Cryptocurrencies have seen a steep rise this year. “This really amazes me,” says crypto expert Zeke Faux. “All I saw was hype and fraud.”
In your book “Number Go Up” you describe how the crypto bubble first grew bigger and then burst – because the prices couldn’t keep rising. Now the crypto markets are suddenly making a comeback, with Bitcoin back at over $40,000. What do you think of it?
Zeke Faux: The fact that crypto prices are now rising again really amazes me, especially since it’s not just about Bitcoin, but also obscure cryptocurrencies like Dogecoin, which avowedly has no greater purpose than being a kind of fun gambling game. Dogecoin was at a record high of $0.10 a few days ago, higher than in the last crypto bubble. No real utility has been invented for any of these currencies, yet people are buying like crazy again. Even some scene heads are asking: Is things really going up again? This can end badly.
After all your research you still don’t have an explanation?
I spent two years traveling the world trying to figure out what all these coins were supposed to be for and to see if there was something behind this crazy bubble. And all I saw was hype and scams. Sam Bankman-Fried, one of the most respected entrepreneurs in the industry, turned out to be one of the greatest fraudsters of all time. The head of Binance, the world’s largest cryptocurrency exchange, just pleaded guilty to seriously serious charges like money laundering, sanctions evasion and financing terrorism. The Securities and Exchange Commission (SEC) has announced that it will take very aggressive action against crypto exchanges. I really don’t see why crypto should be attractive again now, instead there are many new risks. And yet the numbers are going up. It’s inexplicable.
And there is no difference between Bitcoin and other cryptocurrencies, so-called altcoins?
But. Bitcoin has long since crossed the line into cult and religion; there are people who are so obsessed with it that they think it is the solution to all global problems – from poverty to world peace. That’s why I’ve stopped trying to predict what will happen to Bitcoin. But the other coins are either obviously useless or they are a kind of share in a start-up or project. There I repeatedly asked the founders the question: Assuming the value of your currency stopped rising, what would be the appeal of your product? Nobody could answer that. Worse still, some of those I asked not only had useless products, they later turned out to be scammers.
Do you really think the products are all useless?
For crypto to continue to be a success, the industry absolutely needs to invent use cases that are interesting to everyday people. And they haven’t done that yet. That’s why it’s simply not sustainable for the numbers to keep going up for no reason. Compare crypto with artificial intelligence: There was a lot of hype there too, but there was also ChatGPT, which became the fastest-growing consumer product of all time after its launch. Everyone wanted to try it. Something has been created here that people want to use. The crypto companies failed to do that.
And yet people continue to buy cryptocurrencies.
They buy them, but they don’t use them for anything! In addition, the crypto market is quite small compared to the stock market. That is, money flows that would not have a major impact on the stock market can trigger large market movements in the crypto world. The altcoins are highly volatile – and they can collapse almost for no reason.
Let’s talk about the basic ideas behind blockchain and crypto. A big advantage, it is said, is their decentralization.
A good point. But during my research for the book, I gained a new appreciation for the benefits of centralization. If everything works decentrally, then there is no customer service. If you lose your coins, they are gone. And the technologies, the products are quite unwieldy.
For example?
As an experiment for the book, I wanted to buy an NFT…
… a non-fungible token, works of art stored on the blockchain.
Exactly. I wanted to buy one of these mutant monkeys from the well-known Mutant Are Yacht Club collection. To do this I had to use a crypto wallet called Metamask, which was incredibly complicated. Then my monkey basically lived in a browser extension on my Google Chrome. If I lost my password or even clicked a wrong link, my precious monkey could be stolen. That drove me crazy. Do you know what really benefited me during my research?
What?
My Visa card. This allowed me to pay in the Philippines, Cambodia, Vietnam, Italy and Switzerland without incurring any fees. And when my wife had problems with her card, we were able to call our bank and they took care of it. The crypto people always assume that normal people really want to use their products. But they compete with centralized systems that are very fast and cheap. Decentralized systems are clunky and slow and expensive – and consumers don’t really care about the benefits that crypto proponents cite.
But Bitcoin works surprisingly well as a decentralized system.
It’s also pretty impressive that Bitcoin has existed this way for years and no one has been able to destroy the system and steal all the Bitcoins. The way the whole thing is set up still makes it very unwieldy; it can only process a fraction of the transactions that Visa or Mastercard can manage. The payment validation system requires incredible amounts of energy. And one more thing: If a guy comes to me and says he created this decentralized, autonomous system – how do I know that’s true?
What makes you so suspicious?
I’ve heard this many times and then realized that there were either major mistakes or it was all a huge scam.
Okay, then another advantage: In many parts of the world there is no developed payment or banking system, this is where crypto can fill a gap.
Yes, that sounds good. But in reality? I took a closer look at the example of El Salvador…
… where the authoritarian President Nayib Bukele has decreed that Bitcoin will become an official means of payment and that retailers should accept it.
Exactly, that’s where I went. And I experienced that the population completely rejects Bitcoin. There is zero interest in using it for anything. There is a small surfing town on the coast that is considered the country’s Bitcoin hub. Even there, many merchants are so annoyed that they have put up signs: Bitcoin is not accepted here. People in developing countries also want financial products that are easy to use. And there are good examples of this: In Kenya, everyone uses M-Pesa, even beggars. But the system has nothing to do with crypto.
In your research, have you never come across a use case that was actually useful?
Well, cryptocurrencies are very convenient for fraudsters and scammers… They used to need middlemen who made their bank accounts available for payments. This is easier and more anonymous today. But for citizens in authoritarian states, it is actually a good way to hide their money. And then again, there are indications that Russians have transferred large amounts to the Middle East using stablecoins such as Tether, whose value is said to be pegged to the dollar.
They describe the crypto world in pretty dark colors, full of criminals and scammers and naive investors. Why did so many take part?
You know, scammers always sell a story. Crypto was just such a good, powerful story. It was always about the future of money, which promised high increases in value. Everyone knows someone who has made a lot of money with Bitcoin or Ethereum. And the supervisory authorities never really looked. That’s one of the important lessons from the whole thing: it makes sense to regulate the financial markets.
After the current rise, will we see another crash, a spectacular bursting of the bubble? Or how will the crypto age end?
I can’t predict this, but I think it’s very likely that people will gradually lose interest in most cryptocurrencies. If there are no useful applications, the price will go down. Prices cannot keep rising. Of course there are a lot of smart people working in this area, maybe they will invent something new, but I don’t see anything at the moment.
Niklas Wirminghaus spoke to Zeke Faux