Crypto Is to Capitalism as Qanon Is to Politics: Part I

I just finished “Number Go Up” by Zach Faux, a reporter for Bloomberg. Its focus is the doomed ex-billionaire Sam Bankman-Fried (‘SBF’), but it’s more a tour of the world’s financial underworlds. SBF’s story mostly bookends the narrative.

It’s said to be funny, but I didn’t see much to laugh about. It is fully absorbing. I read through it in three days, breaking into my usual retiree habits. Every so often a book does that for me. New novels from John le Carré used to suck me in.

Crypto runs on endless variations on Ponzi schemes. People are persuaded to buy “virtual currency” such as Bitcoin or NFT (computer graphics of apes, among other things) expecting their values to increase, whereupon they hope to sell high after buying low. That’s the relatively innocent side, aside from the systems being vulnerable to financial fraud, hacking, and theft.

Crypto also facilitates crime because its ownership and transfer of funds can be difficult or impossible for the authorities to trace. It has become the world’s money laundromat for all manner of criminals and ne-er-do-wells.

The center of cryptoworld is the so-called “stablecoin” known as Tether, promoted as being fixed to the value of a US dollar. (One Tether equals one dollar.) This, along with the associated anonymity, make it a useful medium of exchange, one of the three features of money in which one is instructed Econ 101, the other two being a store of value and a unit of account. For most crypto currencies, the store of value part does not work out. Tether, however, is still going strong. It may or may not have enough real money to back up its coins, but as long as it is useful, especially to crypto traders and to the world’s worst criminals and terrorists, it may never have to demonstrate its bona fides. That’s the thing about money; if people accept it, it’s real.

What is a Ponzi scheme? Basically it's an invitation to investment and saving that promises sure-fire, outsized returns. And it works by paying such returns at the outset. Word gets around and more suckers jump in. The new proceeds pay for the returns on the earlier deposits. No actual, productive investment is involved. Those running the scheme take a cut and abscond with their money when the bubble bursts.

Some of the participants are fully aware of the likely conclusion — eventually the supply of new participants and money dries up, and those with standing claims to deposits lose everything. The trick is to get in and get out before the collapse. Tether threatens less of a bubble. It does not pay interest. It is simply useful.

The usefulness of crypto technology, potentially extended to other business transactions, is a two-edged sword. The convenience, concealment, and anonymity are also useful to fraudsters and other criminals.

The bubble mania works in reverse too. If suspicions arise about an arrangement’s assets and its ability to cover deposits, people start to bail out, and the contagion feeds on itself, like a classic bank run. That’s how SBF’s empire collapsed. A question was raised about his company’s assets, coincidentally by his biggest business rival and competitor (the equally shady Changpeng Zhao), and his customers fled for the hills. As the saying goes, when the tide goes out, everybody can see who is naked.

We’ve heard a lot about Venezuela because it thumbs its nose at the U.S. government, but it turns out that Cambodia is another failed state, one whose politics and economy are founded on human trafficking and online crypto-facilitated fraud. According to Faux, the top echelons tend to be populated by big-time Chinese gangsters who have captured the government and run the local police. Another crypto poster child is El Salvador, which has adopted the bitcoin as its official currency. Faux’s reporting reveals that ordinary folks in the country do not use it.

Speaking of naked, if you’re an old geezer like me and you get an inexplicably friendly message on Facebook, Instagram, or Twitter/X from a stranger whose pictures display a hot young lady, chances are she or he is a slave somewhere in Cambodia.

With hundreds of slaves sending thousands of these messages out, a small percentage of targets who offer themselves up as gullible marks can pay for the whole operation and allow the masters to reap huge profits. Some of these cons stretch out over extended periods of time, the better to draw in and entrap the targets. Sooner or later you are asked to provide personal information used to hack your accounts or you are snookered into literally send money to import an email-order bride who never shows.

If you are ever tempted by the lure of easy money, the simple remedy is a book called The Index Card on the basics of low-risk personal finance by my friends Helaine Olen and Harold Pollack. If you are young, you already have a great financial asset: time. Patient, committed, consistent saving can pile up nicely over your working life. If you try to gamble you could get lucky, but you probably won’t. That’s why they call it luck.

Part II will attempt to justify the title of this post and discuss Hyman Minsky and Benoit Mandelbrot. If you are desirous of a mail order bride, you will have to find guidance elsewhere.