Finally, main stream media catches up with us on Daily Kos. Last Saturday as part of our articles on interactions between the finance and tech sectors of the economy, we began counting the ways crypto currencies are problematic. That came after spending several weeks examining the coming Trump crash. And after spending last week focusing on a key factor paving the way to a crash, i.e. tech and finance sector players advocating “investing” in crypto currencies.
The tech bros want Trump to set up a crypto-currency “strategic reserve.” To make it they want him to buy up billions in crypto (much of which they own) using borrowed US dollars, and hold it for 20 years. Then, having gained trillions in value (supposedly) it could be used to pay off the national debt and/or buy everyone their very own 200 foot yacht.
You can tell I’m rather skeptical of that scheme. The survey at the end of that article showed most of you are too.
The Atlantic caught up with us on January 7th.
Annie Lowrey, a writer who has been covering bitcoin for more than a decade, starts her piece titled The Great Crypto Crash with: “’The countdown clock on the next catastrophic crash has already started,’ Dennis Kelleher, the president of the nonprofit Better Markets, told me. In the past few weeks, I have heard that sentiment or similar from economists, traders, Hill staffers, and government officials.”
As they say, this is a must read piece. Here is the core of her warning, echoing what we’ve been telling our Daily Kos friends as part of this series:
The danger is not just that crypto-friendly regulation will expose millions of Americans to scams and volatility. The danger is that it will lead to an increase in leverage across the whole of the financial system. It will foster opacity, making it harder for investors to determine the riskiness of and assign prices to financial products. And it will do so at the same time as the Trump administration cuts regulations and regulators.
I’ve heard that somewhere before. And if you’ve been keeping up with the series, or were alive and paying attention during 2008, so have you. Cutting regulation has led to disaster before.
She notes the real worry for regulators and economists is that the crypto crash will disrupt the financial system, though they expect it to take three or four years to manifest itself.
I don’t think it will take that long.
Legislation already introduced into Congress (by Republicans, of course) proposed to create a new class of digital commodities, exempt from SEC oversight. In that bill she writes, “any firm or person can self-certify a financial product as a digital commodity, and the SEC would have only 60 days to object.” (see link above)
Republicans, Helped by some Democrats, Paving the Way to Catastrophe, AGAIN
This is a recipe for fraud and a financial catastrophe equivalent to and possibly worse than the last time Republicans collapsed the financial system in 2008.
This time, EVERY single Democrat needs to vote against this bill. They should not fall for the same crap some did when they voted to pass the Commodity Futures Modernization Act that left a huge loophole for derivatives trading over the counter. That was the loophole the subprime loans disaster in 2008 came from.
This time, this proposal opening up crypto for “trading” is not “modernizing” the financial system; it is potentially jerking the foundation out from under it.
This time, Democrats cannot rescue bankers first as they did under Bush and Obama.
Bankers are going into this rubbing their greedy hands in glee at the prospect of once again bilking the public by privatizing the profits and socializing the losses. They have to be held to account this time.
This is blatant daylight robbery via duping of the public.
And the public being duped the most? The young men under 30 who swung heavily toward Trump and Musk in the last election. Yes, they may currently be making money in crypto, if they buy and sell it at the right time. But this is the Dutch tulip craze all over again. (Look up Extraordinary Popular Delusions and the Madness of Crowds.)
These young guys following the pied pipers of crypto are about to turn their financial future into ashes, and badly burn the rest of us because they haven’t yet learned how to tell truth from fiction, nor friend from foe.
Democrats in Congress need to get up to speed on this and get ahead of this, and warn the public, again and again, of the coming disaster. They need to build credibility and not give in to gullibility as they did in 2008-09. Seventy-one of them fell for this and voted for a bill in the last Congress that would open the door to financial disaster.
That includes 15 Progressive Democrats and Nancy Pelosi. More on this stupidity below.
I am not going to belabor the issues with crypto regulation, or de-regulation if truth be told, in this article too much. We spent time on those before in earlier articles, and I provide a brief summary below. Let’s just focus on the core problems of:
- Proliferation of types of crypto currency
- Vulnerabilities in its core technology
- Impact on the environment and our creaky energy grid, with its energy demands.
Summary of the Problems with a Crypto Reserve, Covered Last Week
- With a total market cap of $3 trillion in all forms of crypto and a rapidly rising national debt of $36 trillion and counting, it is all but mathematically impossible, even if the US government bought all currently existing crypto, that the ‘crypto strategic reserve’ would rise enough in value to pay off the debt. And if the US government owned it all, what use is it, and who would it sell it to without crashing the value?
- If successful, crypto could de-dollarize global trade, vastly decreasing American power and ending the dollar’s role as the global reserve currency. If market-explosively unsuccessful, it could have the same effect. It’s a lose-lose proposition.
- Crypto was invented to circumvent regulation surrounding government currencies, particularly that of the dollar, and ultimately undermine the ability of democratic nation-states to regulate themselves. It is a fraudster’s dream. Hence why it is supported by the likes of Musk, Bannon, Trump and other assorted people of less than honorable intent and character.
- The cryptocurrency strategic reserve proposal appears to be a scheme to permit these persons of less than high character to exchange their illiquid speculative pseudo-dollars for real dollars (at least while those dollars still have value).
If you want the full details of the problems above in the context of the coming debt crisis, last week’s article is here: Pt. 8 Black Swans, Inflation & Cryptocurrency Reserves. The other articles in this series aimed at helping investors prepare for the Second Coming of Trump are here: one, two, three, four, five, six and seven, and eight
Problems with Crypto Covered This Week
If the first four fundamental problems are not enough to persuade you of the folly of crypto currency, let us proceed to enumerate still more.
- Proliferation of types of crypto and their protocols.
- Vulnerabilities of blockchain tech, the basis of all cryptocurrencies.
- Energy demands and impacts.
Proliferation of types of crypto and their protocols
The biggest problem with cryptocurrencies is that there are just too many of them, with too many variations of programming language and too much decentralization, particularly of security protocols.
Most folks are at least familiar with the name Bitcoin and may assume that’s what Musk and the other tech bros are pushing. Not so. Even the Trumps are coming up with their very own version of crypto.
There have been thousands of crypto currencies started and hundreds still in use. Wikipedia has a shortlist by type and programming language of the main ones here: Cryptocurrencies by Type. Towards the bottom of that article is a list of “inactive” cryptocurrencies, most of which were found to be ponzi schemes.
This list is very incomplete. The main article on Wikipedia on cryptocurrencies is here if you want much, much more detail: Cryptocurrency
Side note: I think Wikipedia is currently a decent source of accurate information on most things. It’s not for sale to the highest bidder, like Twitter was. I support it, and so should you.
The key problematic aspects in this proliferation of crypto currencies can be found in the article on Financial Innovation and Technology for the 21st Century Act, the bill that opens the door to fraud as discussed extensively in the Atlantic article. Financial Innovation & Technology for the 21st Century Act
The Commodity Futures Trading Commission, which the bill tasks with supervising cryptocurrencies, is simply not staffed nor funded enough to police thousands and thousands of crypto currencies. The proliferation of such currencies, coming at a rapid pace, also overwhelms the resources of the SEC. By requiring these two agencies to jointly issues rules and define terms to avoid duplication of regulation, but to do so under tight timelines, makes it impossible to actually regulate crypto to any reliable degree.
Nevertheless, as noted above, 71 Democrats in the House voted for the bill in the previous Congress. It is certain to be revived in the new Republican majority Congress. Vote record at the link.
If you live in one of these districts with a representative who voted for this bill the first time, please contact them about opposing any such bill if reintroduced in the new Congress. My Democratic Congress person voted against it, and he’s a so-called New Democrat. Susan Delbene, leader of the group and a former Microsoft employee, voted for it. But so did a bunch of Progressives.
They should be ashamed of themselves.
Contacting them about this issue is another way you can take action to protect your own financial future.
Proper regulation is absolutely critical, but regulation is exactly what crypto currencies were designed to evade in the first place as the previous article discussed. This is the fundamental issue, and danger, with crypto. Without security being required and enforced, the door swings wide open to fraud.
Too many Democrats voted for massive financial fraud that could blow up the world economy. Just as too many of them voted for derivatives deregulation that blew up the world economy a couple decades ago. See last week’s article for details.
Vulnerabilities of blockchain tech, the basis of all cryptocurrencies
Proliferation alone of cryptocurrencies opens the door to manipulation. Investopedia examines some of the issues with crypto security here: Public vs private blockchains challenges and gaps
“Security is critical in public blockchains because of the value being transferred. In many cases, the number of participants is crucial to security because blockchain networks with too few nodes can be quickly taken over by bad actors. Also, if a blockchain's security measures are increased, decentralization and scalability generally decrease correspondingly because of the way public blockchains must be designed.”
One big problem, among many, with proliferation of cryptocurrencies is opening up the possibility of a 51% attack on the blockchain nodes. Wikipedia's summary:
“The total computational power of a decentralized proof-of-work system is the sum of the computational power of the nodes, which can differ significantly due to the hardware used. Larger computational power increases the chance to win the mining reward for each new block mined, which creates an incentive to accumulate clusters of mining nodes, or mining pool. Any pool that achieves 51% hashing power can effectively overturn network transactions, resulting in double spending.”
This occurred with Bitcoin itself in 2014, as noted in this wiki article. The Atlantic article also mentions this 51% attack as a key vulnerability. There are other articles that question the possibility and particularly the effectiveness of this type of attack. https://www.investopedia.com/terms/1/51-attack.asp
There is already a long record of hacks of bitcoin and other crypto using various hacks. This is only a partial list. Note how frequently these issues arise.
1. Mt. Gox (2014) One of the most infamous hacks in cryptocurrency history, Mt. Gox was a Bitcoin exchange that lost approximately 850,000 Bitcoins (worth around $450 million at the time) due to a security breach. The exchange eventually filed for bankruptcy.
2. Bitfinex (2016) The Bitfinex exchange was hacked, resulting in the loss of about 120,000 Bitcoins, valued at approximately $72 million at the time. The exchange implemented a recovery plan that involved socializing losses among its users. Interesting approach for libertarian crypto advocates, eh?
3. DAO (2016) The Decentralized Autonomous Organization (DAO), built on the Ethereum blockchain, was hacked due to a vulnerability in its smart contract code. Approximately $60 million worth of Ethereum was stolen. This incident led to a controversial hard fork of the Ethereum blockchain, resulting in the creation of Ethereum (ETH) and Ethereum Classic (ETC).
4. Coincheck (2018) The Japanese exchange Coincheck was hacked, leading to the theft of around $530 million worth of NEM tokens. This revealed vulnerabilities in another form of cryptocurrency.
5. Poly Network (2021) A vulnerability in the Poly Network, a cross-chain decentralized finance (DeFi) platform, was exploited, resulting in the theft of over $600 million in various cryptocurrencies. Interestingly, the hacker later returned most of the stolen funds.
6. Ronin Network (2022) The Ronin Network, which supports the popular NFT pyramid scheme/game Axie Infinity, was hacked, resulting in the loss of approximately $620 million in Ethereum and USDC. This incident highlighted vulnerabilities in the security of blockchain networks used for gaming.
And another aspect for hacking opens up this way: As the total and individual “value” of any type of crypto rises, the temptation to try to achieve a 51% attack rises. It rises additionally for state actors who may wish to attack a cryptocurrency reserve in order to undermine the financial stability of an adversary state. This latter temptation is the most dangerous one. And the very nature of crypto makes it nearly impossible for a state actor to defend crypto.
Whereas we have many ways to “defend” the dollar against all kinds of threats.
And the Craziest of All Acts
Perhaps the biggest underlying problem for cryptocurrency is that its very foundation, blockchain technology, rests on several unproven mathematical conjectures, such as the conjecture that computing elliptic curve discrete logarithms is hard, or that inverting cryptographic hash functions is hard. The biggest unproven conjecture underlying all the other conjectures is whether P = NP.
The question of whether P = NP can be proven is one of the most significant open problems in computer science and mathematics. P vs. NP is a question about the relationship between two classes of mathematical problems: P (problems that can be solved in polynomial time) and NP (problems for which a potential solution can be verified in polynomial time). Polynomial time means, effectively, solvable in human-relevant time frames like seconds or years, as opposed to time frames measured in eons.
Proving whether these two classes are equal or not, i.e. whether any problem where solutions can be verified efficiently can also be solved efficiently, is a fundamental question in theoretical computer science.
While there is no formal proof either way, the prevailing belief among many computer scientists and mathematicians is that P ≠ NP. This belief is based on the difficulty of finding efficient algorithms for NP-complete problems, despite extensive research. Blockchain tech assumes P ≠ NP.
If a proof either way were found, it would have profound implications for computer science, mathematics, cryptography, and many other fields. A proof that P = NP would suggest that many problems currently considered intractable could be solved efficiently (and no cryptocurrency could ever be secure), while a proof that P ≠ NP would reinforce the understanding of computational complexity (and place cryptocurrency on more secure grounds).
While it is theoretically possible for P vs. NP to be proven, whether it will ever be proven and what the outcome will be (P = NP or P ≠ NP) remains an open question in the field of computer science.
To base trillions of dollars in value, the whole system of exchange, the functioning of global civilization itself on an unproven (literally unproven) conjecture seems to me like an act of madness. That quantum computing might, in a few years, be able to overcome some of the cryptographic technology underlying most current cryptocurrencies is enough to merit a pause in these schemes.
Waiting to find out, and in the meanwhile, spending hundreds of billions or even trillions to set up a crypto reserve not meant to be spent for 20 years (many lifetimes in technological development) is a gamble only a con man would love—to foist off on you, the taxpayer.
A.I. and crypto demand for energy
Crypto has even greater negative consequences than financial disaster, believe it or not. Blockchain tech tends to require enormous computing power for transactions, and transactions proceed slowly, which is another barrier to its ready use by billions of persons.
Various efforts have been made to create crypto that requires less computing power, and other cryptocurrencies have mandated “green” power sources to meet the power demands. A 51% attack takes an immense amount of computer power, regardless of the type of crypto.
Mining crypto for the types that requires it takes a huge amount of power. For Bitcoin alone (remember, one of thousands of types of crypto), Cambridge University developed an active, constantly updated site tracking electrical power demand.
When I checked for this article, it was estimating about 175 Terawatt hours of power used annually for the Bitcoin network alone. The US EIA estimates mining for crypto accounts for anywhere from 0.6 to 2.3 percent of the entire United States electricity use as of 2023. It also estimates electrical demand from A.I. data centers and crypto mining networks could increase substantially by 2050. https://www.eenews.net/articles/unsolved-mystery-how-much-power-is-crypto-using/
https://www.eia.gov/todayinenergy/detail.php?id=63344
https://www.eia.gov/todayinenergy/detail.php?id=64130
https://www.eia.gov/todayinenergy/detail.php?id=63304
This increasing, rapidly increasing, in fact, demand for energy stresses an already stressed grid. Add in EV adoption, which is also increasing at a rapid rate, and you have enormous strains of the grid that are already keeping officials awake at night in worry. The best study I have seen so far of the energy demands for cryptocurrency use in all forms is this one: A Comprehensive Analysis of Blockchain based Cryptocurrency
The green movement is becoming more aware of how A.I. and cryptocurrency mining and use are affecting energy related pollution. A.I. vs cryptocurrency mining power use and efficiency
These sources serve to set up next week’s article looking at the Energy and Utility sectors of the stock market. These may be some of the best sectors for investors to weather Trump’s erratic administration. Except for the fact that climate change related forest fires are increasingly affecting, or even being started by, utilities moving electricity across an increasingly aged grid.
Ironically, I think A.I. and cryptocurrency energy demands will do more to protect the renewable energy and grid improvement initiatives of the Democrat’s IRA bill than perhaps anything else. Distributed energy systems that do not use grid systems running through forested land will rise in attraction, and almost all of those are based on some form of renewable energy generated on premise along with battery storage. The initiatives in the IRA favoring such systems will partially protect the E.V. movement which needs a massive expansion in energy provision to meet the need to change over the transport sector from fossil fuels to renewable power. Investing in renewable energy production and grid modernization via stock purchases of those doing the work is one ethical, and I think profitable, way to both spit in the face of Mr. Trump and protect your portfolio from his financial chicanery.
The other way is to contact your Congress person, especially if they are a Democrat who fell for Republican’s fraudulent de-regulation B.S. before, and warn them away from going along with proven fraudsters and con men on their crypto schemes.
Next week: Energy and Utility sectors of the market. There will also be assessment of the effect of wildfires on utilities as investments. The Maui, Paradise California, and now Los Angeles fires have revealed serious dangers posed by our aging grid system and by how much of the grid runs through increasingly fire prone forest land. Normally, utilities have been regarded as one of the best investments for risk adverse investors. Climate change is transforming that assessment, and may yet dramatically change views on centralized power generation and distribution across thousands of miles of high voltage overhead wires.
Please answer the survey so I get a better idea of what to focus on in next week’s article.
Disclaimer and disclosures:
I am not a CFA (chartered financial analyst). This article and comments are not investment advice from a fiduciary. They are discussions among investors with varying levels of experience. For over 30 years I taught state-market interactions at under-graduate and graduate level, focusing mainly on economic history and thought as well as specialized classes on international trade structures (WTO) and dynamics, and public administration as it relates to economic policy making, taxation and regulation, mainly in China. I was an area political-economic risk analyst for a decade for an internationally known risk assessment firm. I have technical degrees (and experience) as well as academic degrees, including a certification in Military History from West Point which would have let me teach ROTC classes if I had not gone overseas. I also started two small businesses (one a B-corporation type) and currently farm (organically and sustainably) in WA state. I have managed my own investment portfolios for at least 25 years. All advice is offered freely and from this context.
