The owners of cryptocurrencies have had a rough few weeks. Bitcoin and Ethereum have lost more than half their value since their peak last November, a slide that has outpaced the broader markets’ decline. Earlier this month, a so-called algorithmic stablecoin, Terra, which supposedly had a fixed value of $1, started plummeting in value. That’s because it was backed by another crypto token, Luna, which was also tanking. To try to pump Terra back up, its creators sold a bunch of bitcoins, which in turn caused Bitcoin’s price to crash as well.
The whole thing looked like precisely the kind of crisis in confidence that could cause a crypto bubble to burst. And yet by historical standards, the prices of Bitcoin, Ethereum, and many other tokens are still sky-high. The crypto market has crashed twice in the past, only to return bigger and richer than before. Which raises the question: Is this time any different?
David Gerard is a vocal crypto critic and the author of Attack of the 50-Foot Blockchain. He spoke to WIRED about why he thinks crypto is all a scam—and why that’s actually the key to its longevity. This interview has been lightly edited for space and clarity.
WIRED: A lot of people in my Twitter bubble are gloating that crypto's finally dead—that this is, as I call it, the cryptocalypse. It reminds me of how, during the Trump presidency, every time Trump would have a new scandal, some people would be like, "All right, this time he's finally going down."
David Gerard: It's a bit like that. I think that if the market is not regulated much harder than it is—and it needs to be—it'll take about three to five years for a new, fresh crop of suckers to grow back. Because some people really want a get-rich-quick scheme. Frankly, if you just advertise, "I've got a scheme where you can get rich for free," you'll have people queuing up to give you money. They'll tell their friends to give you money.
I sometimes say that the best book on Bitcoin is Extraordinary Popular Delusions by Charles Mackay. That was published in 1841. It’s the book that popularized the Dutch tulip bubble and talked about the South Sea Bubble and various other enthusiasms over the years, various asset bubbles and scams and schemes.
You can totally make a fortune in crypto. I would never say you can't, but you are betting that you are going to be a better shark than all the sharks that built the shark pool.
The Nasdaq, which is the heavily tech stock index, is down 28 percent since mid-November. And up until the Luna thing happened, Bitcoin was down 33 percent over the same time period, so a bit more than the Nasdaq, but not dramatically so. But now Bitcoin is down 47 percent. So it looks like it's both following the market and got a pretty significant extra kick down the slippery slope by the Luna meltdown.
People have forgotten what unregulated markets are like. We've had 90 years of the SEC and reasonably regulated, well-behaved stock markets. And it turned out really well. People can trade in some sort of confidence that there are rules and so on. And people talk about crypto and Bitcoin and so forth as if this is a well-behaved, high-volume market where someone checking that nobody is just lying about everything. And none of that's the case.
A pile of crypto is not a pile of capital that you can develop or invest or whatever. It's just some stuff you can buy, sell, or hold. And early investors can only pay with money from later investors. There is no way “we’re all gonna make it” because it's a game of winners and losers, and the winners are the big guys, and the losers are the moms and dads and grandmothers and the young people who are desperate in their economic situation and looking for “one weird trick” they can have to win.
This is all assuming there is no real-world use case for crypto stuff.
I won't say that philosophically it's impossible, but I will say that it hasn't shown any sign of it in the 11 years that you've been able to exchange bitcoins for actual money, and all of Bitcoin's various descendants. So I would say that the burden of proof is strictly on the advocates to come up with something.
I could try to make the argument for it.
But you would have to use the words future, could, possibly, hypothetically, may, might, and all these other words that mean “don’t.” All these other words mean, "It absolutely doesn't do any of these things. I'm just trying to get you to think as though it does, even though it doesn't."
Well, the argument would be that, as real-world use cases for blockchains catch on, driven by issuing crypto tokens that have actual economic value within real networks, the tokens won't all be magic beans.
All of these things where “we've got a use case for blockchain” it's this strange function that we could totally do without blockchain. We've bolted a blockchain on for implausible reasons, and by the way, there's a token that you can totally make money from in it. There were coins for journalism on this basis, coins to solve the banana market for this basis, coins to solve dentistry on this basis.
The thing that makes this such a puzzle is that everything you’re saying has been out there for years, yet the party continues. There's a concept in economics, the efficient-market hypothesis, which says that asset prices should generally reflect all the available information—
The strong version of the efficient-market hypothesis is hilariously false, and crypto proves it.
I agree with you, but the point I was going to make was that, for example, a couple of weeks ago, Sam Bankman-Fried, who's the CEO of FTX, which is one of the larger crypto exchanges, admitted that a lot of crypto products are Ponzi schemes. And yet so many people still have not fled the market. I guess what I'm wondering is, if this is not the cryptocalypse—if this is just another crypto winter that will eventually give way to further crypto springs and summers—then what would need to happen for crypto to permanently crash?
In 2008, the backing reserve was basically houses. In cryptocurrency, I'm quite serious about this, the backing reserve is gullibility.
It sounds like you’re saying, one, crypto is all nonsense, but, two, the nonsense will continue indefinitely, because as long as you can invent money out of thin air, you can find a sucker to buy it. Unless governments step in to say you can’t do certain things anymore.
Yes. The good news is, there's regulation coming. Treasury is looking at this stuff very closely because they basically have to make sure that these crypto bozos cannot screw up the actual economy where people live. And they would absolutely screw it up, because they're idiots. And they got a taste of that in 2019 when Facebook did its Libra cryptocurrency, or tried to, and every regulator, central bank, and finance ministry in the world said, "No, you are bloody not." Because Facebook didn't know what they were doing and they were really arrogant about not caring that they didn't know what they were doing. So basically, about a month later, the entire US government, Democrats and Republicans were united in this, squashed it like a bug.
So on the regulation question, are we talking about something like, if you have a stablecoin, you actually have to be audited and prove that you really have a dollar for every one of these stablecoins that you say is backed by a dollar?
That sort of proposal, yeah. There's various versions of this, like requiring that stablecoins be issued by actual banks that are highly regulated and so forth. There have been proposed laws to this effect. None have passed, but these ideas are very much in the air.
The thing is that the regulators are reluctant to move too fast, and also they have restricted enforcement budgets. But I'll tell you who really wants to regulate crypto: the money laundering cops. FinCEN are absolutely humorless cops who don't care if they crush your business. And internationally, the FATF, who set rules that regulators are advised to follow if they want their country to be allowed to do business with anyone else. Those guys have put in a bunch of rules that came in 2021 about making crypto transactions more traceable. I think we're going to end up with some sort of two-speed crypto market. You’ll have the entities that are known exchangers where people are traceable, and changing it back and forth to actual money is relatively easy, and then there will be another market which runs high on crack and is just incredibly unregulated and has a much harder time getting to the precious US dollars.
Most people don't own any crypto, and yet you have Fidelity offering Bitcoin in 401(k)s, you have Wall Street institutions investing increasingly in crypto. How much could a crypto collapse affect the broader economy?
The main thing you have to worry about is that these bozos really want to get their tendrils into the world of real money. I think for a lot of them, that's the endgame: get it into people's retirement accounts. Now, the Department of Labor actually issued a notification in March warning financial advisers not to tell retirees to put their 401(k) into crypto. And Fidelity went and offered this product anyway. They really, really want to get into important products, because that way, when it collapses, they're looking to the government becoming the bag-holder of last resort. And this is something to be fought against strenuously. It hasn't happened yet, but we need to fear it.
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