Come on Kids, Play time is over
I wanted to write about a point that I have yet to hear refuted. I’ve written this sometime ago, so I’m not sure if it’ll be too exciting since it feels the mania is dying out but nevertheless. I’ve said that most cryptocurrencies are simply arcade tokens whereby people choose a token and gamble to win big. I’ve offended many grown men suggesting this. Right now, there are millions of young men gambling their futures on these blockchains as if they have the answer to the worlds financial problems.
For clarification, I’m excluding cryptocurrencies that are used for payments in the broader economy or storing wealth—which is its own category in my estimation. I’m referring to projects that involve smart contracts and other projects like video games, transparent DeFi schemes or crypto “farming” ponzis built upon their blockchain. This includes Ethereum, Polygon, Solana, Polkadot, Cosmos among literally thousands of others. These systems run similar to like an arcade game inside a collection of other games, which have their own games. Cryptocurrencies aiming to be a form of payment are a legitimate cause to “opt-out” of the current banking system.
Jim Rickards, lawyer, author, former investment banker and CIA financial analyst has made a similar comparison regarding most of cryptocurrencies, saying “I’d prefer roulette, at least they give you a drink”.
There’s three arguments why I believe this to be a good comparison–the utility of the blockchain does nothing in fulfilling it’s proposed goal, the price plays no role in its use and the price of the coin is not representative of it’s value, simply a function of how many own a given number of coins. Lastly, I argue the dangers of crypto being a one way ticket for ones’ capital. Let’s dive in.
Don’t feel like reading anymore cause you call bullshit? Prove it. Write a short sound argument about why cryptocurrencies are a legit asset class that everybody should join! [Prove Me Wrong, Let’s Get a Discussion Going]
The first point is that many blockchain projects seek to better facilitate some great ideas be it banking, social media, video content, commerce, trade, which is great. However, in order to facilitate these projects, the ownership of the blockchain’s coins is necessary (often by way of “staking”). People seem to miss that owning the coin on these projects has zero impact on the outcome of the underlying project. The goal of a coin like Stellar Lumens is supposedly to “bank the unbanked”; what does sending 50 of these Lumen coins to my mother do for a poor kid in Eritrea? My possession of the coins has nothing to do with the application of the project. It’s the equivalent of collecting lumber in Seattle because you’re interested in rebuilding Puerto Rico from a hurricane—the only to benefit are lumber producers. So just like holding a pile of lumber in your yard, what good are these coins to simply hold? Ownership does not assist in the claimed goals.
Secondly, a rise in price in the coin in question (following ownership), or by analogy, lumber, makes the process of including everybody more difficult because the bar of entry for the disposed is higher. Cryptocurrency would therefore be more effective if the price were as low as possible. Although show me someone advocating for a cheaper price for their project goal to scale. Instead, they want their coins to 1000X while they’re still holding them. The goal of any Crypto investor is to get in as early as possible based on pure speculation someone will come behind them and be willing to purchase at a higher price than them, and so on; a greater fools theory posing as a technological innovation of altruism. What business model makes it MORE difficult to add customers/users if they were true to their goals of widespread adoption? In this sense, it’s a pure lottery.
Thirdly, not only is holding the coins futile for its proposed use-case or ushering in as many people as possible, but people are misled that they actually own something, like a stock share. If you owned 10% of the shares in a telecommunications company, than you own 10% of that company. But if you own 10% of the coins, you don’t own the blockchain, the code, patents, the IT, the machinery, anything of substance. In practice, crypto investors are needed to A) secure the project (no problems here) but B) pump the price so that the owners who already own many coins can cash out before the bubble bursts. Proponents of the industry paint the illusion that one is “investing” in a project but the value creation is a net sum of zero. Whether I, you, or anyone else owns a coin or not, the value of the underlying code written doesn’t change. One person could own 100M coins valued at a dollar a coin, but if there’s no use case–we’re just the richest man on a deserted island.
By contrast, a company’s value can exponentially increase if it is able to attract equity in exchange for shares and deploy it for further growth and cash flow. Cryptocurrency developers do not offer fragments of ownership of their hard programming work, nor debt or dividends, just simply the made up coins (similar to the YouTube clip above).
Lastly, even if you still think cryptocurrency is the future, consider that you are purchasing a one-way ticket into this digital ecosystem. Your dollars go into the crypto arcade, the door shuts behind you and now your money may be stuck to play with the thousands of digital tokens (coins) forever. This is because you are reliant on 3rd parties having enough dollars to pay you out when you want to convert them back (they don’t have enough for everybody; look over Coinbases’ balance sheet). The proponents of decentralization are completely relying on a central counter-party with enough willing fiat currency to meet this exchange demand. This is not speculation or fantasy–it’s well known by all cryptocurrency investors that main exchanges have blocked, limited, restricted or delayed the conversion of crypto coins to fiat currency periodically– because they didn’t have them to give!
Keep in mind that coins are the lifeblood for how the blockchain operates, so they need more and more people to swap fiat currency for crypto but there’s no guarantee of the reverse. Hence, there may be an endless supply of tokens (since they’re just created digitally) but a limited amount of dollars available for them and someone is left holding the arcade tokens (a problem with many emerging market economies since theres far more useless domestic currency and not enough dollars/euros/gold to meet payment obligations). Either investors or the exchanges will run out of currency.
Analogies
In a real arcade, the real wealth is generated by those who’ve created the machine, patented it, advertised it, shipped it to millions of pizza shops, made merchandise & collected the rental income, own the real estate. Only children are left to believe that winning a whole pile of tokens amounts to riches.
Sure, similar to an arcade we can leave one game and then re-enter to a different game with those very same tokens, but the minute we leave the arcade with those tokens they become instantly worthless.
One evidence of this is the amazing futility of cryptocurrency in the broader economy. I have been fortunate enough to travel much of the world (Working hard on OnTheBall Travels for you) and I have yet to find a diner accepting Pancake coin for pancakes. Can you name more than 5 places in your city that accept cryptocurrency? I’m familiar with a Bitcoin ATM nearby (find out how it works!) but the all the restaurants in the mall don’t accept it.
Using everyone’s favourite Pac-man as an analogy–> most projects are like getting the high score in the game and then trying to use the coins on the game to buy you and your friends a slice of pizza. You could also try paying your rent, car payment, or tuition with PacMan coins. Not going to happen.
The creators of Pacman (or the vast majority of cryptocurrency project developers) made their ‘real’ money from giving speeches, interviews, merchandise and have cashed out of their arbitrary coins after we pumped up the price for them. We’re simply holding a fugazi of digitization. They allow us to fuel their game via a Ponzi scheme of those in earliest win & those in last lose. It’s a digital casino where the house wins.
I cannot find the video but here is an article explaining a case where a guy made a coin called “scamcoin” on the Pancake liquidity pool as a joke and over 1 Million dollars piled into it right away hoping to be first in the scheme: https://cryptonews.com/news/tiktoker-creates-joke-scam-coin-and-people-are-buying-it-in-10158.htm Dogecoin is another meant as a joke and at the time of writing it has a market cap of 13.19 billion dollars (you read that correct).
What should be done?
Make Cryptocurrency a ‘currency’. People must be able to exchange goods and services using cryptocurrency (not one crypto for another) without ever needing fiat currency to re-enter the equation. Promote crypto usage for everyday activities applicable to everybody such as rent, food, business, & transport.
To summarize,
I believe cryptocurrency is going to face more challenges in the near-to-midterm as an asset class and many coins will prevail—at least I’m hoping they will if they have utility. Having said this, I believe most crypto assets or coins amount to a digital arcade/casino chip that will have a tough time staying around.
Ownership does not guarantee success nor ownership of the blockchain, price does not dictate adoption and utility in the real-world economy is largely futile. Furthermore, liquidity remains a concern because of the reliance of third-parties having enough fiat for coin conversions and the natural running out of willing/able investors. Ballooned prices will be deflated once these are recognized. Therefore, it’s only a matter of time until the majority of cryptos will be limited to the arcade atmosphere.
I recall one day in school where I reached in my pocket to find a few coins. Delighted about the idea of buying lunch that day, I pulled them out to find that they were arcade tokens from the previous night at the movies. I fear many investors will pour much of their wealth into these projects and be left with the same feeling you get when you reach in your pocket to pull out coins that read “1 Token. For Arcade Use Only”
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