Cryptocurrencies soar in value, plunge, hit new highs, are written off, rebound, and hit new highs again, and the cycle repeats. We should be terrified. Over the last five years, cryptocurrencies such as Bitcoin and Ether have outperformed the overall market. However, can the general trend of outperformance last, or will these digital assets drop over 90% like some of its other crypto brethren? Is there a sustainable performance that creates the foundation for either a new currency or a valuable asset class? Probably not. Forces that drive these eye-watering returns seem to be the same as those that drove the social media-driven insanity behind meme stocks such as GameStop. We are seeing social media mobs controlling demand to a limited supply, creating price spikes that look attractive to any speculative investor. Unfortunately, demand can dry up quickly and the price subsequently falls through the floor. Financial markets ruthlessly sort nonsense from substance. Volatility and existential threats have been brutal and extreme for digital assets and the reckoning for crypto has been predicted for some time. However, digital assets are not on their way to history’s dustbin. Reality is more nuanced, and I try to provide a more detailed analysis since a broad brush hardly seems appropriate. The weakest and craziest portions of the crypto world have been exposed as nothing more than silliness. But some valuable components remain resilient and offer tremendous opportunity. I will explore these in detail. There is more cause for optimism than pessimism among the best and the brightest. We will explore these opportunities while harshly dismissing the hype and silliness – avoid the terror of a worthless market.
Every industry consolidates to a handful of centralized competitors. That will never change regardless of current dreams of decentralization from Web 3.0. Modern computing is a constant struggle between decentralization and centralization. Centralization wins eventually, and it will again. These dynamics, combined with the latest crash that may cool investors’ appetite for all things crypto, suggest that Web 3.0 will not dislodge Web 2.0. Instead, the future may belong to a mix of the two, with Web 3.0 occupying certain niches. Whether or not people keep splurging on NFTs, such tokens make a lot of sense in the metaverse, where they could be used to track ownership of digital objects and move them from one virtual world to another. Web 3.0 may also play a role in the creator economy, assuring intellectual property ownership. NFTs make it easier for creators of online content to make money. In this limited way, at least, even the masters of Web 2.0 see the writing on the wall: on January 20th both Meta and Twitter integrated NFTs into their platforms.
Digital assets are disrupting finance – the world’s largest industry. All assets, intellectual property, and even currency can now be digitized, and anyone can access anything from anywhere. The finance industry is being this intermediated and globalized, economic development and policy will be forever changed.
Decentralized finance (DeFi) can disrupt global finance – but only if Defi systems and central governments cooperate. Yes, sworn enemies cooperating for the greater good.
While each seems to be the sworn enemy of the other, ultimately, a cooperative relationship between decentralized and efficient (versus anachronistic and cumbersome) financial infrastructure and government central banks with stable currencies is absolutely necessary.
Defi transactions, to scale globally, require stable and predictable value. Government-issued currencies are the only reliable and foreseeable foundation. Cryptocurrencies, such as Bitcoin were never currencies. They are a sideshow that will remain a speculative asset, and increasingly unimportant.
Cryptocurrencies represent an architectural shift in how financial infrastructure and technology interact, and therefore, it is disrupting how the financial industry works globally. It is neither a new kind of money system nor a danger to economic stability. It is more important than that.
Digital currencies, crypto assets, digitized securities, and distributed ledgers require an enormous amount of power. While the combination of these assets is subject to tremendous hype, the environmental impact has been mostly ignored. However, this is changing because there has been increasing alarm about crypto’s carbon footprint and environmental impact. While there are attempts to use alternative energy, such as solar farms, thermal heat, and wind farms, sustainability for processing digital assets is still evolving. One thing is clear, as advancements are made in clean and renewable energy, digital asset mining will reduce its requirement for carbon-based energy. This is an essential trend if digital asset processing is to be sustained as an important component of global finance. The trend toward digital assets disrupting global finance is irreversible, thus green energy solutions are essential, and a condition precedent in order to participate and profit from this economic opportunity. It is crucial for crypto mining to address the environmental concerns attached to digital asset processing and creation. There is an irreversible shift to decarbonization and lower carbon footprints. The digital asset market is not going to go away, but since energy is such a critical component, energy efficiency and green energy are the essential components to any long-term perspective of a digital asset strategy. The low-cost provider wins. With digital assets, that means the combining lowest carbon footprint with scale and the ability to connect to the electrical grid.
Digital Assets, Distributed Ledgers, and the Future of Capital Markets “Distributed ledger technology and digital assets have the potential to dramatically disrupt global equity and debt markets.” (World Economic Forum, May 2021) Distributed ledger technology (DLT), otherwise known as Blockchain technology, will radically simplify financial markets and, more importantly, fundamentally change the market’s infrastructure. Specifically,…
“Being Digital,” the groundbreaking book by Nicholas Negroponte described what happens to a global economy when all assets can be digitized. Presciently predicting the impact on music, film, retailing, and commerce in general, Negroponte intuitively understood the disruption and the creative/destruction that would be unleashed when a globalized infrastructure could deliver all products and services, including assets and intellectual property, instantly via a worldwide digital infrastructure and network.
The same “digital” effect is impacting global finance today. Now, all financial assets are “being digitized” and can be delivered instantly on a global infrastructure, fundamentally upsetting the world’s largest industry with unprecedented creativity and destruction.
Crypto assets are the manifestation of that digital form. While there is debate about whether or not an asset can truly be “digital,” the market has spoken. While there will be continued volatility, speculation, creation, and destruction, a digital platform for financial transactions ranging from the simple transfer of funds to complex financial transactions, investment, and lending are here, disrupting a multiple trillion-dollar industry.
Cryptocurrencies Hit New Highs. Should we be terrified?
Bitcoin, Ether and, the most recent joke, frenzy, and punch line, Dogecoin, have increased 10x to 20x over the last 12 months. A spectacular return, but can it last?
The forces driving the eye-watering returns are the same as those that drove the insanity behind GameStop: the equivalent of a trading floor in every pocket funded with excess cash looking for disruptive investment opportunities and charging forward like an out of control herd – or lemmings – however you want to envision it. Cryptocurrency became the overwhelming target of Reddit day traders and mobs. Social media influencers, led by various forms of PT Barnum imitators like Elon Musk and many less sophisticated contributors, combined with the public listing of Coinbase to create a massive rally.
Initiative, savvy, luck, circumstance, and convolution have taken over currencies – or at least digital creations purported to be currencies (but in reality don’t, and never will, quite fit the bill). Those entities that create and support real currencies are taking notice. In other words, welcome to government in action. Here come central bank digital coins. Now imagine these “developed” governments (of whom France is probably not the worst offender) trying to deal with a global currency, currency exchanges, and the transfer of funds internationally. We don’t have to look too far to find the convoluted rules behind Bretton Woods, the WTO, and other international absurdities to recognize that this problem is not easily solved, or even understood. Bureaucrats are generally better at devising rules, charging fees, and collecting taxes and information than making anything that is useful or even comprehensible.
Luck rather than leadership, circumstance rather than foresight or political skill, seem to have been more helpful in triggering these developments. Digital coins (while loosely described as “currency” are more like a digital asset easily transferred and accounted for in a digital ledger) represent a handful of rather clever people taking on central government’s mighty bureaucrats. Armed with simplicity, clarity, and algorithms, they are defeating all administrations’ fondness for complexity, confusion, and rules.
In general, bureaucrats are masters of the art of convolution. Essentially, governments work overtime to create farce in the spirit of precision. An example of bureaucratic absurdity can be found in France (admittedly, a country that has taken bureaucracy to an art form – perhaps more so than art itself). When the government started a new lockdown because of the pandemic, they devised a two-page permission form to leave home, with 15 different justifications, before, thankfully, shelving it in the face of ridicule. The French can buy alcohol, for instance, but not underwear. These rules were simply to be able to walk out the front door, and the government imagined that this kind of detailed process was somehow useful, and not the bewildering reality it represented.