The Philosophical Argument Against Crypto

Whenever people talk about the philosophy of money and its legitimation it seems quite en vogue to talk about the concept in terms of the philosophy of collective fictions. It’s a term that while not invented, was at least recently popularized by the historian Yuval Noah Harari who succinctly described the power of the Dollar Story:

Money is probably the most successful fiction ever invented by humans. Not all people believe in God, or in human rights, or in the United States of America. But everybody believes in money, and everybody believes in the dollar bill. Even Osama bin Laden. He hated American religion, American politics and American culture — but he was quite fond of American dollars. He had no objection to that story.

And this is all true, money is indeed a collective fiction however it is not only a collective fiction. Money is a successful collective fiction based on the efficacy of this shared intellectual construct to fulfill a real need in human life. Advanced market economies need a universal metric by which to measure value and to be a convenient and highly liquid asset used in the settlement of transactions for goods and services. Money needs to fulfill three different properties, it needs to be a unit of account, a store of value, and a medium of exchange.

Now it’s quite easy to come up with counterexamples of things that could never become money. A shared fiction about hamsters as money is indeed quite possible for people to have, except it uniformly fails in its utility as money. Hamsters can only be subdivided so far before they lose their “hamsterness” by virtue of being an indivisible living animal, so they can’t function as a unit of account. Hamsters are also living animals that reproduce at a fairly rapid rate so the supply of hamsters will fluctuate relative to their reproduction and thus can’t be a reliable store of value. And as a medium of exchange, they’re simply difficult to transport and transact in because of the upkeep costs of keeping the animals alive. Now yes, it is possible to have a collective fiction about hamster money, but it is more of a collective delusion than a sound basis for an advanced economy.

What Harari doesn’t cover in his book is that money is likely one of the least interesting collective fictions we’ve devised in the last few centuries. The most profound philosophical advances in this area are the development of public debt and financial assets devised in the 17th century. Both of these ideas are modern ways of funding collective action on scales that have led to the flourishing of democracy, rapid scaling of private financial markets, and the pace of modern economic growth that we take for granted today. Financial assets like government bonds and securities are the most successful collective fictions ever devised and have a rich set of laws, models, and scholarships giving rise to their continued success.

As some people may know from the subtlety of my writing, I’m not a fan of crypto assets or “cryptocurrencies”. After thirteen years, most rational people have either analytically or empirically derived that crypto assets can never actually be used as currency. We’re watching this disaster unfold in El Salvador in real-time as their inept head of state is taking the country to the casino table to gamble public funds on a project which is guaranteed to fail. And It’s a deeply disturbing trend to watch because the average citizen is going to be hurt by this reckless policy decision.

As a result of crypto being a failure in its original purpose of payments, the myth-making around it has since adapted to find a new story. Now, most people pitch their crypto tokens as an investment, a financial asset to be added to your portfolio alongside your stocks and bonds. However, as a financial asset, it is extremely difficult to analyze because the value of a crypto token is not tied to any underlying economic activity or physical thing. Neither is the dollar, but the dollar is not a financial asset or investment, the dollar is a monetary object which is an entirely different class of financial instrument whose efficacy is measured in how it fulfills the three properties of money. Almost all sophistry in the promotion of crypto assets is this superposition of these tokens as simultaneously both an investment and a monetary object when such a claim is logically impossible as both categories have diametrically opposite financial properties. This intellectual bait and switch of crypto is where the properties of opposite financial products are used interchangeably without regard for the coherence of the argument.

Even if we accept the inherent contradictions in these definitions we come to the uncomfortable conclusion that crypto assets are financial assets that have no fundamentals, no cashflows, no income, and their demand can only be generated purely by narrative and the greater fool theory. If we look at the space of other assets there are indeed other comparable goods whose demand is at least in-part generated by narrative. So-called Veblen goods are a well-studied economic curio that has pathological demand generated by their “sign value” as status symbols, these include things like Hermes Bags and Patek Philippe trade at extreme premiums of the underlying labor and goods needed to produce them, and this is almost exclusively due to the narrative created around their existence. Gemstones have narrative-driven demand created by their social significance in human rituals which is compounded by extreme market manipulation by suppliers. Precious metals like gold also have historical quirkiness and are wrapped in political narratives. If gold appears to be a hedge for anything, it’s the fear of inflation, or the fear of financial instability as proxied by changes in government deficits, and this narrative drives a significant part of its price formation.

All of these narrative-driven assets have a notable distinction, they aren’t artificially scarce because they all have a physicality derived from rare or difficult to manipulate commodities. It’s not possible to snap your fingers and create diamonds or Patek Philippe watches out of thin air like an investment bank can create a new bond product out of thin air. This is from the simple fact that all narrative-driven assets are necessarily consumer goods or commodities, and not financial assets.

I asked the other day on Twitter if anyone could come up with a comparable financial asset whose demand is completely artificially generated by narrative. Derivative contracts don’t qualify because I have yet to see a product where if we unwind the stack of underlying we don’t reach some real commodity, currency, equity, or benchmark which is economic in nature. The closest comparable people came up with is the historical practice where the Catholic church in the Middle Ages used to financialize penances for sins into products called indulgences as a means to fund the church’s endeavors. This is indeed an example of a purely-narrative-driven financial asset whose value is purely derived from the Christian faith, albeit a pathological and exploitative reading. If crypto assets have comparable financial products it is that of indulgences, both are purely narrative-driven fundamental-less financial assets that can be created out of thin air and whose market value is purely a function of sign value and fealty to an ideology. The only difference is that crypto assets have a digital secondary market where these neo-indulgences can float and be traded.

This is where I begin to have problems with crypto assets from a philosophical perspective since there are literally an infinite number of these products that can exist. They can be created at zero cost and by social manipulation can be pushed on the public to generate huge returns for the creators. It’s a perverse form of casino capitalism that uses narrative as a weapon to exploit and deceive people into gambling on an exploitative simulacrum of financial markets while producing nothing of economic value as an output. I fail to see how the mass proliferation of these extremely pathological financial assets leads to anything but chaos, addiction, poverty, and a loss of faith in both markets and our institutions.

Like every perspective on crypto, taken to its logical conclusion it results in contradictions that end up devouring the original intent. The hyper-capitalist reading of purely-narrative-driven crypto assets is no different.

Purely-narrative-driven financial assets and the “financialization of everything” are an evolutionary dead-end in capitalism, these types of assets serve no purpose and should be banned from a public interest perspective much like we ban Ponzi schemes and asbestos in the public interest. The purpose of markets can not be to create untethered hyper volatile playthings to day trade since the opportunity cost of this precludes actual economic activity. The purpose of markets is to do price discovery on goods and services. If you remove the exchange of goods and services from the equation, then you have a gambling parlor.