I’ve noticed a strange trend in crypto lately.
The narrative has shifted.
I think this is mainly due to big events in the real world.
Inflation is predicted to hit double digits this year, rising interest rates are expected to cause a recession, stock markets are collapsing, taxes are up, and to top it all off there’s a war on.
All of this has reignited the original arguments for Bitcoin.
I covered those arguments in detail here: Everything you need to know about crypto in one essay.
But here’s the key part of that argument:
The core idea behind Bitcoin is that it allows people to send money safely, over the internet, without the need for any central authority to guarantee or oversee their transactions.
Bitcoin does away with the need for central banks to create money and national banks to move it around.
And perhaps most importantly, its supply can never be artificially inflated. There will never be more than 21 million Bitcoin in existence.
So no more Cantillon effect and no more reverse-Robin-Hood economics, with the rich getting richer at the expense of the poor.
At least, that’s the idea
So at a time when inflation is biting, and the powers that be are unwilling or unable to diffuse the cost-of-living crisis, it’s easy to see why people are flocking to that original argument for Bitcoin.
“It will free you from those fools in power.”
That’s fair enough. But it’s not the real reason crypto is important.
Crypto-currency is just one aspect of crypto.
The real revolution is in taking what Bitcoin does for currency – cutting out the middleman, giving the power to users not central authorities – and applying it to… well, everything.
Like I said in that essay:
This is the next internet.
Over the last 20 years or so, many of our major industries and businesses have moved onto the internet.
And some of the biggest companies around today simply would not have existed, had it not been for the internet.
No Google, no Amazon, no Netflix, no Facebook.
Today we take the internet, and all the things it has enabled, for granted.
It’s hard to see any technology having as much impact on our lives as the internet has done.
But crypto might just come close.
In the short time it’s been around, crypto has gone from merely being a currency to creating a new decentralised financial system.
But the biggest thing crypto has going for it is that just like the internet it is a platform that other people can build things on top of.
Only, as we’ve seen, when things are built on top of crypto they are inherently fairer, safer, securer and more efficient.
Within the crypto ecosystem, you don’t cede control over to a central authority in order to participate. …
Over the next few years, we are going to see entire new businesses and industries being built on top of crypto – just like we have with the internet – many of which we can’t even conceive of right now.
And this time around, it won’t just be the businesses that benefit. It will be their users, too.
Many times over the years I’ve equated owning crypto to owning land in the California gold rush, or to owning land where a megacity is being built.
I wrote about that idea quite a lot when I used to work at Southbank Investment Research:
When I started reading about Ethereum, it all clicked. I could see so many possibilities for its use. The idea of smart contracts was a revelation.
I saw Ethereum as being like land. Land that all our computer systems would one day be built on. And land that you could own with a few clicks of your mouse.
In my head it would be the equivalent of owning land in the California gold rush. People would pan for gold (build programs and DApps), many would fall by the wayside, but some would strike it rich. And when they did, they’d massively increase the value of the land they were panning on – or in this case, the network they were building on.
I saw it as like being able to invest in the internet. Not an individual company, but the actual internet – before the internet really took off. That’s a pretty compelling idea.
And, honestly, I still think this is the most compelling thing about crypto. That’s why I mainly do my Deep Dives on platform cryptos (or layer-1s as they’re now called).
But over the last year or so, the idea of crypto being a platform for the next internet has been crowded out.
Today, it’s all about scarcity. Or rather, fake scarcity.
Scarcity is not the holy grail
Back in 2017, when most people thought every crypto was merely a cryptocurrency, like Bitcoin, a compelling argument against crypto emerged.
If the thing that gives Bitcoin value is its scarcity, but anyone can make another Bitcoin by copying and pasting the code, then it’s not really scarce at all, is it?
Of course, as Bitcoin gained more and more traction and became a name-brand, this argument faded away.
Bitcoin became so big and famous that no one would want to hold a cheap substitute instead.
Sure, people still held other cryptocurrencies. But for different reasons.
For example, memecoins became popular. But they gained traction for very different reasons to Bitcoin. They are fun! They’re a joke, they’re a meme.
There aren’t really many pure crypto-currencies trying to compete with Bitcoin anymore. The only real contenders are cryptocurrencies with privacy features that Bitcoin doesn’t have.
But nowadays, no one is going to create a pure crypto-currency, without privacy or some other killer feature, that can compete with Bitcoin.
Bitcoin has name recognition. It’s a brand now.
So the “Bitcoin isn’t really scarce because you can just make another one” argument disappeared.
Layer-1 cryptos like Ethereum, Terra, Cardano, Solana, Algorand, etc. aren’t trying to create value through scarcity.
They’re creating value by building things that actually create value. DeFi applications, Supply chain tools, insurance, tokenisation etc.
But all of this has been overshadowed by the NFT craze. And what’s driving the NFT craze? Scarcity.
The great scarcity contradiction
Unless you’ve been living under crypto rock, you’ll have seen an awful lot of NFT hype over the last year or so.
I wrote about it in this article a couple of weeks ago: What’s the next BIG thing?
Basically, much crypto chat now revolves around jpeg NFTs and “the metaverse”.
Both of these things are essentially selling scarcity. NFTs are created in limited numbers. Some have rare traits, like pogs or football cards.
And the metaverse isn’t really the metaverse. There are many, many different metaverses, all competing with each other.
Axie infinity is one of the biggest. But recently a lot of its players left, its scaling solution, Ronin, was hacked for $635 million, and its Axie Infinity token is down 83% from its all-time high (ATH) set in November.
Another big metaverse name is The Sandbox.
This is “a virtual world where players can build, own, and monetize their gaming experiences in the Ethereum blockchain.”
Like I said in that previous article, it’s basically just Second Life, which was a popular online game in the early 2000s. Although Second Life actually had better graphics.
Back in November, at Sandbox’s peak, a firm that “develops real estate in the metaverse” (yes, really) paid $4.3 million for a plot of land in The Sandbox.
(The Sandbox’s SAND token is now down 75.5% from its ATH set that same week.)
Then there’s Decentraland. This is the same idea as The Sandbox (Second Life) but has actually been out longer.
Back in… you guessed it, November again, a plot of land in Decentraland’s “fashion district” was sold for $2.5 million.
The Wall Street Journal quotes the person who bought it as saying: “This is like buying land in Manhattan 250 years ago as the city is being built”.
(Decentraland’s MANA token is down 75% since that sale.)
But wait, which is the real fake Manhattan? The one in The Sandbox or the one in Decentraland? Or maybe the one in Bored Ape’s new metaverse, Otherside?
Or maybe one of the other myriad metaverse’s fake Manhattans?
Because that’s the whole point here. This scarcity isn’t real.
There is no one definitive metaverse. Every company in the world is building one. Facebook even went as far as to change its name to Meta.
And while it’s true that the whole crypto market is down, metaverse tokens are down more than most.
It’s not really surprising as their entire reason for being valuable (scarcity) doesn’t really hold up to logic (because they’re not really scarce).
So once the hype starts to die down – remember, as we talked about last week, real investments are having an awful time of it right now – people dump them, fast.
Badges of prestige can quickly turn into badges of shame
So what about the other reason people buy into these projects? Prestige.
That’s why you spend $100,000 on a jpeg right? So you can change your twitter picture to it and get respect from other people on twitter who’ve paid $100,000 to change their profile picture to a jpeg.
That’s why you spend $4.3 million on a fake plot of land… to show that you can.
But what happens when the fashion changes (as it always does) and suddenly having a $100,000 twitter profile pic, or a $4.3 million plot of metaverse land, is uncool?
We got a glimpse of that this week, when Elon Musk – who could buy and sell every single jpeg NFT owner in the world a thousand times over – trolled the Bored Ape bros.
He changed his own twitter profile picture to a collage of Bored Ape jpegs. Bored Ape’s Apecoin surged 22%. Elon Musk was buying in!
Then a few hours later he posted this:
And Apecoin’s price, unsurprisingly, gave up all those gains.
Now, what I’m wondering is, if the market really crashes, 2018-style, will these current prestige badges become badges of ridicule?
Will all of this pseudo scarcity be seen for what it is – a joke – or will it carry on as usual?
If you remember the crash of 2018 and the crypto winter that followed, you’ll know that many projects fell into nothingness.
How many Metaverses would be left after a new crypto winter? How many crypto bros would still have cartoon jpeg profile pictures? We might just find out.
Or maybe there won’t be a crypto winter at all. No one really knows.
But everyone, from CEOs to Central Bankers to Politicians, to Institutional Investors to Billionaires to “shoeshine boys” claims to.
As for me? I have no idea.
But I won’t be buying a plot of metaverse land anytime soon.
Okay that’s all for this week.
Thanks for reading.
Full disclosure: At time of writing, I held the following cryptos: Ethereum, IOTA, Radix, Mina Protocol, Aleph Zero.
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