It's official: Krugman says crypto "sca

I am pleased to see that Nobel Prize winner Paul Krugman wrote almost word for word what I have been saying about crypto currencies all along: they are a scam.

https://www.nytimes.com/2022/06/06/opinion/cryptocurrency-bu…

**From the Big Short to the Big Scam**
**By Paul Krugman, The New York Times, June 6, 2022**

**...**
**What purpose, then, do these assets [stable coins] serve?**

**You can ask the same question about crypto in general. I’ve been in a number of meetings in which skeptics ask, as politely as they can, what cryptocurrencies do that can’t be done more easily with more conventional means of payment. They also ask why, if crypto is the future, Bitcoin — which was introduced in 2009(!) — has yet to find any significant real-world uses. In my experience, the answers are always word salad devoid of concrete examples...**

**Yet suggesting that crypto makes no sense runs up against the incredulity factor. At their peak last November, cryptocurrencies were worth almost $3 trillion; early investors made huge profits. ...**

**It sounds extreme and implausible to suggest that an asset class that has become so large, whose promoters have acquired so much political influence, could lack any real value — that it is a house built not on sand, but on nothing at all. But I remember the housing bubble and the subprime crisis. And if you ask me, it looks as if we’ve gone from the Big Short to the Big Scam.** [end quote]

That’s a lot of real money thrown into a scam.

Wendy

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I’ve come to the conclusion that crypto is more like Gold – minus its $300/ounce value as an industrial metal. The other $1,500/ounce value in Gold’s current $1,854/ounce quote is speculation – what people are willing to pay for it.

As long as there are enough people out there who see value in crypto, and you have enough Hollywood celebrities, athletes, and Fox News hosts endorsing it, and sports arenas named for it, there will be a market for it.

No one ever lost money betting on the ignorance and innumeracy of the American people.

intercst

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<<<krugman: Yet suggesting that crypto makes no sense runs up against the incredulity factor. At their peak last November, cryptocurrencies were worth almost $3 trillion; early investors made huge profits. …

It sounds extreme and implausible to suggest that an asset class that has become so large, whose promoters have acquired so much political influence, could lack any real value — that it is a house built not on sand, but on nothing at all. But I remember the housing bubble and the subprime crisis. And if you ask me, it looks as if we’ve gone from the Big Short to the Big Scam. [end quote] >>>

That’s a lot of real money thrown into a scam.

I think it’s worthwhile to investigate how much of the $3 Trillion is “cost basis” (i.e., US Dollars actually invested in crypto) and how much is “unrealized crypto gains”.

I was living in Houston when Enron went bankrupt in 2002. You had employees on the evening TV news complaining that they lost $500,000 or $1 MM in their 401k. Did they really lose that much?

Most of the value of their 401k account was the inflated value of the Enron stock due to the scam. Their “cost basis” (i.e., employee contribution, plus company match) might have been only 5% or 10% of the account value.

Did they really lose the $500,000 peak value, or “merely” the $25,000 or $50,000 they put in during their period of employment?

intercst

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Wendy,

There is digital scarcity that gives them some of their value.

The major two Bitcoin and Ethereum are massive amounts of pent up spending power. That spending power is self propelling.

The rest are less and less important.

When bitcoin is up you wont believe it is the savior of sorts.

When it is down you wont believe it will be back up.

The major cryptos wont be going away just because of Krugman saying anything.

But give me a blue chip as an investment.

There is digital scarcity that gives them some of their value.

I’ve never bought that argument. Gold has value because it has uses in the real world beyond currency. Jewelry for one. Industrial uses for another (due to non-corrosiveness and high conductivity). Bitcoin may have built-in scarcity but so what? What USE does it have?

The USD might not be scarce but it has USES. For one you can pay taxes with it. And your rent and mortgage, your groceries, energy, etc.

For all the promise and hype I have not seen many uses for crypto. Only a few.

Watch the Netflix movie “Trust No One: The Hunt for the Crypto King”. One of the victims in that movie had what looked like a good use for Bitcoin: to transfer his money from a bank in one country to the bank in another (he was moving), in a way that was simpler than official channels. (note, nothing was illegal with the funds, etc). His problem was he chose a fraudulent exchange to handle the transaction and lost it all.

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“The major two Bitcoin and Ethereum are massive amounts of pent up spending power”

LOL
No one actually ‘spends’ crypto. Nobody accepts it as payment.

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LOL
No one actually ‘spends’ crypto. Nobody accepts it as payment.


That simply is not true.

As an artist I can scoop up some of this and transfer the Eth to USD.

Investment grade art is one of the best long term investments anyone can make...if they have the wealth to play.....

I do not know about transfers in Bitcoin so I wont make any claims.

In Eth you can set up contracts and sell them.

<I think it’s worthwhile to investigate how much of the $3 Trillion is “cost basis” (i.e., US Dollars actually invested in crypto) and how much is “unrealized crypto gains”.>

You make a good point. It’s true of any asset, including stocks.

Let’s say you bought a stock (or bitcoin) for $10,000 – that’s the cost basis. Then an asset bubble occurs. Your stock (or bitcoin) is “worth” $50,000 because someone is willing to pay that.

Either you sell it to them and make a $40,000 capital gain while their cost basis becomes $50,000 (that’s real dollars invested)

or

you don’t sell, the bubble bursts and the value goes down to $15,000. In that case, you can sell for a $5,000 capital gain. Your spreadsheet shows a “loss” from the peak but you haven’t actually lost any money. The person who bought at $50,000 has a real capital loss of $35,000.

I don’t know any way of discovering the cost basis of either stocks or crypto currency. But the question is significant to the Macro economy. If the cost basis during a bubble is high, the money evaporates out of the economy when the bubble bursts, draining the money supply. That’s what happened in 2008-2009 when the housing bubble burst and real assets were lost. It’s the reason the Fed did QE.

Loss of cost basis is separate from the “wealth effect” where asset owners spend less because the value of their assets has dropped, even if they did not lose more than their cost basis. That alone could cause or exacerbate a recession.

If you can figure out how to get at the cost basis, please post.
Wendy

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Wendy,

This is silly.

Cryptocurrency is a worthless scam in exactly the same way that fiat currency is a worthless scam. It has no intrinsic value. Its value comes entirely from people believing it has value. And when it works, it works just fine.

Back in the late 1800s USD was the same. Banks regularly went bust and there was no protection. Had you been posting then, you would have said the same thing about USD. It’s a scam! Gold or nothing!

And the fact that Krugman doesn’t understand it shows nothing. His arguments seems to be that he can’t see anything you can’t use our other well-established scams for, so what good is a new scam? He could make the same argument against the French franc.

Just to be clear, if it turns out that a non-national world currency is a good thing to have, then some form of cryptocurrency would be useful. If it turns out that a currency that is intrinsically digital is a good thing to have, then some form of cryptocurrency would be useful.

Regulation and infrastructure appears over time to support useful forms of money. Once they’ve appeared and been around for at least a generation, then people like you will trust the system. Before that, people who are more amenable to risk (or simply have fewer choices) will trust the system to be usable. There’s nothing strange or unprecedented about this.

That doesn’t make it a scam. There are, of course, scammers all over the place, wherever there’s money to be had. But they are overwhelmingly scamming people out of their USD rather than their cryptocurrency.

-IGU-
(has no cryptocurrency)

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Back in the late 1800s USD was the same. Banks regularly went bust and there was no protection. Had you been posting then, you would have said the same thing about USD. It’s a scam! Gold or nothing!

And the fact that Krugman doesn’t understand it shows nothing. His arguments seems to be that he can’t see anything you can’t use our other well-established scams for, so what good is a new scam? He could make the same argument against the French franc.

IGU -

I don’t know if you were able to read the article (NYT is behind a paywall), but Krugman did acknowledge that crypto, especially stablecoins, could functionally operate as private currency. He argued that this is a worthless use, though, since crypto is inherently worse than the existing alternatives:

As a number of analysts have pointed out, stablecoins may seem high-tech and futuristic, but what they most resemble are 19th-century banks, specifically U.S. banks during the “free banking” era before the Civil War, when paper currency was issued by largely unregulated private institutions. Many of these banks failed, in some cases due to fraud but mostly due to bad investments.

Now, some modern economists defend the free banking era. Perhaps not surprisingly, free-banking defenders, like crypto enthusiasts, tend to have a libertarian bent; the most ardent defenders of free banking are associated with right-wing think tanks that have also promoted environmental denialism and opposed measures against Covid-19. Still, during the free-banking era, private currencies did indeed circulate and function as mediums of exchange.

Arguably, however, that was because there were no better alternatives: greenbacks — dollar notes issued by the U.S. Treasury — didn’t yet exist. Today greenbacks and government-insured bank deposits do exist, so stablecoins play almost no role in ordinary business transactions. What purpose, then, do these assets serve?

So Krugman did understand that point, and he explicitly addressed it. He’s not arguing that cryptocurrency couldn’t theoretically serve as a de facto private currency, citing the same example you did - he’s arguing that there’s absolutely no reason for it to be used in that way, and that all the evidence so far is that it isn’t being used that way, except in very limited cases that can’t underpin the amount of value that’s been assigned to them.

Albaby

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If you can figure out how to get at the cost basis, please post.

Half of the 19 million Bitcoins in circulation were “mined” before March 2012. That would mean a cost basis of $100 or less per coin. At today’s quote of $31,313, that’s 0.0032% cost basis and 99.68% unrealized gains.

About 75% of the Bitcoins in circulation (mined before 2015) have a cost basis of $250 or less. That’s still less than 1% cost basis and 99%+ unrealized gain.

Of course, I’m talking about people who “mined” their bitcoins (i.e, ran a computer and burned electricity to create them), not those who purchased them on the open market.

Bitcoin Circulation
https://www.statista.com/statistics/247280/number-of-bitcoin…

Bitcoin Price Chart
https://www.investopedia.com/articles/forex/121815/bitcoins-…

intercst

Cryptocurrency is a worthless scam in exactly the same way that fiat currency is a worthless scam. It has no intrinsic value. Its value comes entirely from people believing it has value.

Your last sentence is correct but incomplete. Crypto and fiat are actually quite a bit different and different in important ways. As albaby points out, one of those important differences is that there are protections and backstops in place such that your money won’t vanish after you deposit it in the bank. No such protections exist for crypto.

And in fact, that was one point of the article, which was focused primarily on stablecoins. First, note the irony of that one of the advantages of crytpo is supposedly that it isn’t fiat. But stablecoins are pegged to fiat. So if fiat is bad, why would you double down? When you need to circumvent Know Your Customer laws of course.

There was a stablecoin called TerraUSD which had backstops to keep it pegged to the dollar. I say “was” because that worked great until the peg broke and the value of TerraUSD went to zero. Again, note the irony of pegging crypto to fiat.

After TerraUSD cratered last month, the most popular stablecoin became Tether, clocking in a reported market cap of $72 billion dollars. Tether says it maintains its peg to fiat, by holding actual fiat. Dollars, bonds, stuff like that.

Tether is a 100% guaranteed scam. There is no way they collected $72 billion in investments so they could put it in bonds for the investors. Tether is headquartered in the Cayman Islands and has never released an audit. You are just supposed to trust them. Oh, and Tether’s founders have already been in legal trouble for scamming. If you think Tether is real, you are sucker. This is Nigerian Prince territory.

This post is getting long, so I’ll continue in Part II

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There is digital scarcity that gives them some of their value.

Digital scarcity is a fabricated oxymoron.

For decades computer scientists and hardware designers have toiled over communications and computation technology to make sure that perfect copies could be made and verified and made again with no errors. Now we want to undo that and call it more valuable?

Mike

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This is Part II of my post about why crypto and fiat are essentially unrelated, and why most crypto is at least partly a scam.

If you talk to most cryptobelievers about why they buy crypto, the reason they give is they they think it will be worth more in the future. The name for this phenomenon is a speculative bubble. The reason why they think this, is that they believe on some future day, lots of people will use Bitcoin in daily transactions and therefore Bitcoin will become popular driving the price upwards. But a primary problem with crypto and Bitcoin specifically is that the designers didn’t understand what money is or how it works. In other words, Bitcoin sucks if you want to use it to buy something. Merchants want Bitcoin, they want dollars. Even when Tesla briefly said they would accept Bitcoin, they probably never actually did and quickly decided it was a dumb idea in the first place.

To make Bitcoin suck less as a medium of exchange, third-parties have created apps to allow you to spend your Bitcoin. Setting aside the problem that Bitcoin is supposed be trustless to not require a third-party, the third party apps don’t actually allow you to spend Bitcoin either.

For example, look at Flexa and the Winkelvei-approved equivalent, Gemini. To the raucous applause of the crypto-community Flexa says it allows you to spend your crypto at a variety of merchants like Starbucks and Chipotle. Except that it doesn’t. Flexa sells your crypto for dollars, and then creates a QR code that the merchant’s point of sale system recognizes as a gift card. Flexa collects a fee from both you and the merchant. But Flexa only allows you to deposit crypto. You can’t withdraw it. I’ll say that again, you can’t withdraw your own crypto. And you can only spend a maximum of $750/week. Gee, that doesn’t smell fishy at all.

Which brings us to NTFs, the cousin of crypto. NTFs come in a bunch of different forms, but basically NTFs allow creator/owner of digital art control over their creations for essentially ever. For example, in the traditional art world, a creator gets paid when she sells an original and then only the owner gets paid for each subsequent sale. But with an NTF the artist might get a cut of each subsequent sale. There are variety of different ways an NTF could work.

But when you lift up the hood, in most cases an NTF is just an URL embedded in the block chain which points to a .jpeg hosted on good old Web 2.0. Your NTF will exist only if the website doesn’t go 404. And even if it doesn’t, anyone with the URL who wants your art can right click, save as. That’s not a lot of security.

And like many things crypto, an NTF actually makes the existing system worse. For example, actor/comedian Seth Green recently bought a Bored Ape Yacht Club NTF for $200,000, which he then developed as a character in an animated series. Problem is, the NTF got stolen and sold to somebody else. Unfortunately, the IP license goes to the owner. And the owner doesn’t seem interested in letting Green use it. Had Green simply gone old school and licensed the IP in the first place none of this would have happened. Instead he went all blockchain and disaster ensued.

https://hypebeast.com/2022/5/seth-greens-200k-bored-ape-yach…

Tl;DR: Crypto blows.

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And like many things crypto, an NTF actually makes the existing system worse. For example, actor/comedian Seth Green recently bought a Bored Ape Yacht Club NTF for $200,000, which he then developed as a character in an animated series. Problem is, the NTF got stolen and sold to somebody else. Unfortunately, the IP license goes to the owner. And the owner doesn’t seem interested in letting Green use it. Had Green simply gone old school and licensed the IP in the first place none of this would have happened. Instead he went all blockchain and disaster ensued.

I think this is probably wrong.

The purchase of an NFT doesn’t necessarily have to include any rights to the IP, any more than buying a copy of Harry Potter and the Sorcerer’s Stone gives me any ownership of the copyrights or IP of the book. I just buy a physical copy of the book. The only thing that necessarily has to come with buying an NFT is being assigned the “right” to be the only owner associated with the URL on a particular blockchain.

It appears that the BAYC corporate entity tried to set up a system where they would be transferring IP to the holder of the NFT…but their licensing agreement is apparently full of holes.

https://www.traverselegal.com/blog/bored-ape-crypto-punks/#:…).

So it’s not at all certain that Seth Green ever took ownership of this particular Bored Ape before it was stolen from him.

That said, stealing the Bored Ape from him wouldn’t have transferred ownership of the IP. The transfer of the IP along with the Bored Ape from BAYC to Green would have been effectuated by the license agreement, which is a contract between BAYC and Green. The person who stole the NFT isn’t a party to that contract. The person who ended up buying the NFT isn’t a party to that contract, either. So neither Green nor BAYC has agreed to transfer the IP to the thief or the new owner. Without privity of contract between the new owner and either Green or BAYC (whoever actually owned the IP before the theft), the new “owner” hasn’t purchased anything but the NFT.

TL;DR - don’t buy NFTs.

Albaby

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I don’t know if you were able to read the article (NYT is behind a paywall), but Krugman did acknowledge that crypto, especially stablecoins, could functionally operate as private currency. He argued that this is a worthless use, though, since crypto is inherently worse than the existing alternatives.

I didn’t read the Krugman piece, not because I can’t get to it, but because Krugman has nothing intelligent to say about crypto. He doesn’t have any understanding of the technology. The entire notion that now that Krugman expressed an opinion that cryptocurrency is “officially” a scam is absurd. I don’t know what Wendy is thinking.

As I said, the same argument could be made showing that the French franc is no better than the dollar for anything. Or the Euro. It’s not a real argument.

Regardless of what you may think of the various scammers, it’s all about control of the currency. The USD is what it is because the US is the biggest, baddest guy on the block. People who don’t want the US to control them can get a bit of independence by not using USD. Europe does that. Other countries do that. The cryptocurrency people are starting from the same place and with a similar sort of approach. Of course it’s a scam, but it’s our scam.

The reasons people want governments to not control the currency they use is obvious. Look at what’s happening in Russia now. And the reason that governments don’t want lots of of people looking elsewhere is also obvious. As for ordinary folks who just find money more convenient than barter, they don’t care if it’s a scam so long as it behaves like money over their lifetimes. And few of them could reasonably tell you what money is or what makes one kind better than another – it’s really just about not changing value suddenly and being accepted by the folks they want goods and services from.

Me, I hardly ever use USD currency for anything any more. Almost everything goes on a credit card. For all I know, they’re turning it into Bitcoin somewhere on the processing end. Seriously, nobody cares so long as it’s functioning reliably.

For decades (and now) running a bank has been a license to get rich. For much of that time, the important thing was to be trustworthy and do as little as possible. You’ll remember “banker’s hours”. It has always been a gentlemen’s scam, and so long as you didn’t rock the boat or steal too much you could do it forever. The crypto guys are paranoid revolutionaries. But if it’s a scam then it’s just a different flavor the same old thing.

Krugman certainly doesn’t like it and never will. He’s a part of the old guard. He doesn’t know anything about the new thing, and if it gets much of a foothold he’ll have no credibility at all. So, yeah, his opinion is slanted in his own interest, and it isn’t likely to change. So he’s not worth even a casual read in my opinion, at least not about cryptocurrency.

-IGU-

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Crypto and fiat are actually quite a bit different and different in important ways. As albaby points out, one of those important differences is that there are protections and backstops in place such that your money won’t vanish after you deposit it in the bank. No such protections exist for crypto.

The protections and backstops are not there to a great degree because we’re still in the Wild West stage of this. They’ll appear over time if cryptocurrency proves useful. Things evolve.

And yes, these stablecoins are an attempt to make cryptocurrency more attractive as a generally useful currency, but they’re not going to work. In the worst case, they’ll blow up the USD attempting to stay stable when they’re not. In part though, that’s because the USD is the same sort of scam, just older and wiser. It is all a balancing act backed by nothing beyond people’s trust in the system. All the machinery is just part of trying to maintain that trust.

And it’s clear that if most people understood that, they would run screaming to the hills, which is why we are all careful to make sure we don’t. That we’re dependent for civilization on a consensual illusion is on the one hand obvious, and on the other hand terrifying.

-IGU-

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Digital scarcity is a fabricated oxymoron.

No, it isn’t. Digital scarcity is based on a brilliant invention (the blockchain), which itself is based on one-way cryptographic functions. I won’t argue that any of the uses it’s being put to are all that wonderful at the moment. But it’s really no different than preventing counterfeiting to prevent fraud.

For decades computer scientists and hardware designers have toiled over communications and computation technology to make sure that perfect copies could be made and verified and made again with no errors. Now we want to undo that and call it more valuable?

Without the cryptographic technology we use in every communication over the internet, we couldn’t have our modern world at all. We would have to go back to what we were doing in the 1970’s, certainly for all monetary transactions.

You wouldn’t like it.

-IGU-

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Minds are made up. Okay.