Let’s start at the beginning; I’m not a crypto-hater, crypto-bro or crypto-anything. Seriously, debates on the internet are oversimplified and polarised. This situation has made me very hesitant to write this article, but here we are.
Let’s lay the foundations: cryptocurrencies are one of the multiple applications of the blockchain. This technology tries to “digitise” the Trust through a distributed ledger. Trust is something essential because a large part of society relies on it to structure its relationships: we trust that the bank will keep our money, we trust that the hospital will be open when we need it, supplies provide us with a service because they trust that we will pay for it later, and so on. When Trust is lacking, we turn to intermediaries who take custody of the money or mediate the transaction.
Money is undoubtedly a scarce resource with value and general interest, more or less complex to obtain. We use the currency to store it, a covenant on which we rely as a society.
The social science that studies all this, and much more, is economics, which focuses on analysing how families, companies and governments organise the available resources, which are usually scarce, to satisfy different needs and thus achieve greater well-being.
Here are a few “philosophical” questions about cryptocurrencies that I’ve been thinking about lately…
1. Decentralisation and the promise of financial freedom
One of the pillars of Trust in the blockchain is that it relies on many nodes not held by a central authority. This implementation is a logical and more than reasonable way to do it. The danger is in extending too much and altering it to make it ideal. It is one thing to think that football is epic, that a brand of energy drink is going to make us fly,… and quite another to let oneself believe the fairy tale of financial freedom thanks to cryptocurrencies as the only salvation of the current system and the ineffable villain of central banks/governments.
We can discuss the advantages and disadvantages of a centralised economic system. Still, cryptocurrencies need work to be a complete alternative, and this argument only serves to generate a marketing layer.
2. The promise of the future and easy money
Like any nascent technology, it takes time to be assimilated, democratised and optimised. This paradox has a double effect; on the one hand, it serves to foster the syndrome that you must join the band so as not to miss out (FOMO) and on the other, to discredit the naysayers: they are not ready, cryptocurrencies are only within reach of the initiated. This also serves to cover and conceal any imperfections that may appear.
3. Confusing trading with a way of life and selling ideals
As a by-product of the fact that there is no regulation, it is a self-regulating economic system; the problem is that because there are no limits, all the old stock market tricks are used without restrictions. With their long history, haven’t the stock market, forex and penny stocks been the training ground for thousands of stock market professionals?
I have the recurring impression that the necessary skills are oversimplified to sell training and give it the appearance of accessibility. There are real sharks out there.
4. Simplifying trading as much as possible to “hodl”
There are several reasons why the HODLing strategy is popular among cryptocurrency investors. First, many investors believe that the value of cryptocurrencies will continue to increase over time and that holding onto their assets long-term will enable them to capitalise on this potential growth. Second, HODLing allows investors to avoid the potential risks and costs associated with frequent trading, such as transaction fees and market volatility. Finally, HODLing can give investors a sense of discipline and commitment, helping them avoid making impulsive or emotional decisions about their investments.
Without going into the question of whether a strategy is suitable for all investor profiles, I am concerned that such an idea could be used to manage many other investors and thus have a manipulative effect on the stock.
5. Talking about fundamentals and meaningful projects
Fundamental analysis is a method of evaluating the intrinsic value of an investment by examining its underlying economic and financial factors. This approach focuses on the inherent value of an asset rather than its market price and seeks to determine whether the asset is undervalued or overvalued. Fundamental analysis typically involves analysing a company’s financial statements, including its income statement, balance sheet, and cash flow statement, as well as its management team, competitors, and industry trends. The goal of fundamental analysis is to identify fundamentally strong projects likely to generate long-term value for investors.
I have seen this type of argument used to support an ICO-type investment, a start-up token, etc. What might be a remotely reasonable idea about the profitable business model of a project loses its effectiveness through overuse.
6. Seeking the halo of permanent officialdom
Another recurrent debate is about the relationship between exchanges and government authorities, especially in cases that have ended badly. An updated regulation could be the way to achieve the spread and establishment of crypto assets as a digital form of storing value, providing security standards that would mitigate many of the problems that have occurred so far.
In my mind sounds like, “We want decentralisation and freedom but also financial regulation, significantly when problems arise”.
7. Crypto assets are not a bubble nor a Ponzi schema
In summary, bubbles and Ponzi schemes are both phenomena that can occur in financial markets, but they have different causes and implications. Bubbles are caused by market forces and can result in significant losses for investors, while Ponzi schemes are fraudulent schemes that can cause even greater losses for investors.
A bubble is a situation in which the price of an asset, such as a stock or a commodity, increases rapidly and then suddenly collapses. Bubbles are often driven by investor speculation and can be difficult to predict. While bubbles can cause significant losses for investors who buy at the bubble's peak, they do not necessarily involve fraudulent activity.
In contrast, a Ponzi scheme is a fraudulent investment scheme in which returns are paid to existing investors from funds contributed by new investors rather than from profit earned. Ponzi schemes are illegal and are characterized by their use of unrealistic promises of high returns with little or no risk. Unlike bubbles, which are driven by market forces, Ponzi schemes are intentionally created by individuals or organizations looking to defraud investors.
I don’t believe everything around the “crypto-economy” follows one of these patterns. Cryptocurrencies and other digital elements are the order of the day; they are a livelihood for many people and can have beneficial applications. However, given the lack of regulation, their popularity and the ease of digital media, these phenomena happened before, with consequent harm to investors and society.
However, we must banish the myths and deception surrounding them by analysing, understanding and overcoming them. I share these ideas to encourage a breaking point in many crypto debates. By providing clarity and common sense, we can build things on top of that technology that brings real value to society.
Fortunately, this is already happening in some areas, there are social projects that use crypto-assets to prevent the counterfeiting of food vouchers in the third world. There are shared blockchains in transport companies to share the information of each transaction transparently and reliably, there are applications that reduce the cost of transactions, and I am sure there are many other projects that I have not mentioned.
Finally… Do you know of valuable examples of the use of cryptocurrencies?Should I remember any other paradoxes of cryptocurrencies?What do you think?
“Revolutions always come around again.That’s why they’re called revolutions.”
Terry Pratchett, Night Watch
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