Headline stories about crypto delight in saying that it hasn’t delivered because it hasn’t made everyone rich.
According to our friends, the Internet, and posters on the Underground, that was the point of it. But we’re not all rich. So, it’s a bust. We were wrong.
This is the popular narrative: the crypto winter. But where do these narratives come from?
One of the markers of crypto’s success is that no one is uninterested. The community has long been interested in the same way as early adopters of any new product. Despite regular warnings, retail investors (34 million US adults) own crypto. Bankers pushed back against the “end of banks” narrative. Regulators pushed back against the idea that regulations are made obsolete by libertarianism.
Economists didn’t see any need to go back to the drawing board. Journalists had an abundance of stories: sometimes an unexpected person hits the jackpot; sometimes a version of the opposite; and then there are the criminals, hackers, booms, and busts.
We want our narratives like we want our politicians. The new ones should be the opposite of the old ones. The winter narrative follows the crypto boom.
People who missed that boom would be proved right by a season of frosts and storms, rather than by joining the party late with an affordable dollar-cost averaging strategy. Everyone was on one side or the other. This explains the fact that so much of the attention paid to bitcoin is in its price. The price of Bitcoin is like the ball in an under-11 football match. Everyone runs after the ball even though there is space all over the pitch.
Unfortunately, a focus on price drowns out information about value.
It’s notable that there are alternative narratives, but they don’t yet cut through. Retail banks have so far maintained a policy that they will not touch crypto and will not bank a customer that does. But some banks are now reconsidering their position because of retail customer demand, and thanks to corporate customers’ interest in accepting crypto payments. But this potential second-thinking is also because NFT and metaverse projects are becoming so prevalent among consumer-facing corporates of all types, that a bank refusing to deal with them risks losing longstanding corporate relationships.
This shapeshifting is helped by news of the Bank of England’s CBDC project and the World Bank’s digital bond issuance (that is, a bond issued on a blockchain), among other similar examples. If it’s good enough for them, why shouldn’t it be good enough for commercial banks?
Alongside this, the years of technical prototypying are starting to bear results. As the Wall Street Journal put it (showing a bit of confusion about which narrative it is now backing): “As Crypto Slumps, Goldman Sachs Aims for a Wall Street Built on Blockchain.”
In July, Bank of America reported that crypto has value. The report said: “We disagree that blockchains and the applications that run on top of them have no intrinsic value – a comment we hear regularly.”
Pantera Capital, an American hedge fund that specialises in cryptocurrencies, published a July newsletter headed: “DeFi Worked Great.” Their point was that firms that failed when their strategies did not survive the leverage and contagion around their trades were, in essence, centralised, traditional banking business models. They traded crypto as a bank deals in securities. DeFi firms survived because their smart contracts liquidated bad positions beyond human interference. A market crash sank firms that had a TradFi business model but didn’t sink firms that did the new thing in the new way.
There are now plenty of legs for a positive case for crypto to stand on. Yet the narrative remains that crypto is unsound.
Value and price are not the same thing. Value is obviously a difficult topic if an investment bank has to issue a report saying that crypto is not wholly valueless. In contrast, price is easy because it is quoted on hundreds of venues that are open to everybody. But price is unreliable because of the disorderliness of the market. This is not just a point about theories of price, pitting rational markets against behavioural economics. The problem is magnified in crypto because of the lack of fit with traditional metrics anchored in the bond market, the relative lack of history in the market, and the range of traders. Where institutions, hedge funds, family offices, retail investors, meme stock, crowds, whales, teenagers on apps, miners and more all trade the same asset, unpredictability and volatility are inevitable.
That is most likely a feature not a bug. But there is a related point that I would like to see addressed by this technology. This is the problem of bad information. Bad information includes misinformation, disinformation, information asymmetry, negative information (gaps) and contingent information (things that are true or false dependent on whether one thing or another happens next). These are all different. For example, misinformation is false; disinformation is deliberately false. Native crypto assets have a misinformation and a disinformation problem. That is well known. But it is a subset of the same problems that exist on the Internet.
If crypto can address misinformation problems, then it has value for itself but also for the future of the Internet, Web3 or otherwise.
The usual objection to crypto – that it mixes up money and technology in an unholy way – is an advantage in this case. Having money at stake means that there is a cost to having bad information. The development of oracles hinges on their information quality. Prediction markets allow more information to be collated and tested. Be your own bank means you are responsible for figuring out trusted information sources or losing your shirt.
Crypto has the technology. Information is traceable to its source. The incentives, your dog in the fight, are in place – and trading history is a record of your trustworthiness.
If crypto can attack the problem of bad information overwhelming the Internet, it will have a bigger impact outside finance than inside it.
Charles Kerrigan is a FinTech Partner with law firm CMS