Can We (Finally) Admit That Crypto Was Really... Dumb?

0:00 Since its all-time high in October of last year,

0:03 Bitcoin and all other major cryptocurrencies have h havedved in value.

0:07 The collective market capitalization of these tokens fell from $4.4 trillion

0:10 to just under $2.2 trillion as of the time this video is posted.

0:15 And these numbers alone don't even tell the full story because, well,

0:19 the US dollar has also been falling,

0:21 which has made things look better than they really are.

0:24 If crypto was meant to be a currency, the majors have lost almost 50%

0:28 of their purchasing power within the last month alone,

0:31 putting them close to the technical definition of hyperinflation.

0:33 If it was meant to be an alternative payment system, the network delays, costs,

0:38 and fundamental scalability limits have made it very

0:41 hard to justify outside of very specific use cases.

0:43 If it was meant to be a store of value,

0:46 then this time last year, one Bitcoin could buy 32 o of gold.

0:49 Today, it can buy less than 12 oz.

0:52 And most damning of all,

0:53 if it was meant to be an alternative to get around the system,

0:57 it isn't helping that.

0:58 Most trading now takes place on centralized exchanges and the very government it

1:02 was supposed to supersede has been floating the idea of a crypto bailout,

1:06 which some purists might recall was the very

1:08 reason why Bitcoin was created in the first place.

1:10 Crypto may have become a solution in search of a problem.

1:14 But well, it's not like we haven't been here before.

1:17 Bitcoin alongside other cryptocurrencies and projects have all seen dramatic

1:21 declines in the past following events like Mount Gaus imploding,

1:24 the Silk Road being seized,

1:26 China banning crypto, China banning crypto again, FTX imploding,

1:29 and people admitting to themselves that NFTTS weren't

1:31 going to be the asset of the future.

1:34 Every time that these assets then set a new price record,

1:36 it was used as irrefutable proof to say,

1:39 "I told you so." Normally, with the help of some laser eyes.

1:42 But today, crypto is facing a new challenge.

1:44 Legitimacy.

1:45 A decade and a half of fraud, grift,

1:47 and crime might not have been able to kill cryptocurrency.

1:50 But it turns out that a few months of almost unrestricted compliance might.

1:54 There are a few major headwinds all hitting

1:57 these markets at the same time right now.

1:59 And if we can properly understand each of them,

2:01 we can address something really important.

2:03 Is it finally time that we can all

2:06 admit this whole thing was just really stupid?

2:09 Now, this is a $15 billion cryptocurrency fraud scheme

2:12 on a real platform with a real bank or exchange.

2:15 Um, but they've spoofed it.

2:17 Mount Gaus, the Tokyo based Bitcoin exchange

2:19 has filed for bankruptcy protection of Bitcoin plummeted.

2:22 At one point, it was selling for under $61,000.

2:25 The rug pull.

2:26 The rug pull.

2:27 Rugpull.

2:28 Rugpull.

2:28 Rugpull.

2:29 Crypto presidential advisory council.

2:31 Would anybody like to be on that particular council?

2:35 Please.

2:35 For the 17 years they have existed,

2:39 cryptocurrencies have always been an incredibly volatile asset class.

2:43 Even though today represents the largest drop in absolute value terms,

2:47 the market in the past has seen much larger percentage swings.

2:50 Back in the early days of 2011,

2:52 a hack on Mount Gox, the most dominant exchange at the time,

2:55 put an end to the first major bull run in Bitcoin's history

2:58 and saw the coin crash over 93% from its then all-time high.

3:02 Oh, and spoiler alert, this was not the last time that Malcox would be hacked.

3:08 Anyway, by comparison,

3:09 the crash the market is experiencing today looks relatively minor.

3:12 But there are four distinct reasons why even

3:15 industry insiders think that this time might be different.

3:18 The first reason is simply that there

3:20 is no single reason behind this price slump.

3:22 Most of the major market sellowns in the past have lined

3:25 up with something identifiable that caused the sell-off in the first place.

3:29 In 2011, it was the Mount Gaus hack.

3:31 In 2013, it was China banning financial institutions from handling crypto.

3:34 In 2017, it was the fallout from the crappy ICO mania.

3:38 And in 2022, the stable coin Terra Luna turned out to not be so stable

3:43 and it crashed to $0 within 48 hours

3:45 from a previous market cap of over $40 billion.

3:48 Today, there is no single identifiable

3:51 catalyst that has kicked off this correction.

3:53 But there are a few headwinds, and unlike in the years before,

3:56 these variables are unlikely to be going anywhere anytime soon.

3:59 The second reason why a lot of people think this time might

4:02 be different is because true fanatics have moved on to other uh opportunities.

4:06 Not many people on the inside would like to admit it,

4:10 but throughout its short history,

4:11 the number one reason why people purchased cryptocurrencies is

4:14 not because they believed in a democratic decentralized system.

4:16 It wasn't because they wanted to be part of the future of finance.

4:19 And it wasn't even because they wanted to buy

4:21 some stuff that shouldn't be on the internet.

4:23 The real reason is because they believe they would be able to sell

4:26 it at a later date for more money than they purchase it for today.

4:29 Now, I am sure for most of you that this is

4:31 pretty obvious and there is nothing even inherently wrong with this.

4:34 The potential for future gains is basically why anybody invests in anything.

4:39 But cryptocurrency was uniquely attractive because of just how volatile it was.

4:43 Which meant that the opportunities to make

4:45 a life-changing amount of money in a short amount

4:47 of time was perceived to be better and more

4:49 accessible compared to more typical investments like stocks,

4:52 bonds, real estate, or zero data expiry call options.

4:56 It was effectively gambling on the hope that a small investment

4:58 could have a much larger payoff compared to these more traditional assets.

5:01 But today, people can get the same exposure to gambling by just gambling.

5:06 The rise of legalized sports betting, prediction markets,

5:09 and the popularization of crypto casinos have all

5:11 at the very least provided an alternative outlet

5:14 for people to yolo their savings on something

5:16 that can provide them with meaningful amounts of money.

5:18 Sometimes the conversion is incredibly direct.

5:20 A lot of these sites use cryptocurrencies as the medium of exchange.

5:24 So, if regular crypto huddlers lose their money on bad bets,

5:27 it has the same net impact on the market as just selling it directly.

5:30 This will be partially offset by the people

5:33 buying cryptocurrency to fund their accounts on these platforms.

5:36 But overwhelmingly they will statistically be net losers over time.

5:39 Other people have just quietly cashed

5:41 out their cryptocurrency investments to gamble

5:43 on sports or prediction markets as they have become easier to access.

5:46 We have spoken a lot about the growth

5:49 of financial nihilism on this channel before.

5:50 As people see that they are never going to be able

5:53 to achieve larger financial goals with traditional

5:55 slow and steady saving and investing.

5:57 They are taking big risks for the small chance that a big

6:00 win will give them the money that they need to catch up.

6:03 Collectively, all of these people taking lots

6:05 of small risks can create a very big market.

6:08 It's just a question of where those risks get taken.

6:10 In the past, this group was the core

6:13 demographic that not only provided the market with liquidity,

6:15 but also built the culture around the industry by promoting it through

6:18 their social networks and aggressively defending

6:20 their uh investment thesis against any critics.

6:23 The more people who bought into the overall market,

6:25 the higher prices would climb.

6:27 So these unsophisticated groups had a vested interest to go along

6:30 with the idea that they could all ape their way to the moon.

6:33 This group obviously still exists today,

6:35 but a lot of its core have slowly lost interest and moved on to other things,

6:39 which has allowed for another group to rise in prominence

6:42 and undermine the market in their own unique way.

6:44 So it's time to learn how money works to find out why even the true

6:48 fanatics are starting to admit that this whole

6:50 thing may have just been really dumb.

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7:52 So perhaps the biggest shakeup to the crypto market

7:54 has been its full-scale embrace by the financial industry.

7:57 Today, getting your money into and out of crypto

7:59 markets is a lot easier than it used to be.

8:02 Third party exchanges with varying levels of regulation have been developed.

8:06 And even if that's too hard, complete novice investors can get exposure through

8:10 exchange traded funds that track the performance

8:12 of Bitcoin or other assets with institutions

8:14 like Black Rockck acting as the middleman.

8:16 For a while, this helped to drive up prices even

8:19 further as new money entered the market for the first time.

8:21 But in the years since these products were first introduced,

8:24 their net ongoing impact has not been what you might expect.

8:27 Someone buying Bitcoin through a Black Rockck managed

8:29 ETF listed on the NASDAQ is statistically not going

8:31 to be a true believer in the decentralization

8:34 or anonymity that crypto was first developed to provide because,

8:37 well, this is about the most centralized

8:40 and formal way that anybody can purchase anything.

8:42 These people are just treating it like

8:44 any other asset class in a diversified portfolio.

8:46 So they ultimately want to see good risk adjusted returns.

8:50 To sweeten this deal even further for firsttime crypto investors,

8:53 financial products have been developed that pay

8:55 dividends on top of these holdings.

8:56 Now if you are thinking that wait a minute, Bitcoin doesn't pay a dividend.

9:00 It doesn't produce any cash flows at all.

9:03 Then yeah, you have probably thought about this more than most investors have.

9:07 The actual way these financial assets generate

9:09 a return is by selling covered calls

9:11 to other speculators for a higher price than the asset is trading at today.

9:15 The speculator pays a fee to the fund for the right

9:17 to purchase Bitcoin at a set price in the future.

9:19 And if that price isn't reached,

9:21 then that fee gets passed along to the fund investors as a dividend.

9:24 It almost sounds like free money, but if the strike price is reached,

9:28 the fund is forced to sell their holdings to the speculator,

9:31 effectively capping the capital gains they can

9:33 receive from the underlying price movements itself.

9:35 The problem this creates is that in a growing number of cases,

9:38 the other side of this transaction are crypto option market makers

9:41 that will try to hedge these positions by selling options as well.

9:44 If the price falls, there are a lot of models

9:47 that rely on selling the underlying asset to maintain this hedge,

9:50 further putting downwards pressure on the market price.

9:52 Now, maybe it should have been clear

9:54 that derivatives markets on cryptocurrencies may have been problematic,

9:57 but they are just one small part of a larger

10:00 problem that's been plaguing the industry right now.

10:02 It's lost its story.

10:03 A big positive indication to a lot of early

10:06 investors was that obviously Bitcoin and other cryptocurrencies were going

10:09 to be huge because it was clear how much

10:12 governments and the financial powers were pushing back against it.

10:15 For people with actual anti-establishment political motivations,

10:17 crypto promised a way around that system.

10:20 And for almost everybody else, it became a promise of what it could become when

10:24 these opposing forces got on the uh right side of history.

10:28 The cryptocurrency industry was ready to take over the world

10:31 just as soon as these people stopped holding it back.

10:34 When people can use credit cards to buy cryptocurrency,

10:36 when major crypto users won't get debanked,

10:39 when the SEC stops fighting the industry,

10:41 when Bitcoin becomes available through regular investment markets,

10:43 when big banks hold on to crypto as a reserve asset,

10:46 or even when the final Bitcoin gets mined.

10:48 These are or were big events that were

10:51 promised to grow and legitimize the market,

10:53 letting people who bought in early get rich off

10:55 the new demand that each of these changes would introduce.

10:58 Now, to be fair, that has happened, and big rallies in prices were seen

11:02 after things like the softening of SEC regulations,

11:05 but now there is nothing left to promise.

11:07 Everything that was holding the industry back has now got out of its way,

11:11 and a lot of them are now actively encouraging it.

11:13 But now that it has to stand on its own two feet,

11:16 it suddenly doesn't feel like fighting anymore.

11:19 Even with almost complete adoption, endorsement,

11:21 and integration by the highest powers in the economy,

11:24 cryptocurrency's use case hasn't changed that meaningfully.

11:27 They are still overwhelmingly just a speculative asset to sell along to the next

11:31 guy at a higher price with some fringe use cases for fraud or moneyaundering.

11:35 The only difference is that now there is no longer the promise of we are all

11:39 going to be rich when this thing happens

11:41 because well there is nothing left to happen.

11:44 The story of a full-on crypto future is also getting

11:48 harder to sell as it clashes with a new competitor.

11:50 The people with a little bit of money who want to see big

11:54 returns without thinking about the risks

11:55 may have moved along straight to gambling.

11:57 But the people with a lot of money who also want

11:59 to make big returns without considering the risks have moved along to AI.

12:03 AI data centers have crowded out crypto

12:06 mining operations for energy and hardware because

12:08 for now there is more money in generating

12:10 slop than there is in generating crypto.

12:12 They both use a lot of energy,

12:15 specialized data centers, and cutting edge hardware.

12:17 So putting more resources into one means fewer resources for the other.

12:21 Now, that might sound like a good thing for existing crypto holders because

12:24 it limits the supply of new coins being generated to push down prices,

12:27 but a lot of crypto mining is really work being done

12:31 to authorize transactions on the network

12:32 rather than making new coins from scratch.

12:35 This has meant that as the direct

12:37 and opportunity costs for mining crypto have increased,

12:39 the stability of these networks have suffered and people

12:42 are waiting longer or paying more for transfers,

12:44 further undermining the argument that this could

12:46 be a legitimate payment network.

12:48 Now, as I was putting this video together,

12:50 Lil Bole once again beat me to the punch with a video

12:53 of his own that went into a lot more detail about these network issues.

12:56 So, I will leave a link to that in the description like always.

13:00 But the biggest question of all is why does this matter?

13:03 Say what you will about them.

13:05 But at this point, anybody investing in crypto does

13:07 know the risk and their losses shouldn't impact anybody else.

13:10 Right?

13:11 Wrong.

13:11 Even outside of the talk about a crypto bailout,

13:14 this entire industry has cost you a surprising amount of money,

13:18 even if you never directly invested in it.

13:20 If you have watched enough of our videos,

13:22 you will know that we have become somewhat skeptical about AI.

13:24 And the core of that concern comes from just

13:27 how much it is costing us to develop this technology.

13:29 Now, you have every right to be angry about these costs,

13:33 especially as they are being passed along to otherwise

13:35 uninvolved people through higher energy bills and more pollution.

13:38 But at the very least, there are some applications where AI

13:41 can be a genuinely helpful technological tool.

13:43 Is it going to be worth the trillions of dollars that we have invested?

13:47 Probably not.

13:47 But there is some value,

13:49 especially in little tools that could do tedious tasks for us.

13:53 However, all of the same arguments about e-waste, water, energy,

13:56 and misallocated investments applies to the crypto industry

13:59 without even the same potential for a meaningful payoff.

14:02 Data from Cambridge and the International

14:04 Energy Association found that energy demands

14:06 from Bitcoin was roughly the same as the increased energy demands from AI,

14:11 both at around 150 terowatt hours per year globally.

14:14 According to research from the Journal of Resources, conservation and recycling,

14:18 Bitcoin alone generated 30,000 tons of e-waste every year

14:21 as miners cycled through specialized AS6 to remain profitable.

14:25 The crypto market is a zero- sum investment pool,

14:28 meaning the only way for one person to cash out is for another person

14:31 to buy in with the hope that they can cash out to another person.

14:35 The true utility of AI may not prove to be worth the investment,

14:38 but for comparison, the true utility of crypto

14:41 has so far primarily been fraud and moneyaundering.

14:44 So, you may not love whatever the hell this thing is,

14:48 but hopefully it's preferable to actual crime in this week's 17th rug poll.

14:52 Now, the final reason why this time might be different

14:55 is that instead of being a true store of value,

14:58 crypto has really just become a measure of how

15:01 much speculative cash is slloshing around in investment markets.

15:04 Except that today, it's not even really doing that.

15:07 The Dow uh famously crossed 50,000 points on the exact

15:10 same day that Bitcoin hit a new post-election low.

15:14 But really, that just raises another question.

15:16 So, go and watch this video next to find out why the stock market is

15:20 booming while it seems like the rest of the economy is falling apart around it.

15:24 And don't forget to like and subscribe to keep on learning how money works.