A year ago, Bitcoin and other cryptocurrencies were selling at record highs, with a combined market value of around $3 trillion; glossy commercials featuring celebrities — the most infamous of Matt Damon’s “Fortune Favors the Brave” — filled the airwaves. Politicians, including, alas, the mayor of New York, scrambled to align themselves with what seemed like the next thing. Skeptics like yours have been told that we just don’t get it.
Since then, the prices of crypto assets have plummeted, while a growing number of crypto institutions have collapsed amid allegations of scandal. The implosion of FTX, which appears to have used depositors’ money to try to prop up a related trading company, has grabbed headlines, but it’s just one entry on a growing list.
Many people say that we are going through a “crypto winter”. But that may be understating the deal. It’s looking more and more like Fimbulwinter, the endless winter that in Norse mythology precedes the end of the world – in this case the world of crypto, not just cryptocurrencies but the whole idea of organize economic life around the famous “blockchain”.
And the real question, it seems to me, is why so many people – not just naïve small investors, but also big financial and business players – believed that this bad idea was the wave of the future.
A blockchain is a digital ledger associated with an asset, recording the history of transactions on that asset – who bought it from whom and so on. The asset can be a digital token like a Bitcoin, but it can also be a stock or even a physical thing like a shipping container. Registers, of course, are nothing new. What sets blockchains apart is that the ledgers are meant to be decentralized: they don’t sit on the computers of a single bank or other company; they are in the public domain, backed by protocols that cause many people to keep records on many servers.
These protocols are, everyone tells me, extremely clever. I will take their word for it. The question I’ve never heard or seen answered satisfactorily, however, is, “What’s the point?” Why go through the trouble and expense of keeping a ledger in many places, and essentially carrying it around every time a transaction takes place?
Bitcoin’s original rationale was that it would eliminate the need for trust – you wouldn’t have to worry about banks taking your money or governments inflating its value. In reality, however, banks rarely steal their customers’ assets, while crypto institutions more easily succumb to temptation, and the extreme inflation that destroys the value of money usually only occurs amid chaos. Politics.
Yet there was an alternative, more modest justification for the use of blockchain technology, if not necessarily for cryptocurrencies: it was supposed to offer a cheaper and more secure way to track transactions and things in general.
But that dream seems to be dying too.
Amid all the sound and fury about FTX, I don’t know how many people have noticed that the few institutions that have seriously tried using blockchains seem to be giving up.
Five years ago, it was supposed to be a big deal – a sign of widespread acceptance – when the Australian Stock Exchange announced that it planned to use a blockchain platform to clear and settle trades. Two weeks ago, he quietly canceled the plan, reversing $168 million in losses.
Maersk, the shipping giant, also announced that it is ending its efforts to use blockchain to manage supply chains.
A recent blog by Tim Bray, who worked for Amazon Web Services, tells us why Amazon chose not to implement its own blockchain: it couldn’t get a direct answer to the question, “What is the useful thing that he does ? “
So how did this company, which never stood up to scrutiny, become such a big deal?
It was probably a combination of factors. Political ideology played a part: Not all crypto enthusiasts were right wing, but distrust of banks – we all know who’s in charge their – and government-run money provided a hard core of support.
High-tech romanticism also played a part, with the very incomprehensibility of crypto discourse acting, for a time, as a selling point. And then, as prices soared, the fear of missing out — along with significant spending on marketing and buying political influence — drove many more into the bubble.
It is an incredible story, and also a tragedy. It is not just small investors who have lost much if not all of their savings. The crypto bubble has had huge costs for society as a whole. Bitcoin mining alone consumes as much energy as many countries; I’ve tried to estimate the value of resources consumed to produce basically worthless tokens, and it’s probably in the tens of billions of dollars, not including environmental damage.
Add the costs associated with other tokens and the resources burned in failed efforts to apply a blockchain approach to everything, and we’re probably talking waste on an epic scale.
No doubt I will hear many more people insisting that I don’t understand. But it really feels like there was never any of that to get.