A few critical things experts have told me about crypto
It’s June 15, 2022. Here’s the rundown:
In the news: Inflation, inflation, inflation
Let’s talk about crypto
Numbers, links, and more
Inflation, inflation, inflation
More bad CPI numbers; What the hell is going on, and what can be done about it?
Unfortunately, May’s CPI numbers showed that prices are continuing to rise — in contrast to what everyone was hoping for. The CPI Index for May was 8.6% — meaning prices are up 8.6% from May 2021 — the highest in 40 years. Since we’ll probably be talking about nothing but inflation for the next several months, I thought it would be worth taking some time to break things down.
There’s no single thing that caused prices to rise this high, this fast. You’ll probably hear a lot of people pointing blame at the Federal Reserve, which is tasked with keeping inflation under control (roughly 2% per year). The Fed is getting lambasted because of all the pandemic-related stimulus programs, which threw tons and tons of money into the economy (money has value because it’s scarce, and when there’s more of it, well, it loses its value, if you want to think of it that way). But it was also propping up the markets since the Great Recession, and kept interest rates too low for too long.
And given that the Fed had printed an awful lot of money for more than a decade leading up to now, with no inflationary issues, I suppose it’s reasonable to think that they could continue to do so. Maybe?
But again, the Fed is only partially responsible. The rest? The pandemic, supply chain problems, monopolies, China’s COVID policy, the war in Ukraine….seriously, it’s everything.
And another thing to keep in mind: Inflation is up everywhere around the world. Gas prices are up everywhere. It’s a worldwide problem, not just in the U.S.
This isn’t a situation in which we “just do X,” and fix the problem. Which, of course, isn’t what people want to hear. Odds are, this will take months, and maybe years, to wind down.
We largely avoided a serious recession during the pandemic by enacting huge stimulus programs. We still had a quick recession, and a deeply damaging one for many people, but after we sort of kicked the can down the road to keep the economy from completely collapsing, we’re now dealing with the fallout.
The main weapon to fight inflation is interest rate increases. The more it costs to borrow money, the less people and businesses will want to borrow. That, effectively, slows the economy down and squashes demand. Lower demand leads to lower prices, theoretically. It may trigger a recession, and it may not. But a combination of rising interest rates and some reduction of the money supply (the Fed also stopped its “QE” purchases, which basically pump money into the stock markets) are used to slow inflation down.
What you can or should do:
Subsist off of Costco hot dog combos?
On an individual level, there isn’t much you can do. You can try to find higher-yield investments (I-bonds are a popular choice). And you can try to find a job that pays you more so that you can try to out-earn inflation.
Other than that? Wait it out. The last time the U.S. experienced similar conditions was during the 1980s when the Fed raised interest rates to roughly 18% to get inflation under control. In 1979, the CPI annual average was 11.3%, followed by 13.5% and 10.3% over the next two years, so a massive rate hike was needed to knock it down.
With that in mind, things have been worse.
Aside from waiting it out, we can all stop looking for someone to blame for all of this. It’s decades in the making. In my opinion, we spend way too much time trying to blame people and institutions for our problems rather than try and find solutions to those problems. If Trump was still in office, he’d be dealing with the exact same problems. If Elon Musk was the Fed Chair, he would be facing these issues, too.
That’s not to say that we can’t have our frustrations with the decision-makers and criticize them for what we deem to be bad moves. But at some point, the endless blame game becomes exhausting.
As for dealing with inflation? We’re all just going to need to get through it. Things will normalize eventually, barring another unforeseen pandemic, war, or god-knows-what-else.
Let’s talk about crypto
I frequently write about cryptocurrency. This is what experts and people who know what they’re talking about are saying and thinking.
I’ve tried, for some time, to figure out how I feel about cryptocurrencies. I’m not smart enough to understand them — that I know for sure. But given that they’ve become such a hot topic and the investment du jour for a lot of people these days, I wanted to discuss the topic in a candid way.
I do a fair amount of writing about crypto, and have talked to many experts in the field. And one of the things that I think I should point out to all of you is this: There’s a difference in the way that experts talk about crypto, and how investors talk about it. That goes for the experts themselves, too.
For one, cryptocurrencies aren’t currencies. They’re more like bits of software and code. They’re not backed by anything, in most cases. This is something that some experts really drive home when you’re speaking to them. Investors, on the other hand, treat crypto like they would any other asset — Bitcoin may as well be Tesla stock.
But the difference is that if you own Tesla stock, you own a piece of a company. Depending on the stock, you’re entitled to dividends, voting rights, etc. If you own crypto, you don’t really own anything. And in the case of cryptos like Ethereum, you actually own coins native to a blockchain network, that are used to facilitate transactions only on that network. It’s sort of like owning Chuck-E-Cheese tokens.
I will say, however, that many crypto projects show great promise. So, it’s not like these things are worthless. But again, there is a big disconnect between how the people involved in those projects view this stuff, and how everyone else looks at it.
Here are a few important things that I think we should all consider about crypto and the crypto markets, which are currently in meltdown mode.
1. Many people don’t understand what they’re buying
I talk, write, and think about crypto frequently, and I still don’t really get it. The same goes for options trading, for that matter.
Again, though — I think this is the main issue with crypto. People simply don’t understand what they’re buying. I would even say that you’re not even really “investing” in crypto — it’s more like placing a bet that the asset you’re purchasing will be the next one to gain value, like Bitcoin.
This is, as mentioned, because crypto isn’t backed by anything (yes, yes, there are exceptions, like stablecoins, which have failed). And another thing: Many crypto investors don’t actually “own” their holdings. Depending on the platform you use to trade, and the type of wallet you use, you may not be able to trade or transfer your holdings — this played out in real-time this week when centralized platforms like Binance halted trading in the middle of a sell-off.
This is all to say: You may not have much control or ownership over your asset as you think you do.
2. Regulation will be a good thing
A lot of people in the crypto space rue the day that the government gets involved in the crypto markets. But the overwhelming consensus from the people I’ve talked to say that regulation will be a good thing, overall. Yes, there’s the possibility that regulators could go too far and create some problems. But the crypto space losing its “wild west” feel will help pull additional investors and participants in.
In a nutshell, crypto regulation will bring something that’s thus far been missing to the market: Validation, and a sense of security. Right now, if you pour a bunch of money into some crypto coin, its value crashes, and the founders of the project run off with your money, you have no recourse.
So, with regulation a couple of years out, know that many on the inside are looking forward to having a sheriff in town to keep things under control.
3. Crypto, until now, existed in a petri dish
Crypto only existed in a very specific environment, and we’re seeing what happens when the variables change. Crypto has only been around for roughly a decade — a decade during which interest rates were low, inflation was low, and the market went up and up and up.
Now that the economy is contracting, the markets are down, and inflation is up, we’re seeing that crypto is following suit.
To sum it up: That shows us that crypto is not inflation-proof. Its value appears to be tied largely to the performance of the stock market. It still lacks institutional backing (in most cases). And it’s still largely unusable as an actual currency.
This is in stark contrast to what many were saying about crypto for a long time, namely that it’ll prove to be a safe haven (like gold) during times of inflation, and that it may supplant government-backed fiat (like U.S. dollars). All of this is proving to be incorrect, or at least highly suspect.
But But But!
Okay, I’ve sounded like a real downer on crypto.
But I’ll be clear: This doesn’t mean that cryptocurrencies don’t have value, or that some crypto projects won’t grow into massive operations that are integral to the world economy at some point. That’s quite possible.
I’ve also mentioned, a number of times, that crypto isn’t backed by anything. The same can be said for U.S. dollars — which, at one time, were backed by gold, but no more. The difference, I’d say, is that my mechanic will accept dollars, and not Dogecoin. Perhaps I could convince them to accept Ethereum in exchange for replacing my brake pads, but USD is likely a more sure bet.
One expert told me that we’re likely to see a dot-com era bust of the crypto market. Some projects (Bitcoin, Ethereum) will likely survive it. But most of the other stuff (joke coins) will be swept out with the tide.
Now, this isn’t all to tear down crypto. I think that it’s a largely misunderstood market, and a lot of people have simply been swept up in the hype. There’s some real promise for certain projects — and I think that blockchain tech will be very useful going forward. But it’s hard not to see the comparison to the dot-com bust.
Given that the crypto market is currently melting down, too, it’s easy to sort of dunk on it. I suppose, though, that if you believe in crypto as a solid investment, stick with it. If you spent thousands on a joke coin to try and ride the wave of a pump-and-dump scheme? Then it’s time to reap what you sow.
Numbers, links, and more
8: The number of potential owners that can invest in real estate properties through new investing platforms that buy homes, convert them to LLCs, and chop up the equity. (The Information)
$1 million: The amount a Michael Jordan rookie card recently sold for at auction. (ESPN)
“I’d gotten used to the crime, rarely violent but often brazen…”: How San Francisco Became a Failed City. (The Atlantic)
Catastrophic climate change: ←That was the subject of a White House memo sent to POTUS in 1977. (The Guardian)
Frowny Face: The Biden administration is trying to reset relations with Saudi Arabia, despite the murder of Jamal Khashoggi and a whole bunch of other things. (CNN)
Smiley Face: NASA is going to study UFOs. Neat. (Associated Press)