The carnage in the crypto market is nothing new. Over the past decade, although the value of cryptocurrencies such as bitcoin and ether has increased dramatically, accidents have been a common feature of the market. (There is a reason why HODL— “Hold on for dear life” —is a mantra among cryptographic believers.) But even by cryptographic standards, the destruction of value in the last six months, and in particular in recent weeks, has been staggering. .
Since November, something like $ 1.5 trillion in cryptocurrency has been erased. Bitcoin and Ethereum, the market leaders, fell 60 percent from their peaks. And most surprisingly, the so-called stablecoin Terra and its sister listing, Luna, which together were valued at about $ 60 billion six weeks ago, have imploded in a matter of days and are now worthless.
Of course, this huge sale raises a natural question: what happened? No doubt you can point out the possible culprits. Inflation and interest rates are rising, although cryptocurrencies are supposed to be a hedge against inflation and were indifferent to what is happening in the “fiat” financial world. The shares are being sold, although one of the big crypto outlets was that it was supposed to have no correlation with other assets. But really, there’s a much simpler explanation: People’s faith in cryptography has faltered. And faith, not the basics, is what most of the value of cryptography depends on.
Crypto, after all, is different from assets like farmland, stocks or even real estate. When investors try to figure out how much to pay for such assets, they are interested, at least in theory, in their intrinsic value. If you are going to buy farmland, you want to know how much money you will get from the crops you can grow on that land. If you’re going to buy an apartment building, you want to know what rent you’ll be able to get from your tenants over the next 30 years (or whatever your time horizon is). And if you are buying shares in a company, you want to know how much money you will generate in the future, along with the value of the assets you currently own.
Now, intrinsic value calculations are always estimates, and they are also always inaccurate, because there is no way to perfectly predict the future. But the crucial idea is that assets have a value that is independent of what other people will pay for them. If you owned all of Apple right now, you would get at least $ 100 billion in profits, which is real cash that would go into your bank account in the first year. And assuming you let Tim Cook do his thing, you could count on that, and probably more, every year in the foreseeable future. So that provides a baseline on what Apple is worth.
However, cryptographic valuations are generally based on a different principle: intrinsic value does not matter. The value of an asset does not depend on its real-world use value or its ability to generate cash in the future. Instead, the value of an asset depends on what people think is worth it. This is a kind of postmodern view: there is no “real” value, only value narratives that we build collectively and choose to believe or not. As crypto and NFT (non-fungible token) investor Nick Tomaino said last fall: “If the collective group of people on the Internet believes that something has value, it has value. We are in a world where belief equals value.”
There are, of course, other markets where value depends on belief, including, of course, gold, fine arts, and collectibles. But gold has a thousand-year history of people choosing to accept it as money; and the visual arts are surrounded by ideas of rarity and aura of an original work. What is striking about the crypto market is that it has used this same logic to conjure up more than $ 1 trillion worth of nothing (or, more accurately, out of code) in less than a decade.
The purest examples of this phenomenon are memecoins, the most famous of which is Dogecoin. Dogecoin was created in 2013, literally as a joke. It has no use value in the real world; no one needs Dogecoin to buy or sell anything. It’s not even scarce because, unlike bitcoin, which has a finite supply of currencies that will always be available and that becomes harder to produce over time, Dogecoins are very easy to “undermine”. However, at its peak in April 2021, Dogecoin was “worth” a supposed $ 50 billion, and even today, after its value dropped nearly 90 percent, it’s still worth about $ 11 billion. Why? The answer may be as silly as the fact that Elon Musk mentions Dogecoin now tweetcalling it “people’s cryptography” and made everyone excited.
Or take Earth and Moon. They are just over three years old and by 2021 they were worth less than a billion dollars together. Then, within a year or so, they were suddenly valued at $ 60 billion. Only from August 2021 to March this year did their combined value more than triple. At that moment, Earth and Moon seemed the next big things in crypto. Do Kwon, the founder of Terra, began to talk about being a visionary. The possessors of the Moon were called Lunatic. Terra paid nearly $ 40 million to put his name on the entire Washington Nationals stadium.
This was not because something important on Earth as an asset had changed. People did not start using their coins in large quantities to buy things. Terra’s underlying business has not improved dramatically. Above all, what has changed is that in March 2021, Terra launched an app called Anchor, which started offering 20 percent interest on deposits, which caused people to buy Terra and then deposit it and get 20 percent. . That hooked many new investors, and in the months that followed, people began to think about the company’s narrative that it had solved one of the most complicated issues in cryptography: how to create currencies that were stable enough to use as currency without having a mountain of financial reserves to support its value. (Earth, some experts believe, has found the “holy grail” of cryptocurrency.) So, although some have warned that the way Earth is set up means that it will eventually face the equivalent of a bank run fact, as it collapsed), the holders of cryptography collectively decided that Earth and Moon were really valuable, and so they were. Until a few weeks ago, when suddenly they weren’t.
It’s that “suddenly” that makes investing in cryptography such a dizzying experience. In a world where belief determines value, you can never be sure that you are on solid ground. There are cryptocurrencies – ether, the most obvious – that have real use value in the blockchain world. And without a doubt, bitcoin, in addition to its usefulness in the purchase of drugs and other illicit items, has maintained its value long enough so that its status as “digital gold” is not seriously threatened. But even these two currencies can see their values fluctuate wildly based on little more than the inconstancy of investors.
In this sense, it can be said that cryptography embodies the description of Karl Marx and Friedrich Engels on the effect of capitalism on social relations: “Everything that is solid melts in the air.” No wonder, then, that cryptographers always urge each other to believe in increasing their collective trust and identify as HODLers and give laser eyes to their Twitter photos. When the value of cryptography is the product of the collective will of investors, then it is essential to try to keep that will intact.
That’s why the most interesting question about this cryptographic crash isn’t really why it happened, but rather it will lead to a real crisis of confidence. The market has often recovered from accidents in the past, and it won’t be surprising to see it do it again. Belief, after all, can return as quickly as part. But the latest cryptocurrency boom has been driven by new investors in this market: ordinary retail investors as well as institutional investors, most of whom have no philosophical or ideological commitment to cryptography, nor desire for HODL when things are falling apart.
Even for true believers, the removal of Earth and Moon was a powerful reminder that investing in most cryptocurrencies is the financial equivalent of Wile E. Coyote running on air: it works great until people decide to look down. And once they do, there’s a lot left to fall for.