Let me explain the stock market.
Companies are entities which (typically), sell products to make money. Apple sells iPhones and sometimes carbon credits, McDonald’s offers burgers and Amazon has everything. These companies are all owned by people, and ownership stakes can change. Private transactions are usually used to buy and sell smaller companies, just like when you or I purchase a car or house.
We needed to find a way to exchange money more efficiently because big companies have a lot of shareholders who are always looking to buy or sell at different times.
Enter: public markets
The stock exchange allows buyers and sellers to transact in real-time. You may think Amazon is undervalued while I believe it to be overvalued. You can buy my Amazon shares for $100 per share through the stock exchange.
Some would certainly say “Wait! Those’stocks,’ are worthless until they pay dividends!” Stocks are worthless without dividends. Stocks are a great example of the Greater Fool Theory, because they only allow you to earn money by selling them to others.
No, not really. Your stock represents the ownership of an actual business.
Let’s say, for instance, that I own shares in a social media platform whose stock price is $30. This platform makes money by selling advertisements. One day, an online billionaire who is nearing the end of his career decides to purchase this platform. The price? $44B or $54.20 a share.
The billionaire must pay me $54.20 per share because I own stock in the company. He is now the sole proprietor of the platform and its profits.
The stock market is a multi-trillion-dollar marvel of financial engineering built on top of the real economy to allow the transfer of ownership, and transactions that previously took days can now be completed in seconds. It’s pretty cool, isn’t it?
Investors are sometimes willing to pay a lot for stocks. Sometimes, investors will not pay much for stocks. Although prices fluctuate, it is important to note that they reflect the price investors are willing pay for a stake in an actual asset.
Imagine that there is another financial market very similar to the stock exchange. On this market we can trade all kinds of assets, with all types of tickers. These assets look very similar to stock prices! Investors are sometimes willing to pay a high price for other assets and at other times they are not.
This market will be called the crypto market.
The crypto market is full of all kinds of interesting assets. From “blue-chips” like Bitcoin and Ethereum to meme coins such as Doge and Shiba Inu, (which, of course, is a derivative from Doge), and scalable tokens such as Avax or Solana.
Bitcoin was the first cryptocurrency. It was created as a response to the bad central banking practices which caused the Great Financial Crisis. Bitcoin is anti-inflationary and cannot be manipulated, even though the government has printed trillions of dollars and the dollar’s value continues to decline.
After bitcoin, the second biggest player in crypto, ethereum was born. Ethereum is programmable currency, a network capable of executing smart contracts which power decentralized finance. Other scalable networks, like Solana or Avalanche were created after ethereum was launched. Then, was built over of these preexisting network, like Polygon, which is a Layer 2 built on Ethereum.
There are also “stablecoins”, cryptocurrencies that are pegged to actual currencies, such as the US Dollar. Stablecoins are cryptocurrencies that use algorithms to stay pegged to the respective currencies. They allow investors to trade 1 stablecoin per $1 of their associated cryptocurrency. Luna can be exchanged for 85 TerraUSD and vice versa.
Binance, FTX and other companies have created their own tokens, BNB and FTT respectively, and offer holders a variety of benefits, including discounted trading fees. These tokens do not represent equity or ownership stakes on the exchanges. Consider them as “membership” or “access” tokens.
All of these cryptocurrencies combined are worth about 1 trillion dollars. It’s like a smaller version of the stock market. There is a very small difference in the stock market and the crypto market.
Stocks are real assets. Cryptocurrencies? Cryptocurrencies? The crypto-world is not really connected to the “real economy” at all.
What determines the value? Imagine stories, feelings, and vibes of what might be.
Bitcoin should be a hedge against inflation, thanks to the Fed! Let’s purchase $10,000 worth.
Ethereum is used for buying NFTs and people are developing all kinds of tools and protocols using the Ethereum blockchain. Buy some Eth since everyone uses Ethereum!
You can earn 20% APY if you “stake” your Luna? This is much better than depositing cash into a savings account. Let’s purchase as much as we can.
These narratives have been used to explain all kinds of cryptocurrencies, tokens NFTs and DeFi protocols. Investors who bought into these narratives poured money in these assets and prices rose as a result.
We have assets worth billions. What now?
We should be able use these digital assets to secure loans, so that we can trade and buy more, right? Why can’t we use a cryptocurrency as collateral to buy more cryptocurrencies, just like a house is collateral for a mortgage?
The stories keep on growing, money keeps on flowing, prices keep increasing, and the party continues to roar. Let the good times flow.
Let’s step back.
Remember that the stock exchange was created to provide a better way for us to buy and trade ownership stakes in companies. Public markets were created to solve a problem.
Crypto is an industry worth trillions of dollars that’s still trying to find its “use cases”. A trillion-dollar business that’s still trying to figure out its “use cases “.
Imagine if we tried to determine its “usecases”? What about Tesla? Microsoft? Apple? You get the picture.
You might say ” But cryptocurrency shouldn’t compare to companies!“. Quite true. Perhaps we can compare them with commodities? What are the uses of wheat, oil, and copper? Oh, yes. We use them to power our electronic devices, vehicles and bodies.
There are certainly several “use-cases” that have been suggested:
Bitcoin might be a hedge against inflation, or even a brand new currency. What about using NFTs to get exclusive tickets for events? Yield farming may be a better option than a savings account because it offers higher interest rates.
Bitcoin has not yet proven to be a currency that can hedge against inflation. NFTs have also been rendered useless because, well, you could buy a ticket with your phone. It turns out “yield-farming” only works if more money comes in than goes out. Someone has to be the “yield”.
The only “use cases”, therefore, are tools and exchanges which allow you to lend, trade and build upon other cryptocurrencies looking for applications. We now have several billion-dollar exchanges where you can trade these assets. Crypto-lenders promise huge returns. And a dozen tools built on Ethereum and other blockchains.
Cool.
In the past decade, crypto has become a trillion dollar asset class even though it never found a “use case”( although I suppose for a time you could buy drugs from the Silk Road). Prices went up when new money came in and people mistook “price going down” for “value created”.
Engineers built new assets, tools and protocol on top of the preexisting assets, tools and protocol. No one paused to consider the ultimate goal of the project in the quest for ever-increasing output. Why? If the line is moving, then it must be worth something.
This whole thing works well when interest rates and prices go down.
Stacking layers on top of each other won’t last forever if the foundational layer relies on little more than fear and anxiety. When interest rates rise and prices fall, the entire system collapses.
Stablecoins were not stable and borrowing against assets worth nothing but hopes, dreams and FOMO wasn’t a good idea.
The crypto housing crisis is similar to the 2008 housing crisis except that mortgaged homes are built in Minecraft rather than Miami.
Crypto was accompanied by a number of promises.
The banks were to be eliminated.
The idea was to protect against inflation.
It was meant to do many things.
It failed to do anything but enrich those who invested early and sold at the top.
Many talented people are working hard to create something that “works” in crypto. Find a use case with real staying power. It’s also important to question whether we should be even trying to make the crypto thing work. Just “because” you can do something does not mean that you should.
Crypto was supposed to fix an old, broken system. Does the system need to be repaired?
You can invest in the stock market for next to nothing right now. The average annualized return on this market has been 9%. Vanguard index funds are a great example of democratized investments. You can invest in individual companies if you’re looking to go all-in.
If you click on a spam link in Whatsapp, you won’t need to worry that a 17-year old from St. Petersburg will steal your savings.
Your $250,000 will be protected if your FDIC insured bank fails.
You can either start a business that will make you real money that you can sell for real money or work for a firm that will pay you real money for helping it to make real money.
What about the “problems”, if any, with traditional finance? These are features and not bugs.
The argument “the dollar value has fallen by 99% in the last ______ years” is completely out of line with how currencies should work. Nick Maggiulli explains it best:
Hot Take: This is good.
Hoarding should not allow a currency to purchase the same basket of products over a long period. To retain your money’s purchasing power, you should invest it in the society. https://t.co/QTE1PRZmvr
— Nick Maggiulli (@dollarsanddata)
Nov 15, 2022
Money should be spent, invested or redeemed and not kept forever. Money is not a means of storage, but a medium of trade. It is not fair to reward you financially for having a currency which does nothing.
The idea that the dollar is down by 99% also isn’t true, as your money would have been fine if it had been spent on T-Bills.
@ErikVoorhees Yes, currency is a medium of exchange that creates value. You would have generated positive returns if you had purchased US Dollar-denominated stores of value, such as T-Bills and stocks. https://t.co/wGcnLBMVEE
— Cullen Roche (@cullenroche)
Nov 15, 2022
There are bad actors in the “traditional” financial system. It has always been and will continue to be. We have FDIC coverage, highly regulated financial markets and a judicial process that punishes bad actors.
Cryptocurrency is the only industry that admits that “99% of our business is grift, spam and but we’re not.Can’t you imagine that every investor, bank customer, and consumer would have to perform their own due diligence on their checking and saving accounts in order to avoid being scammed?
Cryptography, in theory, is a good idea. In an ideal world, we might be able to eliminate the middlemen and “own” our own money. We could also ditch the government. Theoretical thinking ignores the reality. Reality is messy.
Byrne Hobart made a great quote in an article published recently:
“It is useful to make a distinction between cryptocurrency as a technology, and the companies who use it. It’s also important to not draw this distinction too finely because it amounts to a distinction between crypto in theorem and crypto in reality. This is like giving more weight to what Marx predicted a communist regime would achieve than what Stalin and Mao actually achieved. It’s important to evaluate technologies based on what they actually do and not what they promise. “
Like Marxists who deny the reality of communism and crypto’s biggest advocates, they are quick to condemn every NFT rugpull or stablecoin collapse as well as exchange liquidity crisis with the phrase “That’s not the real crypto!“.
What is crypto? How long will this take?
NASA was founded in 1958. We put a man on the moon eleven years later. Bitcoin was first used in 2009. What can we do now? What can you buy for $5000?
Is it really “early” yet? Crypto is nearly old enough to have a driver’s licence.
Joe Weisenthal gave a 10/10 rating to the response of the crypto-ecosystem to the current economic downturn earlier this week:
Another thing I see is that there are a lot more people saying “next time we should be really serious about decentralization”.
Which, well, sure.
If you don’t see much, “next time how about we make something useful”, which will also help to avoid extreme speculative increases and falls.
— Joe Weisenthal (@TheStalwart)
Nov 15, 2022
In the real world, it’s pretty straightforward: create useful things that make money. Crypto has so far been a series increasingly complex ways to transfer money from one person to another, with a growing chance of your cash being taken by Thanos.
Instead of trying to fit a square peg into a roundhole and recreate the larger financial system, perhaps we should embrace the one we have.
