With the Federal Reserve set to begin raising interest rates in a few weeks, I thought it was time to return to a discussion of crypto now that the era of 'easy money' post-COVID is over.
Many people still don't believe the Fed can stop QE, let alone reduce its balance sheet, and as a result, the refrain "You can't taper a Ponzi" can be heard from every corner of financial media.
I tend to agree with that sentiment because, of course, all Ponzi schemes necessitate the constant inflow of new funds in order to maintain the asset values of the previous round of funding. After all, this is exactly what a Ponzi scheme is.
But in a world of Ponzis built on top of Ponzis built on top of Ponzis, the notion that the biggest one, on which all the others are built, can't save itself for a while by popping all of the daughter Ponzis is a little disingenuous, if not outright obtuse.
That isn't because debt-based currency regimes aren't inherently Ponzi schemes. Yes, they do. It's because, once the currency pile is created, it has the ability to move to where it is best treated and away from assets that are most vulnerable to liquidation.
So, in the real world, as it unfolds in real time, the situation is far more complicated than "You can't taper a Ponzi." That is correct in the long run. However, when it comes to deciding where to invest one's money in order to earn a profit, this is simply not the case.
And this has been the most difficult lesson I've attempted to teach my readers and patrons over the years. It's one thing to accurately predict a system's end state. Total and complete collapse is unavoidable in the case of the US dollar reserve system.
It's another thing entirely to predict when this will happen and in what order the system will fail.
This was the main issue I had to deal with in the early stages of my financial writing career. It simply isn't good enough in 2013 to say, "In ten to fifteen years, all of these losing picks in gold or oil will be winners because the dollar is doomed," when publishing a newsletter where you lay out an investment thesis and give people your best ideas.
My approach needed to improve, become more nuanced, and, frankly, become more in tune with market ebbs and flows while still adhering to my Austro-libertarian analytic framework.
I recall a particularly trying period in January 2015, when I finally admitted that, no matter how much I despised the US dollar in relation to a hard asset like gold, my opinion didn't matter and the market was still king.
The Fed and other central banks still had a lot of clout with investors, so they had a lot of ammunition in their monetary arsenal. Yes, they were merely kicking the can down the road, resulting in a bigger problem tomorrow, but that didn't mean there wasn't money to be made today.
That was the point at which I had to decide whether I wanted to get better at this or quit. It meant truly humbling myself in front of the market and accepting that you aren't a 'one-of-a-kind snowflake,' or any other such nonsense. You are following in the footsteps of others, and you will continue to do so.
It meant going all in on what I do now, combining the global macro picture with political and social trends and placing them in a context of seemingly limitless corruption capable of supporting hundreds of Ponzi schemes around the world simply because everyone wanted to believe in them.
Dexter White and I have had a running debate about the liquidity of the cryptocurrency market for years. He consistently emphasises that cryptocurrency liquidity is primarily determined by the flow of capital into and out of bitcoin (BTC).
Everything else is a derivative of that, and if you control the flow into bitcoin, you control what Ponzi schemes can survive in that market. But, in my opinion, that argument was far more valid in 2017-18 than it is now.
Bitcoin and cryptocurrencies have been in an unusual state since the peak in April 2021. Bitcoin is clearly in a counter-trend bear market, while the rotation out of it and into other areas of the cryptocurrency space has seen spectacular booms and equally spectacular busts.
Following that, the sloshing of liquidity through various projects has made and cost a lot of people a lot of money.
With the Fed tightening dollar liquidity beginning in June of last year and the Bank of England getting ahead of the Fed in raising rates in the face of crippling inflation, we're now in a much different environment than we were this time last year when everything crypto was going swimmingly.
However, it was the massive bull market that lasted through the first half of 2021 that saw tremendous liquidity flow into all kinds of new projects, new ideas for generating yield in order to attract capital. It makes no difference whether or not they are Ponzi schemes.
It's difficult not to draw that conclusion from the current DAO-pocalypse in rebasing projects like OlympusDAO. You pay out 7000+ percent for any length of time with no reason to stay in the token other than the 'number go up,' and you are worse than any emerging market subject to 'hot money flows.' You're a ticking time bomb with a short fuse, ready to explode in everyone's face.
I consider this an explosion, especially for a project that is less than a year old, going from $800 to $35 and back to around $60 in two months.
That was without a doubt. Paying a yield to attract capital with no intention of doing anything with that capital other than holding it is playing chicken with investors, waiting for the first guy to cash out and start the avalanche of selling.
It makes no difference whether you're the Bank of Turkey or some random guy with a few servers and a Github repository.
We're seeing a massive acceleration of the lifecycle of these types of projects in crypto. Olympus has already spawned a slew of imitators, owing to its ability to raise nearly $2 billion in capital in a matter of months at its peak.
I'd say it was a combination of stupid greed, the insane amount of price appreciation in crypto, and a genuine desire to build something new.
Projects like that exist only because the current capital formation system is even more corrupt and unequal than a piece of code with minimal controls over money flow.
Unfortunately, this is how innovation takes place: through a lot of painful trial and error, as well as a lot of crippling losses. There is, however, no way out of the current hamster wheel of Central Bank-backed Ponzi schemes without this environment.
To 'grow up,' crypto must build on bitcoin's foundation in a sustainable way, where the replacements for the current upper layers of Exter's Pyramid are self-contained enough that the capital that flows into bitcoin at the bottom is treated well enough that it has no desire to leave and return to the fiat one.
It is unusual for a new technology to work flawlessly the first time it is introduced. So, I don't consider Olympus a failure because it's pointing innovators in new and interesting directions in their quest to solve the Ponzi math and achieve that elusive sustainability that can only be achieved by converting capital into real world assets.
They do so because the goal is admirable: to put an end to the systemic theft of debt-based fiat money. In the case of one new crypto project I've discovered, the time risk of traditional lending is even reversed in such a way that the entrepreneur is free of Wall Street's vultures.
Bitcoin maximalists believe bitcoin has attained this level of perfection, and they have yet to be proven incorrect. They haven't been proven wrong, however. Only time will tell how many imitators come and go. And I'm perfectly content to be both optimistic and pessimistic about the prospect.
However, bitcoin cannot contain all human activity or desired outcomes. This is where we are now, and it is for this reason that things like the spectacular booms and busts of the various DeFi platforms are necessary growing pains.
This is something that humans are prone to. We go through every bad idea and iterate on it until something viable emerges, if at all. Even projects that have had their fundamentals challenged, such as Olympus, and are still learning from their mistakes, have a future in helping us understand what can be done to avoid the Ponzi trap.
One valid criticism levelled at cryptocurrency is, "What's the point if we can't use these tokens, these magical beans that yield yield, to buy real things in the real world?" Isn't that, after all, what money is?
A place to temporarily park your savings while you save up for something you want or need in the future. As the old system teeters and cracks, and those who broke it try to shuck and jive us into throwing good money after bad while their Ponzi schemes fail, it is at this critical juncture in time that new ideas, good and bad, flourish.
Someone will crack that code in order to more efficiently convert math's promise into real-world wealth, just as someone will always try to manipulate it so they don't have to work for their dinner.
