I haven’t written a lot about cryptocurrencies like Bitcoin because, until now, I’ve felt ill-equipped to really weigh in.  I was hesitant because of two of the four cornerstones of mindful investing: rationality and humility.  Rationally speaking, crypto seemed too complicated to navigate.  Humility-wise, it seemed like smarter people were describing things way beyond me.

The farthest I ever ventured was to say that crypto was too new to be safe and that the value proposition was based only on the idea that crypto will be incredibly useful in the future.  So, up to this time, I’ve been skeptical, but neither for nor against crypto.

Rat Poison

However, I started gravitating toward the “against” position when I read Charlie Munger’s op-ed about crypto.  I’ve often quoted Charlie and his partner Warren Buffett on Mindfully Investing because they’re both billionaire investors with a proven track record that embodies most of the principles of mindful investing.  Over the last few years, Charlie has called crypto “rat poison”, “venereal disease”, “stupid and evil”, and “almost insane to buy”.  Strong words!

Charlie recently wrote: “A cryptocurrency is not a currency, not a commodity, and not a security.  Instead, it’s a gambling contract with a nearly 100% edge for the house.”  The edge for founders and promoters of cryptos comes from buying in at the ground floor for virtually nothing, “After which the public buys in at much higher prices without fully understanding the pre-dilution in favor of the promoter.”  Munger recommends that the U.S. government should ban cryptocurrencies, just like China did in 2021.  If his sentiment becomes widespread on Capitol Hill, a total ban could result in all cryptos becoming worthless overnight, regardless of many other potential risks.

Signs of The Poisoning

Recent crypto news is finding traces of poison all over the place.  For example, 2022 was the biggest year for crypto theft, with at least $3.8 billion stolen.  For something that is touted as “immutable” and “unseizable”, that seems like a pretty leaky hole in the blockchain bucket.

Further, it concerns me that, like the days of profitless companies I observed during the Internet Bubble, the crypto investors losing the most money seem to be poor minorities.  It seems likely that this particular demographic may be the least informed on the intricacies of crypto.  Just like in 2000, the casino is again “winning” money from the gamblers who are least able to afford it.

And once again, most of the news focuses on price action or the tempting predictions of vast wealth from people who have a huge stake in the outcome.  For example, a former Goldman Sachs and Morgan Stanley analyst, who “correctly called the 2020 Bitcoin price boom” has predicted that Bitcoin is poised to go “parabolic”.  His reasoning?  The Federal Reserve may start to pull back on interest rate hikes.  What do interest rates have to do with the value of cryptos?  He doesn’t say.  Apparently, cryptos are just another “risk on” asset like stocks.  But cryptos bear no resemblance to stocks in either substance or function.

And let’s not forget the slew of crypto, crypto bank, and crypto exchange problems over the past few years.  From reading just a handful of articles I found reports of failures, legal troubles, or large losses involving: Grin Networks, Bitcoin Gold, Quadringa, Binance, Terraform, Kwon, Blockchain.com, Custodia Bank, Celsius, Genesis, Bitfinex, Kraken, Paxos, Three Arrows Capital, and Bitzlato.  Note that I don’t claim to know what any of these companies do exactly or what their specific troubles are.

Of course, the elephant I left out of this list is the FTX crypto exchange fiasco involving founder Sam Bankman-Fried among others.  (I like to call him “Sam Bank-Fraud”.)   FTX collapsed in November 2022 following reports of leverage and solvency concerns involving FTX-affiliated trading firm Alameda Research, which had received hundreds of millions from FTX.  FTX faced a liquidity crisis, failed to find sufficient bailout funds, and subsequently filed for bankruptcy.  Around the same time, FTX was hacked and hundreds of millions worth of tokens were stolen.  Sam Bank-Fraud has since been arrested and is facing criminal charges.  The new CEO identified the core issue as “plain old embezzlement” and said that FTX’s accounting practices were so bad that they now have to navigate a “paperless bankruptcy”!  Losses so far have totaled at least $8 Billion and counting.

So, everyone’s learned a valuable lesson with FTX and another outright crypto fraud couldn’t happen again, right?  Wait, this just in from Reuters: “Crypto giant Binance moved $400M” to a trading firm that happens to be also managed by the Binance CEO.  And did I mention that Binance is under investigation by The Department of Justice and the Securities and Exchange Commission for “potential breaches of financial rules…”?  This all sounds suspiciously similar to the FTX shenanigans.  And what was Binance’s main response?  They said, “Reuters’ information is outdated”.  Oh, that’s super helpful, thanks.

The Nail In The Coffin

One could argue that these are all the normal growing pains associated with any new asset in an under-regulated market.  But for me, the final nail in the coffin was when I watched an hour-and-half video called, “Blockchain, Innovation or Illusion?”  Normally, I don’t watch videos or listen to podcasts because I find reading more efficient.  But this video captivated me in the first two minutes.  It contains reasonable information about the many oddities of crypto that I’ve never seen before.  The video is straightforward, uses common sense, explains jargon, and cites multiple sources for almost all of its claims.  That’s a lot more than I can say for most of the stuff I’ve seen describing the benefits of crypto.

So, the remainder of this post contains a longish bullet-point summary of the video.  You can probably read all the points below in 10 or 15 minutes, as opposed to watching the video for 1.5 hours.  If you’re not convinced that crypto is rat poison after reading the rest of this post, and still aren’t convinced after viewing the details in the video, then I have no reply to you.

By the way, my notes gloss over some points from the video and occasionally add a few of my thoughts.  But generally, these notes are pretty faithful to the main ideas and intent of the video.  If you have doubts or think I got something wrong, then watch the whole video yourself and comment there.

My Summary of Blockchain, Innovation or Illusion?

Blockchain Is Not Hard To Understand

• What is Blockchain?  It’s a non-editable database stored across an array of computers.  It’s a form of “ledger”.  Its key characteristics are that it’s uneditable and cryptography is used to make sure that each entry to the ledger is new and unique.
• It’s often assumed that you need a deeper understanding to appreciate the benefits of blockchain and crypto, but that’s a red herring as we shall soon see.

The Benefits of Blockchain and Crypto Are Entirely Unclear

• There’s a notable absence of actual technical experts talking about the benefits of blockchain and crypto.  Most people you hear hyping crypto are salespeople, investors, founders of cryptos, etc.  In other words, these are all people with a stake in crypto.
• Historically, most disruptive technologies present obvious new superiorities.  The superiorities were immediately apparent for internet email, fax machines, microwave ovens, and the electric light bulb.
• For example, you don’t need to understand radiation science to know that microwaves cook many foods faster than conventional technologies.
• In contrast, the superiority of crypto is hard for people to explain.
• Most hyping of crypto quickly devolves into poorly defined jargon and its defenses usually devolve into ad hominem attacks (e.g., you’re too old-fashioned or stupid to understand).
• Supposedly key dichotomies are poorly defined and then assumed to be “good” vs. “bad”.  These are summarized with “magic jargon”.

Magic Jargon 1: Decentralization

• Proponents claim that “Centralization is bad, and decentralization is good.”  But why?
• Crypto arguments assume you can’t trust central authorities.  But we trust governments to perform many useful functions like infrastructure, the justice system, schools, a social safety net, and many many more.
• The vaunted decentralization of crypto is achieved by distributing functions to anonymous machines primarily in autocratic countries run by people that have no accountability when things go wrong.  Is that clearly better?

Magic Jargon 2: Consensus

• Instead of governments, “consensus” is supposed to ensure consistent monetary policy decisions, ensure the accuracy of the crypto code, result in accurate expansion and improvements, and correct all mistakes.
• Consensus is the alternative to a conventional governing system but without safety features like criminal consequences for bad actors or a civil justice system.  Is that clearly better?
• The proliferation of so many different cryptocurrencies by itself shows that each time that “consensus” is reached, the people who disagree are left behind and resort to a different consensus in a competing cryptocurrency.

Blockchain Is Not New or Clearly Better

• The math used to execute blockchain functions has been around for decades, and in the case of cryptography, centuries.
• To date, non-editable (write-only) databases have generally not been as useful as read-write databases for an array of applications.
• And cryptography can be used just as easily to verify the accuracy of a read-write ledger.  It’s not unique to blockchain.
• One key advantage (among many described in the video) of centralized databases is that a central operator can, in most cases, control changes to the database and who is allowed to make changes (i.e., keep hackers out).
• Decentralized databases have no one in charge.  So, an array of people have to be paid (incentivized) to operate the decentralized network that constitutes the database.  More about that soon.

Messy Mechanics

• Blockchain and cryptography alone don’t constitute a cryptocurrency.  There’s a host of other mechanics needed to turn blockchain into a currency that can be exchanged.  These additional mechanics have nothing to do with the supposed inherent benefits of blockchain.  Here are a few of them.
• Tokenization: (or coins) is how the blockchain tracks units of currency.
• Some cryptos have a pre-limited number of coins (e.g., Bitcoin) and others do not.
• Coins only exist as an entry on the blockchain and can only be owned by one person as shown by a “wallet” address.
• The wallet can be accessed only through a password, known as a “private key”.  Blockchain keeps track of which coins are in each wallet.
• Mining: Because of decentralization, no one is paid to run the crypto database (network).
• So, people are incentivized to run the decentralized network through “mining” and “transaction fees”.
• For mining, someone helping to run the network solves a math problem and receives a few newly minted coins in return.  This is called a “block reward”.
• Solving the math problem makes it expensive for someone to participate in the network.  And this expense helps to stop bad actors who might want to spam or sabotage the network.
• In contrast to crypto, for example, a chat room is controlled by a moderator (it’s centralized).  The moderator can exclude or ban spammers or bad actors from the chat room.
• But in decentralized systems, there is no authority to decide who are the good and bad actors.
• All that extra work (and wasted electricity) for solving math problems to mine tokens is needed because of decentralization itself.  This “proof of work” concept is a problem, not a decentralization feature.
• Other workarounds to wasting all this electricity have been proposed but all of them present other new problems.
• This is one of the problems (among others) that after a decade of cryptos is “still being worked on”.
• Transaction Fees: For each exchange of coins, a transaction fee is charged.  This is another way to incentivize people to maintain the network, which is important for cryptos that have a finite amount of coins that can’t be mined forever.
• The transaction fee is not fixed or known in advance.  An operator can specify any amount.  This was originally intended to keep bad actors out by making spam expensive.
• Transactions are prioritized not by order received but by fee level.  People who are willing to pay more for faster transactions benefit the network operators the most.
• How much the transaction costs depends on network congestion and what you’re willing to pay.
• This perversely incentivizes the network to stay slow.  A slower and more congested network means more fees for operators.
• This also makes crypto transactions typically slower than conventional transactions like credit cards.  Crypto takes minutes while credit cards usually take seconds.
• Also, most cryptos don’t scale well to larger amounts of traffic, which makes congestion a built-in problem.
• Being able to pay for faster service creates other problems, including, but not limited to, market manipulation by paying to “front-run” the transactions of competitors.
• In other words, the decentralized design introduces a whole array of additional problems that traditional markets don’t have to address.

Other Magic Jargon

• Other aspects of crypto implementation and their supposed benefits that are typically reduced to magic jargon are reviewed in the video including: smart contracts, NFTs, De-Fi, bridges, staking, DAOs, and Web3.
• None of them are as flawless or efficient as promoters would have you believe.  (See the video for details.)
• For example, bridging code between two different cryptos and smart contracts have been often been exploited by hackers to steal coins.  More on that soon.

Debunking Blockchain and Crypto Claims

• The video dismantles several common claims about the benefits of blockchain and cryptos.  I won’t hit all of them, but here are the ones that stood out for me.
• Claim 1: Blockchain Verifies Authenticity – Blockchain can theoretically verify the authenticity of event tickets, products in a supply chain, NFTs, proof of identity, medical records, etc.
• But blockchain can’t guarantee anything outside of what’s in the blockchain itself.
• Ultimate verification still requires an outside authority (an “oracle”) to say whether what was entered into the blockchain was authentic in the first place.
• The video offers the example of a bag of “free trade” coffee that goes through multiple steps from grower to final consumer.  At each step of the way, a bad actor could switch the private key label on the bag or reload a properly labeled bag with fake coffee or a million other things that the blockchain can’t verify.
• Real trust has nothing to do with blockchain or decentralization.  And standard chain-of-custody procedures have been around for decades that efficiently tackle this problem without the need for blockchain.
• The oracle problem negates the huge majority of value propositions that blockchain proponents offer.
• Blockchain by itself provides no guarantees because there is no one to enforce that the blockchain is correct.
• Also, blockchain arguably creates new problems that are worse than existing problems.  Like why should your venue tickets, proof of identity data, or medical records be on a publically available and decentralized database?  See other examples in the video.
• Claim 2: Blockchain Is Not Under Anyone’s Control 
• Blockchain decentralization is a myth.
• Consider that computer code is the law of blockchain.  Therefore, whoever writes the code is the lawgiver.
• Does this automatically protect crypto holders from private special interests that want to exert control over the network?  No.
• For example, Bitcoin code is ostensibly “open source”, but what finally makes it into the code is decided by a few people associated with several for-profit corporations.
• It would be foolish to assume that the interests of these corporations have no influence on the network and how it operates.
• Instead, it would be wiser to assume corporations are more interested in increasing the value of their stake in Bitcoin than in improving the efficiency of the network or protecting Bitcoin holders from governments.  Follow the money!
• In the case of Bitcoin, “decentralization” means the cryptocurrency is in the hands of a cartel of private corporations that have no responsibility whatsoever to incorporate code changes proposed from outside the cartel.
• In theory, if 51% of the network operators agree, they can take over the network from the cartel.  But likely only several large players would be able to band together to do this, which creates a defacto new cartel.
• Ethereum has an even thinner “open source” and “consensus” veneer.  See the video for details.
• Mining is not decentralized either.  Recent studies show that most mining has been conducted by relatively few miners, particularly in the early days of crypto.
• And even today, the top 5% of miners get more than 80% of the block rewards.
• Claim 3: Crypto Is Unstoppable
• The blockchain infrastructure is claimed to support the free exchange of tokens between individuals, which is better than cash.  So, crypto is supposed to be “unstoppable” by hackers, governments, or companies.
• But the entire infrastructure of crypto is entirely dependent on the internet, which is maintained mostly by government entities and private companies.
• Governments can and do control and restrict activities on the internet that they decide are detrimental.
• Similarly, twelve corporations control 90% of domestic internet traffic and are under no obligation to allow crypto exchanges.
• Importantly, the vast majority of crypto exchanges are not recorded on the blockchain.  Instead, they are executed by private centralized exchanges like Binance, Coinbase, and FTX.
• These centralized exchanges are currently subject to much less oversight and regulation than brokerage houses that deal in more conventional assets like stocks, bonds, commodities, etc.
• Nothing is stopping centralized exchanges from closing shop and taking everyone’s crypto.  And they can even take people’s fiat currency because government banking laws do not protect these deposits.
• The video cites the example of the failure of Quadringa.
• A more prominent and recent example is the failure of FTX, an exchange run by Sam Bank-Fraud.  The video may predate this event because it doesn’t mention FTX’s problems.
• Claim 4: Blockchain Is Immutable.
• Blockchain is mutable in multiple respects.
• For example, there’s not just one Bitcoin blockchain.  There are many.  Each is a fork off of the original Bitcoin blockchain.
• Anyone who had original Bitcoins and is now on a forked Bitcoin has coins on both forks!  And multiple copies of actual Bitcoins can be owned by multiple people.
• So, the claim that there can only be 21 million Bitcoin is wrong.  Every time there is a fork, the possibility of 21 million additional coins (of the new type) comes into existence.
• Also, there’s no law stopping the Bitcoin cartels (or 51% of the operators that take over or “attack” the cartel) from changing the blockchain if they want to including: rejecting transactions, reversing transactions, and moving tokens around.
• These attacks have already happened multiple times.  Grin Networks suffered attacks that shut them down for a while.  Bitcoin Gold suffered two such attacks.
• It’s harder to attack the larger cryptos, but not it’s not entirely impossible.
• Governments can also martial huge resources to alter or stop crypto exchanges, for example, to stop criminal activities.
• Further, smart contracts (described more in the video) purposefully edit the blockchain.  Because these smart contracts can also be attacked and altered, so can the blockchain.
• Every day, hackers use rouge contracts of various kinds to steal people’s crypto.
• For example, hackers managed to siphon off $50M by exploiting DAO contracts in Ethereum (described more in the video).  To fix it, the Ethereum cartel “rolled back” the blockchain to an earlier date, which is another type of blockchain modification.
• Claim 5: Crytpo Can’t Be Seized
• Each and everyday crypto is seized including by law enforcement and hackers.  Crypto owners also frequently “lose” their holdings through user errors.
• This claim also assumes that no one can ever steal or take your private key, which is obviously wrong.
• Keys can and have been retrieved by government authorities in multiple ways, like seizing computers, etc.
• Crypto is no more seize proof than anything else protected with a password.
• Because seizures and stealing can take place entirely online, the video argues that crypto is one of the most seizable assets in existence.
• At least someone stealing the cash under your mattress has to risk breaking into your house.

The video also argues that crypto is not an investment in any real sense.  But we’ve already covered that with the wise words of Charlie Munger.

Conclusions

My tone for this post has been unusually glib.  That’s because I feel duped, even though I never bought any form of crypto.  With recency bias in mind, I now feel like I should have known all along that crypto was rat poison.  I just didn’t take the time to do the research or have the gumption to question the whole farce.  And that’s a great lesson in mindful investing.  Always do the research.  Always ask questions.

If water is flooding in and you think the ship might be sinking, it’s best to dawn a life jacket, jump overboard, and swim to shore.  The ship might not sink, and you might look like a fool, but you will be an alive fool.

Today, a single Bitcoin still trades for almost $25,000.  If I had any crypto I would abandon ship now, and take my losses or winnings, as the case might be, before it’s too late.  If you own crypto and still don’t think the ship is sinking, then good luck to you.