The Future of Crypto

Speculating on scenarios

On Sunday, we discussed this, and then we got into the state of the economy in general. Here is the recording.

One problem, which we discuss briefly, is the user-interface conundrum. Even if I wanted to own a cryptocurrency, the technical knowledge I would need to obtain it and keep track of it seems daunting. That is why third-party “wallets” and “exchanges” have emerged. But once you involve a third party, you have a new security risk. You are now dependent on the honesty, competence, and solvency of the third party. That security risk has become quite salient in recent months.

At a live event back in May, at about 14-1/2 minutes in, I brought up crypto. I’ll repost the video recording below. I brought it up because Fidelity was saying that they wanted to allow customers to put crypto into their retirement accounts. One of my panelists said that this was “financial malpractice.” And my guess is that Fidelity is not marketing the crypto option very aggressively these days.

I have always thought of cryptocurrencies as pyramid schemes. A pyramid scheme depends on an ever-expanding base of new participants. Right now, I cannot imagine that there are many people eager to get started investing in crypto. Without an expanding base, my hypothesis would predict that crypto prices will collapse, and do so relatively soon. As I write this, Bitcoin is actually holding up better than I would have expected.

Before the calamities of recent months, many venerable Wall Street firms were saying that they felt that they needed to get involved in crypto markets. My guess is that they are backing away at full speed.

Lee Bressler sees the fall of FTX as an opportunity for a reputable Wall Street firm to take over the crypto brokerage market. I have my doubts. I know that if I were CEO at a big financial company, the last thing I would want to lose sleep over is whether my company’s crypto desk might get me into trouble. If something goes wrong there, I will look and feel like a fool. I may find myself obligated, either legally or to protect our reputation, to pay back customers for losses. On the other hand, if I shut down the crypto desk now and we forego the profits of trading crypto, fine. I can live with that.

So what lies ahead? It is possible that the crypto dream is over. A few cryptocurrencies will limp along, but with little ongoing social or financial significance. That is one scenario. I give it about a 60 percent chance. Keep in mind that I have erred on the bearish side on crypto all along.

Another scenario is that crypto becomes regulated, and regulated crypto becomes part of legitimate finance. I give this only a 10 percent chance. I think that if it does happen, then regulators would be setting themselves up to fail. Regulating legacy finance is hard enough. Olivier Blanchard once described it as a cat-and-mouse game in which the mouse (the financial sector) is much more agile than the cat. In the crypto space, the mouse is all the more agile.

A final scenario is that the many people who have invested brainpower, reputations, and money in crypto will not give up so easily. They will come up with ways to revive the ecosystem and to overcome skepticism. The dream of the crypto enthusiasts lives. I give this a 30 percent chance.