I don't understand crypto (didn't understand derivatives either). I have worried that my ignorance will cost me in investing — that people smarter than me are going to make bank while I'm derp-derping with my index funds.
Reading as others, apparently as ignorant as me, ask questions about crypto, etc. the in-crowd seem to get it, seem to understand it. I find that generally the case with anything monetary/financial though: the people that do this complex stuff seem to understand it but seem unable to explain it in a way that someone as simple as me can understand.
In order to play the crypto game you have to learn this absurd set of rules. And there's something about crypto though where the proponents almost revel in other's ignorance. I've had a hard time deciding whether the proponents really understand it (and all of its nuances) or if pretending you understand it in fact part of the game.
This is the key to the crypto scam. It looks like it's complicated, and you have to be really smart to understand what's going on!
But it's not complicated at all.
Buy some crypto. Convince more people after you to buy it too - price goes up. If more people are selling than are buying, price goes down. Time your exit.
In the end, everyone loses - because there's always going to be more money going out (to pay the electricity bills and suchlike) than there is coming in.
If you're lucky, you might be able to get more money out than you put in. But it's pure luck in gambling on the timing, it's not about being smarter than other people.
As was pointed out in a podcast I listened to this week, you’ve essentially described a Ponzi scheme. Fundamentally, making gains on crypto requires someone else showing up and putting money in so you can get yours out. It’s more obvious with NFTs because they’re not pretending to also be money.
He’s describing a speculative bubble, not a Ponzi scheme. By your definition any enterprise where money flows in and out and involves more than one party is a Ponzi scheme.
1. If bitcoin didn't have transaction fees and you have unrolled every bitcoin transaction ever made, everyone would have the same amount of money they started with. This is called a zero sum game.
2. But it does have transaction fees so if you did the same in the real world then the miners would be ahead and everyone else would lose. This is called a negative sum game or a scam.
3. If you were to do the same to, say, every Intel stock, then you'd be ahead because of the dividends paid.
This is silly. Way too many things would meet this standard for "scam"/"ponzi". Gold for example: it costs money to dig it out of the ground, and critically to keep it stored securely, insured, tested for purity, etc. Consider how much money the USA must spend keeping its gold stockpile safe! Those are pure drags on the system so indeed the total amount spent on gold must always be more than net proceeds from gold sales after accounting for cost of ownership.
A ponzi scheme can turn into a roughly zero sum game if there isn't a rush but instead stable behavior over hundreds of years. Which is exactly what you describe with gold.
Plus, gold actually does have some industrial uses so its value is actually somewhat greater than zero even if people one day woke up and didn't think it looked good for jewelry :P
This is just true if you assume the transactions have zero value which seems unlikely given that in general most transactions/commerce creates a lot of value.
This is a shallow and narrow way to view crypto, and describes the typical incurious HN view that crypto is just a big ponzi.
Another way to view it, is as a digital economy running on a different set of technologies. You don't need to "invest" or "time the market" or anything, you just buy ETH to use it as a gas token.
Buy some ETH, an amount you are OK to write to zero like you would a hamburger or movie ticket purchase. Move the ETH off a CEX into your own self custody wallet to understand what it means to hold an asset with nothing but a private key. Convert it to stable coins with DEX like Uniswap, to avoid thinking about price. Send them to and fro, use DeFi, buy a ENS domain. It might cost you $10-50 total but you will probably come out of the experience with a better understanding of crypto, and you might also start to see traditional banking infrastructure differently, maybe slower or less verifiable or less secure or too centralized or too hard to build programmable interfaces on top of.
This is too cynical of a take for me. I fell down the rabbit hole after reading/watching some of Vitalik's writing years ago. I think it's worth spending a small, insignificant amount to play around with some apps that have a genuine purpose. These days I'm most interested in gitcoin.co grants and the use of quadratic funding to support public goods (eg: open source software). You can read a summary write-up of a previous round [here](https://vitalik.ca/general/2020/10/18/round7.html) if curious.
> I've had a hard time deciding whether the proponents really understand it (and all of its nuances) or if pretending you understand it in fact part of the game.
Along those lines, it always seemed like an Emperor's New Clothes kind of scam to me ("These are the finest hashes!"). There was always this dialog in my head when the crypto bros would extol it's virtues that went something like "Wait, it's just a hash, right? But what if they're on to something? Nah, they're not onto something... but they seem to be making money... but it seems like a ponzi scheme where the people who got in early can cash out, but the people who jump in later lose money... c'mon, how is it not a ponzi?"
> I don't understand crypto (didn't understand derivatives either)
Never invest in something you don't understand. That seems to have worked out for you as you didn't get caught up in it.
> And there's something about crypto though where the proponents almost revel in other's ignorance. I've had a hard time deciding whether the proponents really understand it (and all of its nuances) or if pretending you understand it in fact part of the game.
You are projecting your insecurity - don't focus on the assholes. Most people actually being productive in the blockchain space want you to learn. You are right to think there are lots of marketers/sellers who don't understand what is going on. Listen to the engineers who are talking about the details on discord and on their blogs, not the idiots on Twitter trying pump their bags.
> In order to play the crypto game you have to learn this absurd set of rules.
This is true - people who are playing the crypto game are trying to invent new rules for how society should operate. This is why some things that happen in the crypto world seem incredibly stupid or useless. People are working with different fundamental assumptions.
> I don't understand crypto (didn't understand derivatives either). I have worried that my ignorance will cost me in investing — that people smarter than me are going to make bank while I'm derp-derping with my index funds.
Crypto requires a constant influx of new investment to continue making that number go up.
The FOMO narrative gets pushed hard for this reason. As long as regular investors are convinced they have to invest in crypto or else they'll miss out, the money continues to flow into crypto.
The problem with these collapses is that it breaks the narrative and makes people wake up to the reality of the game. That's one of the reasons the crypto industry is moving hard and fast to distance themselves from FTX and SBF.
The FOMO narrative gets pushed hard for this reason. As long as regular investors are convinced they have to invest in crypto or else they'll miss out, the money continues to flow into crypto.
And oh, was it pushed hard by FTX. The infamous "Don't be like Larry" Super Bowl commercial [1] was from FTX.
The FTX bankruptcy has somewhere upwards of a million creditors.
In general, the issue with cryptocurrency is there is very little actual economy around it (that is, buying and selling actual goods, not just exchanging for different cryptocurrencies and tokens), so much of the value isn't really backed by anything.
It's mostly just speculation, which becomes a "greater fool" thing - you're only going to win if you time it right, there's enough pumping happening for you to profit, and get out before the next crash.
People who try timing it will always fail. I tried trading and timing, and if I compare that to just holding bitcoin and no timing or no altcoin trading, I would have ended up with more.
I'm not the only one it seems due to the famous HODL.
Same as with the stock market, just buy and hold for a long time. Hard to beat that strategy.
I agree with your first line. Almost everybody who try to time it will fail, I should have made that clear. Mostly the people who "timed it right" did it by accident.
But I disagree with the last bit. Holding is a terrible strategy with crypto now, because there's no economy to buffer it, and there are so many scams that drop the price of basically all the cryptocurrency market when they collapse. There are still more after FTX to go.
There was a time when speculating and holding for enough time could make ridiculous amounts of money. But at this point the only way to win is not to play (or be one of the scammers and do a rug-pull, but please don't).
> I don't understand crypto (didn't understand derivatives either). I have worried that my ignorance will cost me in investing — that people smarter than me are going to make bank while I'm derp-derping with my index funds.
There are two sides to crypto. There is the technology side (blockchains, cryptography, consensus) and there is the finance side, the financial products on the blockchain. If you're an engineer you'll easily understand the technology side but there's no way around spending a significant amount of time learning about (traditional) finance to understand how exchanges, derivatives, market making, monetary policy, loans, leverage, and so on work. All of the same ideas apply to crypto.
This "absurd set of rules" mostly applies to the technology side, not the finance side. If you strip out all the marketing, the financial products you find on the blockchain are no different from the products you find in traditional financial institutions, with maybe a few exceptions like AMMs or stablecoins.
My experience has been that the people who understand crypto and who are successful are NOT the people who understand technology, but mostly the people who come from a finance background and can pattern-match their experience to crypto.
I think reading warren buffet’s letters to shareholders of berkshire hathaway is definitely worth it, there’s a lot of common sense about companies and investing, and kind of proves the feynman quote about “you don’t really understand a topic unless you can explain it to a motivated freshman” (“freshman” = 1st year undergraduate student in th US) . By that standard, Buffet clearly does understand finance, the ones who can’t explain either don’t really understand, or, as you implied, are trying to scam you
> the in-crowd seem to get it, seem to understand it.
absolutely not speaking of anyone on HN (where people seem more learned and aware) but most of those who 'seem to understand it' on Twitter / Reddit etc. are just folks who have put in their money after reading fancy terms and want to 'pump' a given coin. So that they can validate their investments to themselves.
This is just my personal opinion so there's that. I have been wrong about lots of things, could be about this as well :)
I have some rudimentary knowledge of crypto. I think better than most.
I don't understand some of the more complicated concepts like DeFi and flash loans. I mean I could explain some of it but I didn't actually understand it.
That being said, I decided to learn more and got some of that knowledge from Twitter. It's a terrible place to learn because the education is laced with propaganda and it's very difficult to tease out. Something about it makes you put down guards that you otherwise have.
I stopped using Twitter for other reasons and something really interesting happened. It felt like I was coming out of hypnosis. My optimism towards crypto began to fade - probably because outside of crypto circles the general sentiment is that it's a scam.
A broken clock is right 2x a day and it's important to remember you're likely no smarter or dumber because you bought or avoided crypto.
I think the 'Intro to Bankless' podcast is a really good way to start learning the nuances. There are many parts of the crypto community that are very welcoming to newbies. /r/EthFinance is one of the best.
Crypto is indeed very complex. You have everything from AMMs to no-loss lotteries to Arweave perpetual endowments. I spend 10 hours a day in crypto finance and don't understand all of the nuances, so I can see how it might be intimidating. The best way to learn IMO is send a few dollars to Polygon to play with different protocols like Uniswap, Aave, PoolTogether, things like that.
Yes, because software engineers understand every nuance about operating systems and financial advisors understand every nuance of the global financial system...
I'm making the point that it's extremely complicated and not to worry about knowing everything.
It only offers overcollateralized "trustless" loans (ie instant with no credit check or KYC). However, KYC'd undercollateralized lending protocols are making some headway. The most popular one currently is called Maple, wherein delegates can perform credit checks on borrowers, and provide first-loss capital, while lenders can be you and me.
One can imagine that a "crypto finance" mortgage would look similar to a traditional mortgage in that credit checks and property assessments are needed, however when on-chain it could be done with more transparency (and having just gone through the process I can tell you it is NOT transparent) - the biggest benefit would be borrowing money from a real pool of user capital as opposed to a bank, so real people can earn 7% APY on their money backed by a basket of home loans, with a very transparent middleman. Does that make sense?
that's mostly product churn. yes, definitely part of crypto, but people don't have to understand each and every new thing in crypto to understand crypto.
Both opponents and propontents can be so sure about themselves, either that it's obvious it's all a scam or obvious it has value and huge amounts in the future.
The fact of the matter is that nobody can tell at this moment (I'm sure plenty of you will claim they do).
If you cannot see the potential value yourself, I would advise to stay away from it.
And if there will be something in the future where you can see the potential value, and is high risk/high potential return, you could invest 1% of your portfolio into that one. Worst case you lose 1%, best case you gain 100%. The latter is how it went with crypto, but it could have just as easily turned the other way.
I guess investing in startups is the same, although you need a shitload of money to get into that game.
> In order to play the crypto game you have to learn this absurd set of rules.
Bitcoin has a value that rises and falls on a (spectacularly) speculative basis. Apart from the complications of buying/selling/holding Bitcoin, it is no different to trading in something else with perceived value that has active buyers and sellers and which has questionable intrinsic value.
However, there are numerous other schemes, derivatives, exchanges, faux lookalikes, messiahs, manipulators and fakes that make for those absurd rules.
I find Matt Levine and his column Money Stuff at Bloomberg precisely so valuable because this complicated dry stuff is explained simply and with a lot of humor. I don't know enough to know if it is over simplified or wrong but it seems correct and is very accessible. It probably won't help you invest in derivatives or understand options better than index funds, but that column is an interesting rare exception to the rule of finance being esoteric and inaccessible.
can you give an example of nuance he left out? (I'm not reading every mail that comes in, and sometimes find his writing too verbose, but not really due to details, just to repeat/reiterate things, and mostly in the same - not too illustrative - way)
At a high level, could a cryptocurrency be used as a normal currency? What would be the benefit of using a cryptocurrency? Is the goal to be used at a large scale globally or would it at best remain niche?
And behind "normal currency" I hide a lot of things that I don't know about. Does it has to be stable? Does it have to follow a real currency like the USD?
'USDC' which is a dollar-backed stablecoin issued by Circle/Coinbase is essentially the United States' de-facto digital currency. The advantage of a cryptocurrency vs a normal dollar in your bank account is that the ERC-20 version on Ethereum is 'programmable' - ie can be used in smart contracts for all sorts of things from borrowing/lending, to market making, to exchanging or staking. You could write a contract that drips USDC into an account to pay your bills, I dunno. There are endless possibilities. For me, I prefer to have my money in USDC because it provides a lot more flexibility on what I can do with it than simply having it in a bank account.
Transaction cost: about $0.75 on Ethereum or $0.01 on Polygon at the moment - no size limits. Zelle is free up to ~$1,000 per day.
Settlement: 12 Seconds on Ethereum or 2 Seconds on Polygon, "instant" on Zelle. However many transfers on Zelle use ACH under the hood, so it may take 3-5 days to settle with your bank. If the recipient isn't enrolled in Zelle it may take 14 days for them to register to receive funds.
I'll note that I regularly move USD around as part of my job and have always found USDC to be a superior experience than bank transfers - especially because I can use smart contracts and custody tooling to set custom transaction policies on required approvers, whitelisted recipients, etc.
No, cryptocurrency cannot be used as a normal currency. Nothing as easy as handing cash to someone else exists in cryptocurrency.
There's one giant benefit of using cryptocurrency and a few smaller niches. It is a currency of last resort to guard against hyperinflation or currency controls or for drugs. You should really only be using it if you can't turn your money into dollars but can earn cryptocurrency another way.
The smaller niches include things like flash loans
Flash loans are actually new thing in the world but still pretty dangerous. You can get a massive massive loan (Think $1 billion) without putting anything down as long as you pay it back in the same transaction you get it. Ethereum can guarantee the loan and repayment succeeds so the borrower really can loan $1 billion. Of course this only works as long as whatever tool the loan contract is using to check that the borrower can repay $1 billion works. If not then the money is going to be stolen...
As for goal, there isn't one. Its whatever folks want it to be and a large number think ponzis are the goal...
As for normal currency, it does not need to be stable. See Venezuela as recent example. It typically can't follow a real currency like USD exactly. In fact trying to keep an exchange rate between a strong currency and something else the same almost always ends horrifically like https://en.wikipedia.org/wiki/Black_Wednesday
> could a cryptocurrency be used as a normal currency?
They mostly aren't suited to this. A desirable property in a normal currency is relative stability (generally with small, managed levels of inflation to encourage useful investment). But in order to bootstrap a cryptocurrency you need to get people interested in using it to establish a value, so you set up the currency in a way that disproportionately rewards early adopters and encourages speculation, to pull people in. This in turn makes it a lot less stable and you see where this is going
> What would be the benefit of using a cryptocurrency?
For those who are true-believers, the idea is that you have currency which is free from government manipulation, free from authority, is unstoppable, uncensorable, irreversible, may be anonymous etc etc.
For those of us who are not, most of those are actually negatives. Plus an honest evaluation of the largest cryptocurrencies often shows they don't fulfil these pipedreams anyway. Bitcoin, for instance, can be censored if wallet addresses are known and the government manages to get 'miners' onboard with a blacklist. Exchanges can refuse to accept deposited funds unless they come from known, KYC/AML compliant organisations. And given that mining BTC is a huge, expensive, energy and equipment intensive operation, there are not actually all that many firms, so collusion is a definite possibility, and with about half the hash power they could collude to block transactions.
> Is the goal to be used at a large scale globally or would it at best remain niche?
There are as many aims as there are users. Some want complete freedom from government monetary interference, implying large scale use. Some want to revolutionise the finance sector and disenfranchise the established banks. Some are basically addicted to gambling. Some want to get rich, and see it as an easy way, or the only way. Some just want to facilitate 'dark' transactions (contraband of various forms).
> Does it has to be stable?
No, but there are so-called stablecoins which attempt to peg their value to normal currencies, specifically the US dollar. Some attempt to do this algorithmically - see Terra/Luna/UST and the chaos from that collapse earlier in the year. Most algortihmic stable coins are vulnerable to some sort of bank-run scenario.
Others attempt to do it by having their stablecoins backed 1:1 with the normal currency they are pegged to, the largest of these is "Tether" also known as USDT. They used to claim there was a dollar in a bank-account for every token issued, but they refused audit for years and eventually dropped the claim. They have various redemption barriers ($100k minimum payout, for example) to stop any sort of run from happening, and there are strong feelings in crypto communities and sceptic communities that they are playing fast and loose, and have perhaps backed a lot of their tokens retrospectively (create token, use it to buy an asset, now that token is backed) or purely manipulatively (giving out billions to friendly exchanges to use to prop up BTC prices without getting any more backing than an IOU).
> Does it have to follow a real currency like the USD?
That seems to be the gold standard here! Though stablecoins against other currencies probably exist, and I believe I heard about gold and silver backed stablecoins at some point. The problem with all of the backed ones is "Hey, I have this massive bank account, just sitting there backing my coin, surely nobody would notice if <shenanigans>"
It depends on the specific protocol (aka blockchain or token) you're using. For instance, bitcoin is very simply publicly visible, each transaction is broadcast in the clear and you can trace inputs and outputs online [0]
Other protocols, such as zcash, specifically obfuscate the inputs and outputs using cryptography, in ways that I'm not specifically sure how to explain, but are supposed to work.
In some ways to me this is unsurprising in a way different from the ponzi nature of crypto. I can't explain Ed25519 either, and I'd also get bogged down reading a paper explaining it. I can get my head around the basics of btc and pre-proof-of-stake ethereum though, this[1] 3Blue1Brown video went a long way.
Definitely not going to disagree that lots of tokens are ponzis, and lots of the tech and promises are imaginary vaporware. But there are some real pieces of tech in the mix too.
In general the ledger of all transactions is public. But it’s like all of the transactions are tied to a random id. So to unmask a person you have to find at least one transaction that identifies the person tied to the id. So you can remain anonymous if you try really hard, but make one mistake and your whole history can be unraveled and known.
In general it is considerably easier to unmask people using crypto than other methods because perfect security is hard (criminals are dumb).
You can follow transactions on the blockchain, but the question is if you can tie that wallet to an identity. If the last wallet belongs to a CEX then it's likely they know the identity of the owner due to KYC regulations.
Tornado Cash previously broke that trail using asset pools, but that has been sanctioned now.
the ledger is public, so every transaction is traceable. maybe you create a wallet/entity thats not clearly linked to a person. you could probably claim its not traceable with a wallet address alone, you can see its transactions but have no idea who it is. at some point in the future or past you interact with the real world, like say sell crypto and withdraw USD, or start by buying crypto with USD. at that point they link that entity with a person(exchanges generally have to follow Know Your Customer rules), and can trace the transactions to the person through the public ledger.
Yeah they get it's a rug pull/ ponzi scheme. The more people they lure in, the more suckers there are to buy their coins and the more they money they will make.
It's all shit man, all the hype is to lure in more sucker bagholders. Who will keep driving the price up.
I was involved in the very early Bitcoin days, and it started for me as something else to do with lots of spare GPU cycles, then I started learning about the underlying tech, which I thought was quite an elegant solution for p2p trustless ledger. I still think it is.
I have not been involved for a long time though, as the original feelings I got from those early days and the community back then seems to have changed completely. Now its all bullshit shell games and scams.
FTX's failure is hardly Crypto's failure. FTX is a centralized exchange. Crypto, at least when it was created, is/was against centralization.
But yes, cryto industry is much more centralized than before. Centralization without regulation is the root of all evils.
We don't need deep tech understanding of Cryto to know that centralization without regulation is problematic. History of finance has proven it again and again and again.
Those who trusted FTX are either dumb or greedy. Perhaps both.
As a crypto adopter, the best we can do is:
1. Stay away from unregulated centralized company like FTX, Binance, Tether, etc.
2. Stay dicentralized.
Derivatives have some financial uses for normal investors (eg if you want to hedge your bets against short term tail risk etc.), but crypto tokens really don't. I wouldn't sweat it.
It's not that complicated - you get a record in a globally distributed trustless database that say you own something, and as new records are added to the database stuff gets moved around.
There are layers to crypto's predominant "discourse" depending on which wave you came in through. The earliest waves were all utopian technologists, libertarians, and Silk Road users. The ICO era brought in more people who had played with penny stocks or forex, and imposed some of those "gamblers and swindlers" attitudes. And as talk of "institutional crypto" started popping up you got a much more Wall-Street influenced crowd that funded conspicuously large endeavors with intentionally obfuscating and centralizing properties. For the most part, none of these people in the later waves perceived the tech as a good that could be deployed for societal coordination(since what distributed ledgers ultimately do is just another method of organizing information), they just saw a zero-sum game they could compete and try to "win" in by ultimately exiting to dollars, or by building a large organization in the "crypto industry"(utter nonsense - it's ruled by protocols, and the downfall of FTX further demonstrates that).
People who just held BTC in their own wallets over all of these waves, didn't lose custody of the keys or sell, did marvellously well. Internationally, BTC remains useful to countries with unstable currencies; not because ordinary people are all interested in holding it for its own sake, but because it enables banking and payment services outside of the traditional system, which means that in some parts of the world you can go to "a guy in the market with some phones" and he can set you up with options for exchanging currency, getting remittances, etc. Often USD is used on one side of the trade rather than a native crypto asset; it's crypto being used as a pragmatic tool rather than a manifest ideology.
In contrast, people who really try to trade the market actively either have an "angle" for getting an information advantage(e.g. they possess some data or influence, in the way that SBF did), or they are most likely gambling with leveraged bets and getting sliced to pieces by highly optimized trading bots.
If you take a position in crypto as a simpleton(which is my standpoint, and shouldn't be taken as gospel investment advice), it's better to move slowly, accept absurdly high volatility and just aim to survive; do not use products that "give you some help with that"; assume the tech is sharp-edged, use official wallets, and keep careful track of the keys. Many people who work on crypto don't actually own a lot of it.
In this case the emperor has no clothes, it really is fraud all the way down.
You might want to start reading Matt Levine’s excellent Bloomberg column, he has a knack for simplifying things. He also published an excellent primer on crypto.
Reading as others, apparently as ignorant as me, ask questions about crypto, etc. the in-crowd seem to get it, seem to understand it. I find that generally the case with anything monetary/financial though: the people that do this complex stuff seem to understand it but seem unable to explain it in a way that someone as simple as me can understand.
In order to play the crypto game you have to learn this absurd set of rules. And there's something about crypto though where the proponents almost revel in other's ignorance. I've had a hard time deciding whether the proponents really understand it (and all of its nuances) or if pretending you understand it in fact part of the game.