Crypto criticism: "The Rules of the Alternate Reality Game that is Crypto"

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YRT70
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Crypto criticism: "The Rules of the Alternate Reality Game that is Crypto"

Post by YRT70 »

I thought this author makes some pretty good arguments against crypto and DeFi. I'm curious what other people think of it, including Prahasaurus and others.

The full article makes 16 points. I've selected 4 here:
The Rules of the Alternate Reality Game that is Crypto
  • The total crypto dollar market capitalization or the market capitalization of any individual token is not indicative of or even related to the actual real money invested. The market capitalization is derived from trading activity, including a significant amount of wash trading, that only involves a fraction of the total number of tokens outstanding and establishes a price per token based on demand and supply that then is applied to all the tokens outstanding to derive a theoretical total market capitalization.
  • The total amount of real money in the crypto game cannot exceed the total money paid for tokens by all the participants. It is a zero sum system. Anything else would be counterfeiting real money. This in spite of the perception of the crypto ‘investors’ that their cumulative wealth gains equal the theoretical market capitalization.
  • DeFi, or distributed finance, is an activity equal to the creation of mods for a game such as Minecraft. DeFi adds capabilities to the game, it replicates mechanisms and capabilities found in the real world, it innovates compared to the real financial industry, but it adds no value to the real world and it only exists and survives inside the game; unless of course you assume the game becomes the real world.
  • The most critical flaw of DeFi as it relates to real world finance is the fact that applications depend on using a commodity inside a game (called a ‘currency’) that has a floating exchange rate against real money. That not only opens the door to boundless speculation, but it introduces an inherent element of volatility and risk in each and every application that uses a crypto platform to transact business with anything grounded in the real world. Therefore, DeFi in its current form will fail for real world applications. It is not a new financial system but mods that make gameplay more sophisticated for the most compelling alternate reality game ever invented.
Source.
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nisiprius
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Re: Crypto criticism: "The Rules of the Alternate Reality Game that is Crypto"

Post by nisiprius »

I'm a crypto skeptic, but I didn't find this all that convincing.

The first thing you have to deal with is that most of us believe that real dollar value actually can be created out of thin air out of nothing but thoughts and emotions. I'm thinking of intellectual property here.

When a street musician performs and people toss money into a guitar case, that looks like a zero sum game--the money in the guitar case comes out of the wallets of the audience. Would you say that it is impossible for the music industry to make money in the long run because "The total amount of real money in the music game cannot exceed the total money paid by all the participants?" If the argument is that crypto is a zero sum game, then how do you tell which human financial activities are and are not zero sum games? It's not as simple as asking for the shipping weight of the boxes full of music on the loading platform.

Perhaps the argument against crypto is that it cannot be very profitable because it isn't very enjoyable entertainment and doesn't enrich the human spirit. That makes a certain amount of sense to me, but saying "Katy Perry can't really be profitable because her work doesn't enrich my spirit" doesn't seem quite right...

The second thing to come to grips with is that in casino gambling, the games themselves are zero-sum (for the player +casino system--negative for the players, of course). Yet the casino industry as a whole is not. I think legalized casino gambling is a bad thing and I wish it had stayed in Nevada, but I don't see it as financially unreal or likely to collapse any time soon.

And the third thing is that if you look at r/wallstreetbets, I don't think anyone there has the illusion the stock market, the way they play it, is anything but a zero-sum game... if they even think about it at all. What many people believe is that even in a zero-sum game, they can play rock-paper-scissors with the rest of the market and come out ahead. That is, by sensing something about the dynamics or mood of the market, they can outpsych others and be on the winning side rather than the losing side.

The narrative--probably false and it seems so long ago, but, anyway, the narrative--for GME was that the internet hive-mind was taking money away from wicked investors with naked short positions in GME. If you had said to them "don't you understand that this is a zero-sum game, your money is not coming from the profitable business activities of GME but out of the pockets of other investors," they would have said "Of course we know that, that's why we're doing it!"

The statements that "The most significant inflow into all of crypto originates from Tether" and that Tether is "simple fraud" are intriguing--that is, that he's identified the source of what is pumping up crypto and the thing that will eventually lead to its collapse--but I don't know how to test those statements and I feel reasonably sure the crypto fans will dispute them.
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Re: Crypto criticism: "The Rules of the Alternate Reality Game that is Crypto"

Post by Valuethinker »

YRT70 wrote: Tue May 11, 2021 6:24 am I thought this author makes some pretty good arguments against crypto and DeFi. I'm curious what other people think of it, including Prahasaurus and others.

The full article makes 16 points. I've selected 4 here:
The Rules of the Alternate Reality Game that is Crypto
  • The total crypto dollar market capitalization or the market capitalization of any individual token is not indicative of or even related to the actual real money invested. The market capitalization is derived from trading activity, including a significant amount of wash trading, that only involves a fraction of the total number of tokens outstanding and establishes a price per token based on demand and supply that then is applied to all the tokens outstanding to derive a theoretical total market capitalization.
  • The total amount of real money in the crypto game cannot exceed the total money paid for tokens by all the participants. It is a zero sum system. Anything else would be counterfeiting real money. This in spite of the perception of the crypto ‘investors’ that their cumulative wealth gains equal the theoretical market capitalization.
  • DeFi, or distributed finance, is an activity equal to the creation of mods for a game such as Minecraft. DeFi adds capabilities to the game, it replicates mechanisms and capabilities found in the real world, it innovates compared to the real financial industry, but it adds no value to the real world and it only exists and survives inside the game; unless of course you assume the game becomes the real world.
  • The most critical flaw of DeFi as it relates to real world finance is the fact that applications depend on using a commodity inside a game (called a ‘currency’) that has a floating exchange rate against real money. That not only opens the door to boundless speculation, but it introduces an inherent element of volatility and risk in each and every application that uses a crypto platform to transact business with anything grounded in the real world. Therefore, DeFi in its current form will fail for real world applications. It is not a new financial system but mods that make gameplay more sophisticated for the most compelling alternate reality game ever invented.
Source.
I am not sure about these specific criticisms -- they seem trivially obvious (which probably means I don't understand them, fully).

The derivation of a "market cap" for crypto currencies is fairly meaningless. We don't talk about a "market cap" for US dollars, or Canadian dollars, do we?

One is right to be sceptical of what is going on. The degree of hype, the fervency of the believers, the involvement of "investors" with very little knowledge of finance or previous experience talking about how much money they have made on crypto. It all feels very 2000 dot comm-ish, but it also all feels very Canadian junior resource stocks in the late 70s & early 80s, or commodities trading by individuals in the 70s, or Australian mining boom in the early 80s or US oil boom in the 70s ...

Of course, the internet was quite real in 2000, and turned out to be even more real than was expected by 2016, say -- the prototype of things which became the iPhone was barely visible in 2000. It was the arrival of the smartphone which transformed (again) what the internet was (that and the dominance of social media platforms, with which we are still wrestling as a society).

Shrug. If you are going to get on a wave, get on early -- I wasn't prepared to do that at the time. This one feels well past that moment.
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Re: Crypto criticism: "The Rules of the Alternate Reality Game that is Crypto"

Post by dt123 »

Excellent article. Though posts here that start out as anything negative about crypto rarely get much traction, seemingly because the pro-crypto people want it to disappear from the headlines. But the article you linked to is a good analysis that's going to be hard to refute. I think his point #16 is most interesting, that (potential) adoption of blockchain by the major banks/governments is very different from the adoption of crypto as it currently stands.
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Re: Crypto criticism: "The Rules of the Alternate Reality Game that is Crypto"

Post by Prahasaurus »

YRT70 wrote: Tue May 11, 2021 6:24 am I thought this author makes some pretty good arguments against crypto and DeFi. I'm curious what other people think of it, including Prahasaurus and others.

The full article makes 16 points. I've selected 4 here:
The Rules of the Alternate Reality Game that is Crypto
  • The total crypto dollar market capitalization or the market capitalization of any individual token is not indicative of or even related to the actual real money invested. The market capitalization is derived from trading activity, including a significant amount of wash trading, that only involves a fraction of the total number of tokens outstanding and establishes a price per token based on demand and supply that then is applied to all the tokens outstanding to derive a theoretical total market capitalization.
  • The total amount of real money in the crypto game cannot exceed the total money paid for tokens by all the participants. It is a zero sum system. Anything else would be counterfeiting real money. This in spite of the perception of the crypto ‘investors’ that their cumulative wealth gains equal the theoretical market capitalization.
  • DeFi, or distributed finance, is an activity equal to the creation of mods for a game such as Minecraft. DeFi adds capabilities to the game, it replicates mechanisms and capabilities found in the real world, it innovates compared to the real financial industry, but it adds no value to the real world and it only exists and survives inside the game; unless of course you assume the game becomes the real world.
  • The most critical flaw of DeFi as it relates to real world finance is the fact that applications depend on using a commodity inside a game (called a ‘currency’) that has a floating exchange rate against real money. That not only opens the door to boundless speculation, but it introduces an inherent element of volatility and risk in each and every application that uses a crypto platform to transact business with anything grounded in the real world. Therefore, DeFi in its current form will fail for real world applications. It is not a new financial system but mods that make gameplay more sophisticated for the most compelling alternate reality game ever invented.
Source.
"DeFi, or distributed finance...." Nice try, thanks for playing.

I would say just about anything you find on LinkedIn is going to be of exceptionally low quality, and this example fails to challenge that assumption.
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Re: Crypto criticism: "The Rules of the Alternate Reality Game that is Crypto"

Post by Prahasaurus »

dt123 wrote: Tue May 11, 2021 7:42 am Excellent article. Though posts here that start out as anything negative about crypto rarely get much traction, seemingly because the pro-crypto people want it to disappear from the headlines. But the article you linked to is a good analysis that's going to be hard to refute. I think his point #16 is most interesting, that (potential) adoption of blockchain by the major banks/governments is very different from the adoption of crypto as it currently stands.
Well, I agree with you it's hard to refute, but not for the reasons you think.
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Re: Crypto criticism: "The Rules of the Alternate Reality Game that is Crypto"

Post by YRT70 »

Prahasaurus wrote: Tue May 11, 2021 7:58 am "DeFi, or distributed finance...." Nice try, thanks for playing.
Looks like an error indeed but I don't think it would be justified to therefor dismiss his arguments.

I would rather see a criticism of what is actually saying, like Nisiprius did above.
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Re: Crypto criticism: "The Rules of the Alternate Reality Game that is Crypto"

Post by txhill »

I think the funny thing about this article is it perfectly describes the dollar and all activities performed with a dollar, whether in the stock market or elsewhere. He says nothing that happens in crypto is linked to "real money," but I don't think he has done a critical analysis of what "real money" is or he'd see the hypocrisy here.

I'll also echo Prahasaurus's point about LinkedIn. I've heard it described as a place where people of mediocre talent cosplay as the people they want to be. I'm practically forced to be on LinkedIn because of my job, but just a glance at the most active people on that platform lines up pretty well with that assessment.
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Re: Crypto criticism: "The Rules of the Alternate Reality Game that is Crypto"

Post by Prahasaurus »

YRT70 wrote: Tue May 11, 2021 8:16 am
Prahasaurus wrote: Tue May 11, 2021 7:58 am "DeFi, or distributed finance...." Nice try, thanks for playing.
Looks like an error indeed but I don't think it would be justified to therefor dismiss his arguments.

I would rather see a criticism of what is actually saying, like Nisiprius did above.
Fair, and I don't like to be flippant. But I found the article of incredibly low quality, really not worth the time to debunk. For example:
The most critical flaw of DeFi as it relates to real world finance is the fact that applications depend on using a commodity inside a game (called a ‘currency’) that has a floating exchange rate against real money. That not only opens the door to boundless speculation, but it introduces an inherent element of volatility and risk in each and every application that uses a crypto platform to transact business with anything grounded in the real world.
That is atrocious prose. And it seems written by someone who has a very superficial knowledge of crypto, but wants to post on LinkedIn about crypto (using convoluted sentence structure) to impress his connections. Perhaps I'm just biased, because I think LinkedIn is a garbage site of little to no value. But regardless, I found his arguments weak and confusing.
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Re: Crypto criticism: "The Rules of the Alternate Reality Game that is Crypto"

Post by Gadget »

nisiprius wrote: Tue May 11, 2021 6:52 am
The statements that "The most significant inflow into all of crypto originates from Tether" and that Tether is "simple fraud" are intriguing--that is, that he's identified the source of what is pumping up crypto and the thing that will eventually lead to its collapse--but I don't know how to test those statements and I feel reasonably sure the crypto fans will dispute them.
The Tether thing used to be my biggest turnoff from bitcoin and crypto in general. It's been around for years. It likely kept me from investing in crypto much earlier.

There have been recent updates that seem to imply this fear is done with though. The NY attorney general recently settled with whoever owns tether. Net result was a $18.5 million fine.

After the NYAG settlement with tether happened, Coinbase started allowing tether to be traded. Since Coinbase is a public company with the SEC likely closely watching, you'd think they wouldn't do that if they weren't sure it was mostly legit.

That said, I'm still not ever going to use tether over USDC in the crypto stablecoin world.
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Re: Crypto criticism: "The Rules of the Alternate Reality Game that is Crypto"

Post by decapod10 »

A couple of thoughts: I feel that a lot of these types of arguments can be unfair because they lump all crypto together, and then they will just choose to attack whichever specific coin fits their argument, and just assumes it can be generalized to the entire ecosystem as a whole.

Also, I feel like the author needs to prove his points rather then we need to refute a lot of these arguments.

That being said,

The total crypto dollar market capitalization or the market capitalization of any individual token is not indicative of or even related to the actual real money invested. The market capitalization is derived from trading activity, including a significant amount of wash trading, that only involves a fraction of the total number of tokens outstanding and establishes a price per token based on demand and supply that then is applied to all the tokens outstanding to derive a theoretical total market capitalization.

He seems to be making several different arguments here, but maybe I'm misunderstanding. The Bitcoin 24 hour volume was $6.3 trillion dollars, he is saying that this is due to wash trading? Like 2 guys with 1 trillion dollars are just selling each other Bitcoin back and forth? There is certainly manipulation and washtrading in small coins. I can point to actual events like this. But I have a hard time believing ETH and BTC is just a bunch of wash traders, but if it is, he should try to prove it. After all, blockchain is completely public and transparent, you can look at every single transaction ever made on blockchain from the comfort of your own home. Otherwise, the argument is "the value of crypto is determined by what someone pays for it", to which I would say I agree, I guess?

The total amount of real money in the crypto game cannot exceed the total money paid for tokens by all the participants. It is a zero sum system. Anything else would be counterfeiting real money. This in spite of the perception of the crypto ‘investors’ that their cumulative wealth gains equal the theoretical market capitalization.

Why is this true?

DeFi, or distributed finance, is an activity equal to the creation of mods for a game such as Minecraft. DeFi adds capabilities to the game, it replicates mechanisms and capabilities found in the real world, it innovates compared to the real financial industry, but it adds no value to the real world and it only exists and survives inside the game; unless of course you assume the game becomes the real world.

I think this argument has some merit, if it's saying what I think he is. Basically, the link between DeFi and traditional finance is relatively tenous at this time, so if you believe DeFi will continue to grow, then you believe that either 1) The link between DeFi and traditional finance will be stronger, e.g. companies will issue stocks and bonds on blockchain 2) Cryptocurrency itself will become mainstream enough where crypto becomes incorporated into "real finance" (though does not necessarily have to completely replace it). I think that is a reasonable position, but I don't see how this is particularly insightful. I think pretty much all DeFi proponents would say yes, one or both of these endpoints is the vision of DeFi, though of course we may be surprised by some other outcome that we are not expecting.

The crypto ecosystem itself does not create any incremental intrinsic value as measured in real money. To illustrate this let’s look at a crypto company. Its operations are financed by its revenue model, like any other company offering a commercial product. That means the company is extracting real money from the crypto ecosystem, its customers. As it grows and becomes successful its share price rises. That increase in company value does not flow back into the crypto ecosystem, but accrues to the company’s shareholders.

This was not included in your 4 points, but I think it's an important thing to discuss. Just because the value of something cannot be measured by the same metrics as a traditional company, does not mean that it does not have value or does not create value. So I think it's important to consider where value comes from, not just "well it doesn't fit my model, so it is worthless". Companies produce value because they produce a good or provide a service that a customer is willing to pay for, because the customer finds that service valuable. That is where value comes from.

Note that Ethereum and other blockchains are providing a service. The people who are running the Ethereum Network are providing the use of their computers, the energy that they use to run those computers, the storage of the blockchain information, and the Ethereum Network Virtual Machine software to process your transactions and record your transactions on the blockchain. In exchange, they get some Ether as payment. They do not accept any other reimbursement in any other form, including USD/fiat. As long as people find this service valuable, then the Ether must have value as well, because as of today, I can exchange my Ether for a service that the public is willing to pay for.

I think the thing that can be reasonably disputed is how do we know what Ether's intrinsic value is right now? How do we know it's not overpriced? How do we know people will continue to find it useful in the future? I think those are reasonable questions, but I would say stocks face the same questions, no matter what sort of valuation metric you use. If you really believe that valuation metrics are important because they can help us decide which stocks are better investments, isn't that a bit anti-Boglehead as well?

Ultimately, I agree that crypto is extremely risky, and I don't routinely recommend investing in it, but I just find the arguments that people use to argue against it to be very weak. There are many, many good reasons that I could come up with to argue why investing in crypto could be bad, but this guy's arguments are not among them.

For example:

1) The advantages of public blockchain do not outweigh the benefits of private databases, and therefore people will eventually discard public blockchain when they find that it is not a useful technology
(examples: privacy concerns, less efficient than database, transactions not reversible when errors occur, etc)

2) Even if blockchain becomes ubiquitous, you have no idea if you are overpaying now

3) Even if blockchain becomes ubiquitous, you don't know which crypto will ultimately becomes the most valuable

4) Government regulations could squash the value of a specific crypto, or the crypto space as a whole

5) Transaction costs are too high, especially for small transactions

6) Taxes on crypto transactions are too onerus, which prevents mainstream adoption

7) Crypto is very complicated to use, which will prevent mainstream adoption

etc.
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Re: Crypto criticism: "The Rules of the Alternate Reality Game that is Crypto"

Post by YRT70 »

decapod10 wrote: Tue May 11, 2021 2:58 pm ...
Thanks for the thoughtful reply decapod. I agree his arguments aren't as strong as I originally thought. It looks as if he's throwing spaghetti against the wall hoping that something will stick.
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Re: Crypto criticism: "The Rules of the Alternate Reality Game that is Crypto"

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