Inside the #Ponziverse

There are so many other topics besides cryptocurrency that I’d like to write about on this blog, but because I’ve been ranting so much about it recently, due to the renewed interest in NFTs from this billionaire’s war between Web 3.0 grifters and Bitcoin grifters, I thought it might be wise to create one or two new “unwound thread” posts for people to share with their friends and comrades, based on my Twitter thoughts, with additional commentary.

This rant started out with learning yesterday (Christmas Day) that one of my niece’s classmate’s family is fully invested into NFT virtual real estate, of all things. Here’s the sketch that my sister outlined about the father: he’s on disability, he drives a car for Uber, somehow the IRS found out about his unreported earnings and are garnishing his wages, and the family has already been suckered into buying timeshares (plural), you know, the partial ownership of vacation properties that are notoriously hard to get out of if you don’t want to use them any more (I’ve heard that Disney is a rare exception to this rule of not being able to exit their timeshares, because they don’t want the bad publicity).

Are you sensing a theme here as far as a certain combination of gullibility, greed, and inability to cover one’s own tracks? So now he’s been reading on the Internet posts like this one that are telling him that NFT real estate value will appreciate wildly (unless it doesn’t), because it’s the latest technological marvel, and you can buy some right now, in not just one, but two different virtual worlds (Decentraland and Cryptovoxels), but don’t wait, because supplies are (artificially) limited!

This guy is now, sadly, fully bought into all of this, and he thinks that his family are going to become “hundred-millionaires” thanks to the appreciation on their NFT real estate investments that he’s sunk the kid’s college fund money and everything else into snapping up with real (USD) money. Best of all, he can now mortgage his virtual properties for more funny money to buy even more pretend properties!

These are exactly the people who I’m worried are going to lose everything in the upcoming (it’s only a matter of time) market crash. The visual analogy I’m using from now on with NFTs and smart contracts is as follows: Ethereum itself is a house of cards. We don’t know where the price will settle after they switch to proof-of-stake in order to avoid being banned with the proof-of-work worldwide ban that I’m agitating for in order to save the climate from more disruption than necessary, and to help us wean ourselves off of fossil fuel energy as quickly as possible, while we still have time to prevent further permanent damage to our climate for future generations to live in.

But this dad my sister was telling me about believes that the real world doesn’t really matter because he’s looking forward to living inside his virtual McMansion full-time, like the characters in Ready Player One. Does any of this sound healthy to you? It’s as if he’s already let go of the idea of ever being able to cash out his crypto into units of currency that he can use to buy things IRL. I wonder how he’s going to pay for those timeshares they own.

Back to that house of cards. For now, ETH is trading at a certain price, trending upward, and so people are buying it up like a junk bond. It makes much more sense to think of it as a security rather than a currency, but let’s not get sidetracked. I’ll tackle inflation and deflation in a future post.

Unfortunately, there’s almost nothing you can do with cryptocurrencies besides cash them back out into real money, and people are so greedy that they’re not satisfied with just the returns from their preferred junk bond(s). There are very few things you can actually do by having ownership of an NFT in the real world, although I don’t doubt that there will be more use cases for them in the future, since people seem enamored of the concept.

But if you’re out there selling a “limited number” of virtual plots of land in some MMO that you may or may not have secured funding to continue running for more than the next 6 months, then you’re building, if not a Ponzi scheme, another house of cards, except this one is inside the top triangle formed by the bigger house of cards. Are you with me so far? Good. This inner house of cards is forming around the incredibly boneheaded idea of “artificial digital scarcity” which is just a way to create artificial demand for something that is far from scarce on the Internet.

But eventually the easy money is used up in the inner house of cards, and many people aren’t satisfied with the Ponzi-like returns from buying and selling NFT virtual real estate, so so now they’re able to mortgage that real estate, or otherwise invest their various crypto coins into “investment schemes” (hopefully the planners call them “opportunities” so as to not run afoul of any pesky legal regulations surrounding grown-up people investments and not a child’s idea of them), on the blockchain, and we can visualize that ecosystem as another, yet smaller, pyramid-shaped house of cards being built inside the NFT real estate house of cards inside the Ethereum house of cards.

There’s a risk factor we can easily see from this picture. If the big house of cards collapses, it takes the other two with it. But also, if either of the other two houses of cards collapses, all three go down. In terms of actual economic value to the entire enterprise, the proportional sizes of the pyramids are probably more or less correct, but in terms of leverage and potential downside (as well as upside, which just makes people even more likely to want to buy in, in the hopes of winning the lottery), I’m pretty sure the dad that I heard about from my sister is paying way too much money for ownership of the smallest piece of the littlest triangle.

This nested leveraged system, with no legal rules governing anything except for the capital gains and losses that you can report, in fiat money, on your income taxes, combines the speculative mania for anything “tech” (with “X on the Blockchain” replacing “X on the Internet”) of the late tech boom of 1999-2001 with the irresponsible and complex casino-style gambling with complex side bets on who’s going to default on their debts first of 2007-2009. Only this time it’s we the people doing it to ourselves instead of the big bad central bankers who haven’t really spoken out against it other than to scold people for buying into what’s clearly not a real currency or a real stock.

One response I get a lot is that I must not care about people in developing countries who don’t have access to banks or a safe currency to store their wealth in. Articles like this one, cheekily titled “Check Your Financial Privilege”, summarize a few of these countries where individuals have been able to use Bitcoin to bypass a corrupt or highly inflationary system. I don’t have much to say about Sudan or Ethiopia, where it may indeed be useful, but I wanted to point out that Nigeria, the third country mentioned in the article, is currently working to roll out a new blockchain-based (not Bitcoin or Ethereum) digital cash called the eNaira, which sounds more innovative than any other blockchain-based currency that I’ve heard about so far.

But the eNaira is Nigerians’ money, a digital version of their own money supply, and not Bitcoin hoarders’ money that they want to helicopter drop into poor countries, regardless of the effects it has on the population, as a sort of “white savior”, you might say (*cough* Jack Mallers *cough*). The inflation rate on the Naira isn’t as dire as the Bitcoin Magazine article makes it seem. I think the desire for personal profit on their HODL hoards easily explains the very distorted and self-serving positions they take about currencies, and the irrational fears they have of future waves of hyperinflations like what happened in Argentina over the past decades.

When I read that 32% of Nigerians, 21% of Vietnamese people, 20% of Filipinos, and 16% of Turks and Peruvians are using cryptocurrency, I just hope that they don’t lose more than they can afford to lose the next time the market crashes, and also that they’re more savvy and less gullible than my niece’s classmate’s dad who’s going to get rich quick on NFT virtual real estate.

I think it’s possible that Big Oil was behind Satoshi Nakamoto, and that’s why they don’t care about cashing in the early blocks. It was probably created by an individual, but at this point in time, it’s the fossil fuel companies who are the ones profiting the most from the demand for fossil fuel energy that simply wouldn’t be there otherwise. But that’s a story for another essay.

My next two posts, coming in the next two days, will be about how cryptocurrencies are “cosplaying being a bank” with play money and also they’re terrible at it, and about why a ~2% inflation rate in the money supply (the inflation rate the Fed targets for the USD) is actually a good thing for the economy, and particularly for workers, because otherwise the wealthy would sit on their money and never invest it.

In the meantime, you can learn more about the history of Japan’s Lost Decade, read the definition of “liquidity trap” and “credit crunch” (the two can happen at the same time!), or read this article explaining why a deflationary currency, such as Bitcoin is by design, is central bankers’ worst nightmare for their own currencies (because it kills investment and jobs).

What do you think? Tell me in the comments below.





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