“Cryptocurrency is a giant scam, although a complicated scam . . . ” So begins Stephen Diehl’s diatribe against the crypto industry.
When he published it in June, Bitcoin and other crypto assets were trembling. Since then, the collapse of FTX, the second-largest crypto exchange, has created a potentially existential crisis. Billions of dollars of customer assets seem to have been incinerated, along with FTX founder Sam Bankman-Fried’s status as an altruistic visionary. Is crypto all just a mirage?
Like Bankman-Fried, Diehl is a thirtysomething American with a nerdy manner and unbrushed hair. But while Bankman-Fried urged US lawmakers to carve favourable new regulations for crypto, Diehl pulled the other end of the rope. He lobbied for crypto to be regulated like other assets. In June he co-ordinated a letter of 1,500 technologists to senior members of the US Congress, urging them to look past “the hype and bluster of the crypto industry” and understand its “inherent flaws”.
Diehl has the grasp of programming and economics to question crypto from first principles. He has tried to sell blockchain technology — the distributed databases on which crypto is built — and believes that he could have ridden the crypto wave: “Anybody who looks like a nerd like me can probably go to the Valley and raise $50mn from some very credulous [venture capitalists] to pump a token and make a life-changing amount of money.”
Instead he stood on the sidelines, blogging about crypto’s failings. That won him a following — but also harassment, including death threats. “The past three years have been hell,” he says, naturally shy. “It’s not easy being a crypto sceptic.”
Diehl’s book, Popping the Crypto Bubble, traces Bitcoin’s emergence during the global financial crisis to the post-2016 crypto gold rush, which he refers to as the “Grifter Era”. He argues that crypto is slow (it relies on broadcasting transactions across decentralised networks) and unreliable (individuals are responsible for securing their assets; when they lose passwords or die, there is much less recourse than with, say, a bank). It cannot be both a great investment, which goes up and up, and a viable currency, which offers stable value. He argues that crypto assets’ price is based largely on there being an even greater fool who believes the hype.
“After 14 years, it is still a solution in search of a problem. It’s not building a new financial system. It’s not building a new internet. It’s not an asset uncorrelated with the market. It’s not a hedge against inflation. It is a vehicle for pure, naked speculation detached from anything in the economy. It’s a casino that’s wrapped in all of these lies. When you tear back those lies, what’s left looks like a net negative for the world.”
You may not be interested in crypto, but you should be. “It reveals a lot of our dark tendencies,” Diehl says. “And it’s a mirror for a lot of the political struggle in society.”
Diehl, 34, grew up in Massachusetts. He studied physics, and was an early employee at Quantopian, a now-defunct hedge fund that crowdsourced investment algorithms. He later moved to the UK with Adjoint, a software company applying blockchain technology. High street banks wondered if such distributed databases could, for example, consolidate the steps to approve a mortgage.
“This is an interesting idea. Except in practice it doesn’t work very well. I worked on a few of those projects, and in every single circumstance, there’s a much simpler solution, using software that’s been around 30 years.”
Blockchain could connect actors who don’t trust each other. But in a world where banks do trust each other, “a so-called trustless network is redundant . . . If you have three high street banks and they all have data that they want to share with each other, having three databases that are automatically kept in sync is a much more complex architecture than simply having one database that they all share.
“I won’t say we have a 100 per cent answer on [whether blockchain is useful]. But the answer seems to be not really.” Last week Australia’s stock exchange abandoned an attempt to transfer its clearing house system to a blockchain-based platform — writing off A$250mn ($168mn) and seven years of work.
In 2019 and 2020, when Diehl started blogging, bitcoin rose sevenfold. Crypto fans mocked non-believers with initials such as “hfsp”: have fun staying poor. Did Diehl not fear missing out? “I don’t have a high-risk tolerance.” (He failed to outperform an index fund while trading his own money.)
His reservations were also ethical. “The price floor for sterling is that people have to acquire sterling to pay their taxes. The price floor for crypto, if there is one, is dark money flows, money-laundering and crime.”
Crypto exchanges have been hacked and gone bust before. How serious is FTX’s collapse? “It’s the equivalent of a JPMorgan or a Citi collapsing in 48 hours. Plus they were the biggest player pushing the crypto industry’s regulatory agenda.”
If Diehl is right, should all crypto assets soon go to zero? He is wary of predicting. “I think once the capacity for parabolic upsides goes away, institutional money is going to dry up . . . I fully suspect there’ll be a lot of retail interest for some time because the memes and the narratives appeal to a certain type of investor — someone who’s young, male, economically disenfranchised and who has a high risk tolerance. There’s a lot of those people.
“[Crypto is the] commoditisation of populist anger and gambling and crime.”
Crypto fans’ loss of faith in the financial system is, in some ways, odd. Even in the 2008 crash, bank deposits were insured. Stocks rose for much of the past decade. “In my most empathetic reading of crypto investors, look at this country — how many young people feel that they have a chance of getting on the housing ladder? A lot of them feel that they need to invest in higher-risk assets because they need higher returns.”
How much sympathy does he have? “I don’t want to see so many people getting hurt. My generation has been hit by the financial crisis, by Covid, we’re going to have the climate crisis. These people don’t need this extra suffering in their life.”
One response to FTX’s bankruptcy is that it was a centralised platform, and based offshore. A better form of (decentralised or regulated) crypto could replace it. “If you accept the thesis that the assets are a ‘greater fool’ scheme, it doesn’t matter where you’re trading it.”
What if crypto’s crisis is like the dotcom bubble? Pets.com went bust, but Google and Facebook soon surged. But unlike FTX, Pets.com “would show up at your door with dog food, they were trying to do a real thing,” says Diehl.
On the spot
Book you most recommend to people? This Time Is Different by Carmen Reinhart and Kenneth Rogoff
Your most irrational habit? Coffee addiction.
What will we use the metaverse for? It will have applications in gaming, things like computer-aided design, and porn. Do I think it’s going to change anything about our society? Not really.
One argument, put forward by venture capital firm a16z, is that crypto could be used to pay creators online, breaking the grip of Facebook and Google. Does that stack up? “No, because the end consumers of these products want dollars and pounds.” What if we live more of our lives online, paying for digital goods in the metaverse? “Can I not pull out my phone and pay you pounds in 15 seconds? Money’s already digital.”
He argues bitcoin, in particular, is too slow to scale: it processes about seven transactions a second — “roughly enough to run a small Tesco’s, but not a national economy.” (Diehl hasn’t “fully formed an opinion” on the digital currencies that central banks plan to issue.)
Crypto was meant to democratise finance. Instead, because crypto assets are unregulated and “deeply manipulated”, hedge funds and others have managed to pump and dump. “This looks like a giant wealth transfer from a lot of really unsophisticated retail investors to a lot of sophisticated investors.”
Among those whom Diehl criticises is Elon Musk, who has fanned the meme coin Dogecoin, and whose car company Tesla bought bitcoin (before selling most of it). “Elon is a clown. I think it’s a joke to him. He’s just an enabler for it. I’m not sure he even believes in it.”
Politicians have been wary of blocking crypto “innovation”. Regulators have been overwhelmed. Diehl likens the bubble in ICOs — initial coin offerings, where crypto entrepreneurs raised money for projects that mostly disappeared — to a cyber attack on the regulatory system. “Let’s create 10,000 securities violations, and the [Securities and Exchange] Commission simply doesn’t have the bandwidth to go after 1 per cent of those.”
One answer is “to go after the exchanges”, the biggest players. But so far the US response has been “incoherent”. The SEC’s chair Gary Gensler has suggested most crypto tokens are unregistered securities, “but it seems like they’re unwilling to actually prosecute that.”
Sherrod Brown, chair of the Senate banking committee, called FTX’s collapse “a loud warning bell”. But many people in Congress are happy to let crypto “burn itself out like a forest fire”, says Diehl.
He wants crypto to be curtailed instead, as a blow against the post-truth world. “The average person needs to be able to tell you as a matter of common knowledge why investing in assets that have no intrinsic value is a bad idea.”
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