introduce. Now, to be fair, that has happened, and big rallies in prices were seen after things like the softening of SEC regulations, but now there is nothing left to promise. Everything that was holding the industry back has now got out of its way, and a lot of them are now actively encouraging it. But now that it has to stand on its own two feet, it suddenly doesn't feel like fighting anymore. Even with almost complete adoption, endorsement, and integration by the highest powers in the economy, cryptocurrency's use case hasn't changed that meaningfully. They are still overwhelmingly just a speculative asset to sell along to the next guy at a higher price with some fringe use cases for fraud or money laundering. The only difference is that now there is no longer the promise of, we are all going to be rich when this thing happens, because, well, there is nothing left to happen. The story of a full-on crypto future is also getting harder to sell as it clashes with a new competitor. The people with a little bit of money who want to see big returns without thinking about the risks may have moved along straight to gambling, but the people with a lot of money who also want to make big returns without considering the risks have moved along to AI. AI datacenters have crowded out crypto mining operations for energy and hardware because, for now, there is more money in generating slop than there is in generating crypto. They both use a lot of energy, specialized datacenters, and cutting-edge hardware. So putting more resources into one means fewer resources for the other. Now, that might sound like a good thing for existing crypto holders, because it limits the supply of new coins being generated to push down prices. But a lot of crypto mining is really work being done to authorize transactions on the network rather than making new coins from scratch. This has meant that as the direct and opportunity costs for mining crypto have increased, the stability of these networks have suffered, and people are waiting longer or paying more for transfers, further undermining the argument that this could be a legitimate payment network. Now, as I was putting this video together, Lil Boil once again beat me to the punch with a video of his own that went into a lot more detail about these network issues, so I will leave a link to that in the description like always. But the biggest question of all is, why does this matter? Say what you will about them, but at this point, anybody investing in crypto does know the risk, and their losses shouldn't impact anybody else, right? Even outside of the talk about a crypto bailout, this entire industry has cost you a surprising amount of money even if you never directly invested in it. If you have watched enough of our videos, you will know that we have become somewhat skeptical about AI, and the core of that concern comes from just how much it is costing us to develop this technology. Now, you have every right to be angry about these costs, especially as they are being passed along to otherwise uninvolved people through higher energy bills and more pollution. But at the very least, there are some applications where AI can be a genuinely helpful technological tool. Is it going to be worth the trillions of dollars that we have invested? Probably not, but there is some value especially in little tools that can do tedious tasks for us. However, all of the same arguments about e-waste, water, energy, and misallocated investments applies to the crypto industry without even the same potential for a meaningful payoff. Data from Cambridge and the International Energy Association found that energy demands from Bitcoin was roughly the same as the increased energy demands from AI, both at around 150 terawatt-hours per year globally. According to research from the Journal of Resources, Conservation and Recycling, Bitcoin alone generated 30,000 tons of e-waste every year as miners cycled through Specialized ASICs to remain profitable. The crypto market is a zero-sum investment pool, meaning the only way for one person to cash out is for another person to buy in, with the hope that they can cash out to another person. The true utility of AI may not prove to be worth the investment, but for comparison, the true utility of crypto has so far primarily been fraud and money laundering. So you may not love whatever the hell this thing is, but hopefully it's preferable to actual crime in this week's 17th Rug Pull. Now the final reason why this time might be different is that instead of being a true store of value, crypto has really just become a measure of how much speculative cash is sloshing around in investment markets, except that today, it's not even really doing that. The Dow, uh, famously crossed 50,000 points on the exact same day that Bitcoin hit a new post-election low. But really, that just raises another question. So go and watch this video next to find out why the stock market is booming while it seems like the rest of the economy is falling apart around it. And don't forget to like and subscribe to keep on learning how money works.