[Recommend my two-volume book for more reading]:
BIT & COIN: Merging Digitality and Physicality
The crypto industry is largely an empty bubble that will burst.
Economic and financial bubbles are interesting phenomena to study. The ‘physics’ of bubbles is quite universal. The crypto bubble may seem unique, but it obeys the same law of bubbles.
The trans-bubbles
The most spectacular bubbles take advantage of both an expanding force and a squeezing force. The former attracts participants by taking advantage of people’s nearsightedness and greed, but the latter forces out dissenters and opponents.
This type of bubble can be called trans-bubble, because it is a systemic effect of two types of force operating from opposite sides.
The expanding force is usually well understood, but the squeezing force is not.
In order for the squeezing to become effective, participants are subject to a negative environment that has a large effect on their survival. The effect can be multiple factors, including financial, economic, social, and psychological.
Both the expanding force and the squeezing force are objective forces operative in a system. It can be a spontaneous process and not necessarily a conspiracy.
Compared to regular bubbles, a trans-bubble can have a stronger self-reinforcing mechanism, grow larger, and last longer.
But if it is a bubble, it will burst when reality crushes in. The essence of a bubble is not its size, expansion speed, or cycles, but its emptiness within. It is that inner emptiness that dictates its eventual collapse.
It is economics working at the physics level.
Examples of trans-bubbles
So far, the biggest trans-bubble is the global asset market, which clearly has both an expanding and a squeezing effect.
The asset market, due to its large systemic effect, makes it very hard for those who don’t want to be part of it to stay away from it. Money is connected. The asset bubble creates unevenly distributed inflation and far-reaching generational wealth redistribution. This type of inflation may not show up on CPI. But it is real and has a more detrimental effect than regular inflation.
Inflation is an economic and financial reality, not a mere statistical data point. When things are connected through fiat money, other people’s non-productive gain is not merely their gain, but your loss. Note here the emphasis on “non-productive” because productive gains are different when they benefit not only the operator itself but also others and the whole system.
The asset bubble not only attracts more participants to join the nonproductive economy but also makes it hard for others to pursue a productive alternative. It has a hidden but active force that suppresses the alternatives.
So far, the biggest sub-bubble in the global asset bubble is the Chinese housing bubble. The level of foolishness of that bubble is spectacular. For a number of years, the demand for high-yield corporate bonds issued by Chinese housing companies surpassed the supply by a large margin. Everyone, including foreign investors, wanted to get some of that. In addition to corporate bonds, various forms of financial instruments were invented just for the housing sector. So the builders built far more than what the market needed or could absorb.
Now, everyone blames the Chinese builders who issued such bonds and built these houses, but people fail to see the real nature of a trans-bubble: builders built more and more not only because they were foolish and greedy but, more importantly, because they were placed in a negative environment that would squeeze any dissenters out of the system if they dared to pursue a less “clever” strategy.
The environment in which the Chinese housing bubble has grown isn’t a neutral existence that happens to be utilized by the housing industry but is something that has been continuously optimized to gear up and lubricate debt-based unlimited building. Banks, financial institutions, governments, supply chains, service chains, media, social circles, and employment agents are all optimized for this type of business practice, and innovative entities and organizations are created for the same purpose, creating an environment that would make any company or person who thinks differently appear utterly foolish and be quickly eliminated.
In other words, the system had a very strong self-reinforcing mechanism acting through trans-directional forces.
The phantom crypto
Crypto is a bubble because it is empty (see section ‘The emptiness of crypto” below). But it is empty because it has mostly phantom assets without economic support.
From a sound economic viewpoint, the world needs just one coin as a universal currency on a single universally scalable blockchain that supports an unlimited number of tokens of all kinds of real-world assets (RWA).
But the world has been given the opposite: thousands of blockchains with thousands of coins and tokens created out of thin air but little tokenization of real-world assets.
The term “real-world assets” (RWA) should be understood in a broad sense here. It is a relative term used to differentiate real assets from phantom assets that are created and exist for their own sake only.
Most crypto coins and tokens are phantom assets.
By calling crypto ‘phantom,’ I’m not implying that all virtual assets are phantom assets. An RWA does not have to be physical or traditional. It can be digital and new. But most crypto assets are phantom (imaginary and unreal) because they fail the basic test for an RWA.
An RWA passes a simple test: if all trading activities of the asset stop, an RWA will still exist in its base form and have an intrinsic value.
Most crypto coins and tokens today fail this test.
On the other hand, not being an RWA is not a death sentence to the asset. Bitcoin itself is not an RWA according to the above definition, but that is not a problem in itself. One of the most basic promises of the Bitcoin blockchain is to introduce a more advanced currency (electronic cash) to the world. That is the bitcoin.
The problem is that the crypto industry has failed to build a real economy on the original Bitcoin, but rather pursued thousands of “cryptocurrencies” that serve no real-world purpose except for their own “number go up” schemes.
It didn’t have to be like that. It was the corruption of the real Bitcoin by BTC Core that begot this mass corruption from Bitcoin to BTC, to Ethereum, and then to thousands of others. A part of my two-volume book BIT & COIN: Merging Digitality and Physicality explains how this has happened.
The result is that we end up with thousands of blockchains, with thousands of coins and tokens created out of thin air, but little tokenization of real-world assets.
Stablecoins constitute a major exception to the statement because they are not created entirely out of thin air. A stablecoin can be created with a solid foundation to serve a productive purpose and doesn’t have to be part of a bubble or a Ponzi scheme. But, in their current forms, stablecoins became part of the crypto problem by choice, which is a separate matter not discussed here.
The emptiness of crypto
As said above, the essence of a bubble is not its size, expansion speed, or cycles, but its emptiness within.
The reality of crypto in its current form is its economic emptiness, devoid of utility and productivity.
In its nature, the crypto bubble is far more empty than the Chinese housing bubble.
The Chinese housing bubble is $50 trillion inflated from probably a $25 trillion real economy, meaning that it is a 2x bubble. In the worst case, it is perhaps a $50 trillion bubble based on the $10 trillion real economy, a 5x bubble.
But the crypto bubble is currently 1000x emptier than the Chinese housing bubble.
The emptiness of crypto is found in the following observations:
A normal currency system would have at least a 10:1 ratio in efficiency, meaning that every $1 currency would support at least a $10 real economy. (For reference, US GDP and dollar currency in circulation have a ratio of around 12:1.)
The current crypto has $2.5 trillion in currency. Therefore, to justify its existence, it should already support a real economy of $25 trillion (by reference, $25 trillion would be 25% of the entire global economy).
But in reality, crypto doesn’t even have a $25 billion real economy, let alone $25 trillion. In fact, there’s no concrete evidence to show that crypto currently supports a real economy of $1 billion globally. Other than speculative cryptocurrency trading itself, very little economic transaction involves a cryptocurrency today, and even in those cases that do, the cryptocurrency only plays a supplemental role to a fiat currency.
But let’s be generous to crypto and assume that it is supporting a real economy of $25 billion.
$25 billion is 1000 times smaller than the $25 trillion the cryptocurrencies should be supporting based on the $2.5 trillion total currency value crypto has masqueraded.
That is a level of emptiness higher than 1000 times the ordinary sorts of emptiness. ”Emptiness squared” doesn’t even touch its edge.
Some may cite the hundreds of billions of trading volumes on crypto exchanges against the above statement, but that is not the real economy. It is part of the disease itself. Using it to justify crypto is like using the large size of a tumor to prove its healthiness. See the cancerous crypto.
Some may argue that BTC, unlike the original Bitcoin, is an exception because BTC is not primarily meant to be a currency but a store of value. Firstly, that is a straight admission that BTC is not the original Bitcoin. But how does a thing like BTC become a reliable store of value before it has first proven its utility? BTC will have to prove that it is a superior store value to other available assets, especially precious metals. All arguments that support BTC are based on circular logic. I argue that BTC is not superior but inferior to gold as a store of value due to its lack of physical essence and stability independent of market expectations (see The Idea of “Digital Gold” — BTC’s Value Fundamentals; and Gold is superior money, and tokenized gold is a superior currency).
Crypto is a trans-bubble
But how did the cryptoverse get so absurdly wrong at such a large scale and for so long?
It is because crypto is not just a bubble but a trans-bubble. It is not merely driven by greed and foolishness but also by a very strong systemic squeezing effect.
A commonly known explanation for a bubble is greed, which is indeed operative in crypto. Who wants to build real solutions when creating your own coin is the quickest and easiest way to get rich?
But there is more than that. Many who came to blockchain didn’t initially want to participate in the Ponzi schemes but wanted to build some real solutions. But they were either squeezed out or forced to convert once crypto became large enough to be not only a bubble but a trans-bubble.
Here is the squeezing effect of the systemic crypto trans-bubble: the system ensures that anyone who doesn’t want to create his own coin (or token) out of nothing will look a fool, financially, socially, and psychologically.
The effect is not merely that more people are attracted to participate in the empty coin Ponzi schemes but also to ensure that competing ideas, technologies, and businesses do not succeed. The latter is important because, otherwise, the empty bubble would be constrained or even popped by substantive solutions through competition, demonstration, and reality-checking.
Multiple suppressing forces contribute to the squeezing effect. They all operate in the form of a severe bias toward empty coins and tokens against substantive solutions. These biases are found in any of the following:
- the availability of talent, especially the awareness and participation of developers,
- funding,
- customer perception end reception, and
- the public understanding and recognition.
The existence of immediate trans-directional forces creates a more interesting phenomenon of “bubble physics” in that the crypto trans-bubble goes through a series of expansion and contraction cycles rather than expanding and collapsing all at once in one cycle. This makes it appear to have more life than it really does and has allowed people to argue that crypto is not a bubble.
But it is a bubble because it has no real economic support. It is just a different kind of bubble. The new kind of bubble physics is only a result of a stronger psychological force involved, but nothing changes its bubble nature that determines its economic reality.
Bubbles always burst, and trans-bubbles are no exception. They are just larger and more spectacular when burst.
The future of crypto
However, given the apparently unlimited supply of greed and Ponzi optimism, crypto could grow even larger. It still has a large pool of money to extract from. $2.5 trillion is only 2.5% of the global equity market or 2% of the global commodities market.
Is it possible that in an imaginary world crypto would reach $50 trillion, 40% of the global commodities market?
It depends on what crypto consists of in that world. If we’re talking about useful tokenization of real-world assets based on a scalable and cost-efficient blockchain, the above outlook is not only possible but may even be inevitable. It is a great future because the tokenization of everything means a more efficient and productive economy and society.
But the current cryptocurrency market is nothing but that. It is all currencies and tokens created out of thin air rather than tokenization of real-world assets. Therefore, if the question is whether the cryptocurrency market in its current empty form can reach $50 trillion, I can only say I don’t know. A wise man once said, “Never underestimate human stupidity,” so I don’t want to say impossible.
But one thing is certain: it means a disastrous future. It is a picture of a parasite overtaking the body of the host.
However, whether or not the crypto bubble peaks at $5 trillion or $50 trillion, the entire scene of thousands of cryptocurrencies doing little more than pumping coin prices will disappear soon, certainly before this generation grows up.
The world will realize that crypto does not represent the true blockchain technology. It’s a distortion at best. With major aspects being outright fraudulent, it’s a corrupt misrepresentation mostly.
Bubbles may exist in humanity, and parasites may live within a bubble, but humanity cannot survive within a bubble. It may survive with a bubble but not within it. When the bubble grows large enough to be felt as an intrusion rather than a stimulus, humanity searches for real economic ‘food’ and gasps for real economic ‘oxygen’, namely utility and productivity. Occasionally, it does that even before the parasitic burden is exposed.
When it does, it will create for itself a healthy blockchain-based global economy. See The future of blockchain.
[Recommend my two-volume book for more reading]: