“Cryptocurrencies are a gigantic scam, albeit complex…” Thus begins Stephen Diehl's rant against the crypto industry.
When it was released in June, Bitcoin and other crypto assets skyrocketed. Since then, the collapse of FTX, the second largest cryptocurrency exchange, has led to an existential crisis. Millions of dollars in client assets are said to have been burned along with FTX founder Sam Bankman-Freed's status as an altruistic auditor. Is all cryptography an illusion?
Like Bankman-Freed, Deal is an American in his thirties with an odd demeanor and messy hair. But while Bankman-Fried pressed US lawmakers to come up with new regulations for cryptocurrencies, Diehl was pulling the other end of the rope. He advocated that cryptocurrencies be regulated in the same way as other assets. In June, he brokered a letter from 1,500 tech experts to key members of the US Congress, asking them to move beyond the "hype and noise about the crypto industry" and understand its "inherent weaknesses".
Diehl has the programming and economics knowledge to challenge crypto from first principles. He has been trying to sell blockchain technology – the distributed database that creates cryptocurrencies – and believes he can ride the cryptocurrency wave: “Anyone who looks as stupid as me can probably go down in the valley and collect $50 million from a bunch of people. [venture capitalists] are credible to pump up arguments and make life-changing amounts of money.”
Instead, he stays on the sidelines and blogs about cryptographic failings. This not only brought him followers, but also persecution, including death threats. "The last three years have been hell," he said, clearly embarrassed. "It's not easy being a cryptoskeptic."
Diehl's book Exploding the Crypto Bubble traces the rise of bitcoin during the post-crypto-gold global financial crisis of 2016, which he calls the "age of the hustlers." Cryptography is said to be slow (based on the transmission of transactions over a decentralized network) and unreliable (people are responsible for the security of their assets; when they lose their passwords or die, they have far less recourse than, say, in the case of a bank). It cannot be a good investment that is growing and growing and a stable currency that provides stable value. He said that the price of crypto assets is largely based on the existence of an even greater number of idiots who believe the hype.
“After 14 years, finding a problem is still a solution. We are not talking about building a new financial system. The new internet is not being built. It is not an asset unrelated to the market. This is not inflation insurance. It is a pure and simple speculative tool, far from anything else in economics. This is a casino covered with all these lies. When you take off the lie, what's left looks like pure negativity to the world."
You may not be interested in cryptocurrencies, but you should be. "It reveals many of our darker tendencies," says Diehl. "And it's a reflection of a lot of political struggles in society."
Deal, 34, grew up in Massachusetts. He studied physics and was one of the original employees of Quantopian, a now-defunct hedge fund that developed investment algorithms. He then moved to England with Adjoint, a blockchain software company. Larger banks are wondering if this distributed database will make it easier to do things like mortgage approvals.
"Interesting idea. Except it doesn't work very well in practice. I've worked on a few of these projects and in all cases there are much simpler solutions using software that's been around for 30 years.”
Blockchain can connect participants who do not trust each other. But in a world where banks trust each other, “so-called trustless networks are redundant… If you have three big banks and they all have data they want to share with each other, having three databases automatically synced is redundant. "a much more complex architecture than having one database that everyone shares.
“I wouldn't say we have a 100 percent answer [whether blockchain is useful]. But it seems the answers are not quite the same." platform transfer - $250 million ($168 million) and seven years of work write-off.
In 2019 and 2020, when Diehl started blogging, bitcoin grew sevenfold. Crypto fans mock non-believers with initials like "hfsp": enjoy poverty. Isn't Dil afraid of losing? "I don't have a high tolerance for risk." (He didn't beat index funds by trading his own money.)
The reservation is also ethical. “The minimum value of the pound is that people have to earn pounds to pay taxes. The underlying price of cryptocurrencies, if any, is illicit money flows, money laundering and crime.
Cryptocurrency exchanges have been hacked and tampered with before. How serious is the FTX crash? That's the equivalent of JPMorgan or Citi falling in 48 hours. They are also the biggest players driving the crypto regulatory agenda.
If Diehl is right, should all crypto assets be phased out immediately? He is responsible for advertising. “In my opinion, once the power of the parabolic trough is gone, institutional money will dry up. . . I suspect retail interest will be high for a while because memes and narratives appeal to a certain type of investor: young, male, financially disaffected, and with a high tolerance for risk. There are many such people.
"[Crypto] is the commodification of populist anger, gambling, and crime."
Crypto enthusiasts' loss of faith in the financial system is somewhat curious. Bank deposits were also insured during the 2008 crisis. Stocks have increased over the last decade. “In my most sensitive reading for crypto investors, look at this place: how many young people think they have a shot at climbing the housing ladder? Many of them believe they should invest in riskier assets because they need higher returns.”
How much sensitivity does he have? "I don't want so many people to get hurt. My generation is being impacted by the financial crisis, Covid, we are going to have a climate crisis. These people don't need this immense suffering in their lives."
One of the answers to FTX's failure is that it is a centralized offshore platform. It can be replaced by a better form of cryptography (decentralized or regulated). "If you accept the thesis that assets are 'stupid' schemes then it doesn't really matter where you trade."
What if the crypto crisis was like the dot-com bubble? Pets.com flopped, but Google and Facebook soon thrived. But unlike FTX, Pets.com "will show up at your door with dog food, they're trying to do the real thing," says Deal.
What books would you recommend for most people? "Different Times This Time " by Carmen Reinhart and Kenneth Rogoff
What's your most irrational habit? Addicted to coffee.
What are we going to use the metaverse for? There will be in-game apps, computer designs, and pornography. Do you think something will change in our society? Not too.
One argument put forward by venture capital firm a16z is that cryptocurrencies can be used to pay web content creators, breaking the dominance of Facebook and Google. Is it a step forward? "No, because the end user of this product wants dollars and pounds." What if we lived most of our lives online and paid for digital goods in the metaverse? “Can't I take out my phone and pay a pound in 15 seconds? Now digital money."
He believes that Bitcoin, in particular, scales very slowly: It processes about seven transactions per second - "enough for a tiny Tesco, but not for a national economy". (Diehl has not "fully formed an opinion" on the digital currency the central bank plans to issue.)
Cryptocurrency is meant to democratize finance. Conversely, because cryptoassets are unregulated and “deeply manipulated”, hedge funds and other organizations have successfully pumped them in and dumped them. "It's like a very large transfer of wealth from a really unsophisticated retail investor to a very sophisticated investor."
Diehl's critics include Elon Musk, who supports the meme currency Dogecoin and whose auto company Tesla bought bitcoin (before selling most of it). Elon is a clown. I thought it was a joke to him. It's just a tool for that. I'm not even sure he believes it."
Politicians are afraid to block cryptocurrency "innovations". Regulators are overwhelmed. Diehl compared bubbles in ICOs — initial coin offerings in which crypto entrepreneurs raise money for projects that have largely disappeared — to cyber attacks on regulatory systems. "Let's have 10,000 securities breaches, and the [Securities and Exchange Commission] won't have the bandwidth to go after that 1 percent of the breaches."
One answer is "go to the exchange", to the bigger players. But the US response has been "incoherent" so far. SEC chairman Gary Gensler suggested that most crypto is unlisted securities, "but they don't seem willing to value that."
Senate Banking Committee Chairman Sherrod Brown called the FTX collapse a "loud wake-up call". But many people in Congress are pleased that cryptocurrency is "on fire," Deal said.
Instead, he wants to reduce cryptocurrency to a shot in a post-truth world. "The average person should be able to tell you why investing in assets with no intrinsic value is a bad idea."