Opinion: There are people who don't like or believe in crypto. And then there are people who hate crypto. Peter Schiff comes to mind.
Another die-hard crypto hater is Stephen Diehl
. He is the author of Popping the Crypto Bubble, a book that criticizes cryptocurrencies, the blockchain industry and the culture surrounding it.
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The book starts with Diehl's unfiltered take on cryptocurrencies. We quote:
"Cryptocurrency is a giant scam, although a complicated scam that uses technobabble, heterodox economics and populist anger to obfuscate its functioning. A pitch perfect scam for the post-truth era of social media where trust in institutions and experts is at an all-time low."
The short intro is then followed by a short history of the crypto industry
, mostly focusing on the technological novelty that was Bitcoin (which Diehl downplays) and the ICO
era that culminated in the 2017 bull run
He then covers different market bubbles, beginning with the 1700s and ending with what he calls "The Crypto Bubble." This comparison of overvalued (or even fundamentally worthless) assets sets the tone for the rest of the book.
The next section points out different problems of crypto:
- Economic: Diehl argues the store of value and medium of exchange value pitches contradict each other (and crypto is neither of them).
- Technical: Blockchains are hard to scale and public blockchains are useless for enterprises because of compliance issues.
- Valuation: Crypto is based on the Greater Fool theory (you always need to find a new fool to dump your coins on).
- Environmental: Crypto has a massive carbon footprint and produces e-waste.
The next section talks about the problems of crypto culture
. Cryptoanarchism is a veiled attempt at dismantling the state, technolibertarianism is misguided in seeing tech as the solution to societal problems, Austrian Economics is a pseudoeconomic theory (according to the author), and financial nihilism is the belief that everything is a Ponzi
and ultimately there is no such thing as intrinsic value.
Another section covers crypto's ethical problems: the prevalence of snake oil salesmen, crypto's usage for illicit activities and the cultish aspects of crypto culture.
Finally, another couple of sections talk (again) about the economic and technical problems of crypto:
The book closes with a brief framework for discussion, but ultimately, advocates for a complete ban on cryptocurrencies because they're fundamentally worthless and do way more harm than good.
It just so happens that the book is reviewed by someone who isn't a fervent crypto supporter either. Some of the following arguments made by Diehl's arguments are actually valid criticism.
Cryptos Are Non-Productive Assets
Diehl argues that cryptocurrencies, unlike stocks, have no underlying value and are based on a circular economy, produce no revenue, and thus are unproductive. He writes that their utility is based largely or exclusively on speculation that makes the number go up. Hence, cryptocurrencies are more akin to gambling than to investing.
Well, what can you reply to that?
Most DeFi DApps
produce little to no revenue, according to Token Terminal
. Ethereum (during its proof-of-work
era) produced the most annual revenue, although whether that merits a $200B market capitalization
is debatable. By and large, though, most crypto tokens are powered by speculation.
Crypto Is a Speculative Asset and Cannot Perform the Function of Money
According to the book, cryptocurrency is not only fundamentally worthless because there is no underlying value or revenue stream, but it is also far too volatile to be money, as Bitcoin presumably tries to be.
We addressed this point in our article "Can Bitcoin Become Money?
" and pointed out arguments for and against cryptocurrencies becoming money. Ultimately, Diehl is right that a volatile asset like crypto at this stage of its evolution is not suitable as money. Even though that does not necessarily exclude a future where Bitcoin is far more liquid
and less volatile, it will hardly become money and an investment vehicle
. Even commodity-backed currencies use the commodity as backing, not as the currency itself.
Crypto Is Hard to Scale
This is hardly a contentious argument. Even almost 15 years into Bitcoin and almost 10 years into Ethereum, both cryptocurrencies are still looking for the holy grail of scaling without giving up their main value pitch (decentralization and censorship resistance
). All scalable cryptocurrencies have compromised heavily on decentralization
, making them ultimately similar (and some think inferior) to traditional centralized solutions and decentralized blockchains alike.
Crypto Shifts Security Responsibility to the Individual and This Isn't a Good Thing
One of crypto's value pitches is "be your own bank." But that may not be attractive to everyone. Even more so, a world where everyone is their own bank may be a far more violent and unsafe world
. Crypto muggings
are already a thing, and it's not a stretch that more supply (of muggable people) would cause more demand (of muggers). After all, an individual is far easier to rob than a bank, so custody may not be so bad after all.
Technology Isn't a Silver Bullet for Poor Governance
Let's quote the author on this one:
"Technology and software do not offer an escape from government; they can only offer another competing governance system with its own power dynamics and coercive institutions. Technolibertarianism is, at its core, simply a preference for that system over democratic institutions. - this is correct and crypto essentially is the foundation of a new political philosophy (whether it's a better one is up for discussion)."
In other words, code is law is simply "code" for preferring technology as arbiter over humans, whether this leads to democratic solutions or not. Technology may lead to better or worse governance
, but we don't know which one it would be since we haven't tried it out. Diehl argues that crypto proponents falsely "sell" crypto as a better solution than the one we currently have. Considering the amount of fraud and scams
already present in crypto, this may not be far from the truth.
Financial Nihilism Rationalizes Fraudulent Behavior
Diehl sees financial nihilism as the notion that states that, ultimately, nothing has value for the contemporary investor
since they see investing not as a way of increasing their wealth (which they don't possess) but as an escape valve for their miserable situation. Put simply, you're only a 100X on a memecoin
away from escaping the dreaded 9-to-5.
However, this rationalizes and encourages Ponzis, scams and pump and dump schemes
, which are all based on investors' greed. You may willingly participate in the ponzi since you can't make the money you need honestly.
Everyone knows fraud is a big problem in the crypto space. However, crypto is a symptom of the current times rather than a cause. Cryptocurrencies don't make people financial nihilists, but people are financial nihilists and therefore invest in highly volatile assets.
Technobabble as a Smokescreen to Dump on Unsuspecting Investors
Anyone who has read a metaverse
-related white paper
knows that many of them are big words and promises with no substance
. Moreover, these shady projects almost always have big insider allocations
that guarantee the ones "in the know" a fat revenue cut, leaving the public gambling on a meteoric rise that may or may not come.
In that sense, Diehl is absolutely right that crypto tokens often target vulnerable people with little capital and/or a propensity for gambling. Once the token is live and trading at multiples of the private valuation, the insiders cash out, and the casino players are left trying to leave with their funds intact.
Crypto Culture Has Cult-like Aspects
Let's quote again:
"The crypto ideology makes miraculous promises of wealth, not derived from labor or economic activity but purely from faith."
This is WAGMI
in a nutshell. Apostates who don't HODL
are looked down upon as NGMI. Never mind the fact that each "blockchain religion" has its own faction of maximalists that would never consider turning on their group. Even if it means financial ruin as it did for Lunatics
NFTs, DAOs, Metaverse, Play-to-Earn, DeFi — All Have Little to No Real Utility
Diehl hammers all the blockchain enthusiasts' favorite hyped sectors by discarding them for technological and ethical problems:
- NFTs aren't really unique after all and are only based on an illusion of uniqueness.
- P2E games promote "bullshit jobs" that produce unproductive work.
- DAOs are a form of regulatory avoidance.
- DeFi is essentially a Ponzi.
- The metaverse is pure hype and copies existing flaws instead of remedying them (like "scarce" virtual land).
All of these can be partially refuted but are not far from the truth. Small wonder that DeFi and P2E have plummeted in value during the bear market
ICOs, Celebrity Endorsements, Crypto Journalism and Memecoins are All Ways of Defrauding Retail
Diehl also slams all of the above for promoting fraudulent coins in one way or another
. The 2017 ICO bubble was famous for producing all sorts of scams and frauds, most of which got away unscathed. Celeb endorsements (looking at you, Melania Trump
) have ranged from dodgy to outright fraud.
One way or another, all of these mechanisms aim to generate more interest from retail for the benefit of insiders.
Crypto Is Financial Populism and Will Not Initiate Beneficial Reforms
Diehl argues that crypto emerged against the backdrop of the 2008 financial crisis
and the Occupy Wall Street movement (which is correct). Essentially, crypto is a way of showing the establishment the middle finger
(also correct) and embraces populist measures like "YOLO investing" (correct again).
Populist politicians have proven time and again that their policies can lead to one group benefiting at the expense of another, but not to a higher standard of living for everyone. Even though this argument can be debated, Diehl argues that crypto is, at its core, populism and has a tendency to prey on vulnerable groups.
Diehl has been blogging against cryptocurrencies and blockchains on his page for several years. Readers familiar with his content will recognize a lot of rehashed talking points in this book. However, rehashing content is one of the book’s minor problems.
Presenting Arguments as Indisputable Facts
Let's quote an example from page 53:
"However, the entirety of crypto is almost universally recognized as an economic bubble. In the opinion of eight Nobel Prize laureates, bitcoin is, in their words, an obvious economic bubble."
Intelligent as Nobel Prize laureates may be, they are also human and fallible. So their opinion is hardly "universal recognition."
Another example from page 67:
[...] "commodity-based money is a rubbish foundation on which to build productive enterprises or run an economy."
Is it, though? Fiat currencies are a still-ongoing 50-year experiment that still may or may not take a turn for the worse, considering the growing debt burdens in advanced economies. Diehl is not only as dogmatic as the people he criticizes but also has a logical flaw in his argument. If the "technology of money is one of incremental evolution" and Bitcoin is an evolution of money, how can it be rubbish?
Another example would be the argument that crypto's primary use case
is illicit activity, even though that has been proven wrong numerous times.
The broader point here is that Diehl presents some points as facts, even though they cannot be conclusively proven to be facts.
No Alternatives Are Presented
Though Diehl correctly identifies many flaws of crypto, his prescription follows the classic modern day approach of pulling out the ban hammer. Crypto can indeed be seen as "an escapist ideology from the current tech oligopoly." But that is neither necessarily a bad thing, nor does Diehl suggest alternatives to breaking the oligopoly of tech companies.
Diehl calls crypto a false alternative but limits his prescription to "strengthen the institutions," even though those very institutions have been losing the people's trust and enabled the same inequality crypto feeds on.
To be fair, Diehl proposes the following framework for discussion:
1. How do financial assets with no income and intrinsic value fit into markets?
2. Are the externalities associated with cryptoassets a net negative or net positive for the world?
3. How do we reconcile the runaway energy costs associated with Proof of Work mining schemes with our climate goals?
4. How do we protect the public against crypto investment fraud?
5. How do we prevent hyper-volatile speculative coins and cryptoassets subject to extreme run risk from creating systemic risk in the broader economy?
All of these are fair questions and present a good starting point. However, his "solutions" are limited to three short points:
1. Regulate cryptoassets as securities and enforce the registration laws.
2. Ban surrogate money schemes derived from sovereign currencies.
3. Firewall cryptoassets away from the banking sector and the broader market.
Even though these may not be completely misguided, they cannot be the basis of an honest discussion about crypto.
Potential Innovation as a Consequence of Crypto Is Dismissed Out of Hand
Let's assume crypto is indeed just a big casino.
Firstly, that is a use case in itself, since casinos provide a form of entertainment (although crypto should in that case be upfront about it).
Second, that does not exclude innovation that can happen on the back of crypto, like in the fields of social coordination or finance. The former may still lead to a better iteration of social media networks or creator rewards. And in finance, we might still see an iteration of DeFi that is less circular and speculation-based than the current one.
In short, only because crypto is driven by speculation today doesn't mean that it will always remain this way. Particularly if the sector is subject to regulation weeding out the most harmful and toxic elements, its culture and the solutions it offers may change.
Overall, this is an interesting book that warrants a read, especially if you are pro-crypto. It raises several valid points of criticism, even though the author does not try to give a "balanced" view.
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