Crypto’s Best Days Are Behind Us

Crypto’s Best Days Are Behind Us. By Sohale Mortazavi.

Almost a quarter of the Western public have owned crypto “currencies” at some stage. But the boom times for crypto are now over, apparently.

John M. Griffin at the University of Texas, and Amin Shams at Ohio State University found that half of the rise in the price of Bitcoin during the 2017–2018 bubble was the result of price manipulation using Tether on the Bitfinex exchange. They concluded that the perpetrator was a single entity that was almost certainly the exchange or an accomplice. …

I have argued elsewhere that this kind of price manipulation renders cryptocurrency as a whole a giant decentralized Ponzi scheme and that a full ban on cryptocurrency is the best, and probably only, solution.

Reality is increasingly limiting the bubble:

However, there are limits to how high Bitcoin prices can be artificially manipulated in this way.

Most popular cryptocurrencies, including Bitcoin, employ a “proof of work” consensus mechanism for verifying updates to the blockchain. Critics sometimes mock this process as “proof of waste.” Cryptocurrency “miners,” which are simply network participants competing to solve pointless cryptographic puzzles for the right to approve transactions and collect a reward of cryptocurrency, now waste unfathomable amounts of electricity. This waste is by design. The difficulty of the puzzles scales with the amount of total processing power thrown at the network. …

Bitcoin mining alone—to say nothing of other proof-of-work coins—was using half of a percent of the world’s entire electricity consumption in 2022. …

So long as more energy remains available to miners, energy consumption will continue to scale linearly with price. …

If stablecoin issuers are artificially inflating cryptocurrency prices, they are also necessarily driving up mining costs. But miners cannot pay utility bills with stablecoins. They need real cash to avoid shutting down or going into debt. Higher prices thus force miners to convert more of their earnings into actual cash. This places some limit on how high unbacked stablecoins can pump cryptocurrency prices without making the whole operation — including crypto miners — insolvent. At some point, using stablecoins to artificially inflate crypto prices will eat up all of the real cash liquidity coming into the cryptocurrency space, and the result will be a liquidity crisis that more stablecoins cannot fix. …

But what a ride it has been:

Bitcoin investors have become accustomed to bull runs that bring tenfold returns, maybe more.

But Bitcoin prices 10 times the previous high would incentivize miners to use 10 times the energy — five percent of global electricity production. A subsequent bull run of the same magnitude would require half of the world’s current electricity production. I would say “and so on and so forth,” but you see the problem here. …

Manipulating cryptocurrency prices to a high-enough level to keep luring in new money without breaking the whole system is likely a careful balancing act that gets harder with each successive bull run. This helps explain the reduced returns. …

Bitcoin’s annual ROI [return on investment] has been trending down since its inception. Despite growing media coverage and hype, every bull run since at least 2013 has produced lower returns than the previous one...

It cannot go on:

Luring in new investors requires ever-higher prices, and ever-higher prices are creating ever-higher mining costs. The scheme is even less sustainable than traditional Ponzi schemes, which don’t require dedicating a growing share of new investors’ money toward massive processing centers that now rival the size of the entire world’s traditional data centers. …

Ultimately, … the real limit on cryptocurrency mining — and, by extension, cryptocurrency itself — is likely to be political. Diverting so much energy toward crypto mining activity is neither tenable nor sustainable. Policymakers will eventually have to step in before miners consume anywhere near the entirety of global energy production.

This is already happening. China banned cryptocurrency mining in 2021, which sent miners underground or fleeing to more permissive locales. The European Union is again considering a mining ban as the European energy crisis worsens. In the United States, where crypto mining already gobbles up as much as 1.7 percent of the nation’s electrical output, New York placed a moratorium on new cryptocurrency mining permits at fossil fuel plants. …

Fraud finds a way:

Crypto firms issuing and artificially inflating the value of their house tokens are just plain old Ponzi schemes. They have proven much easier to identify and prosecute as such. Sam Bankman-Fried was indicted and arrested for, among other charges, his role in orchestrating securities and commodities fraud at FTX and Alameda Research. …

At this point, pretty much every major player in the industry appears to be under investigation, and the future of crypto looks bleak. …

Forecasting speculative markets is always fraught, to say nothing of those so poorly regulated and highly manipulated as cryptocurrency markets. Those calling the end of Bitcoin or crypto have so far been proven wrong or — more likely — simply premature, so pardon me for hedging my bets, but I won’t go that far.

Fraud, like life, finds a way. But if the price manipulation driving recent crypto bubbles is no longer financially viable or politically tenable, then crypto may well have entered a new era of diminished future prospects. …

The blockchain illusion:

In the end, the greatest innovation of cryptocurrency may have been its ability to evade regulatory scrutiny. Blockchain — which is essentially just distributed append-only spreadsheets — was a remarkable mystifier when it involved proof-of-work.

But the novelty and tangibility of crypto mining appear to have been indispensable to blockchain’s ability to confuse and obfuscate. … Now that excessive energy consumption has curtailed the expansion of the proof-of-work cryptocurrencies upon which the crypto industry has been built, the jig — it appears — is finally up.

The scorched-earth behavior of some of the biggest players in the cryptocurrency space suggests they know the walls are finally coming down. The falling valuation of better-regulated crypto companies apparently operating mostly within the bounds of the law — Coinbase stock has been down as much as 90 percent from its 2021 IPO in recent weeks — suggests a poor outlook for even the “legitimate” firms operating in a sector driven by fraud once that fraud is excised. When your house is a Ponzi scheme built atop Ponzi schemes atop a Ponzi scheme, everything starts to come down when the base buckles.

Who would have thought 15 years ago that the key to untold riches was to bamboozle the masses with append-only spreadsheets?