Certificates of Deposit with a 38% APY. Yeah, right.

Crypto nuttiness is going to end, probably soon. And with a bang, not a whimper. I encountered the sign pictured above touting a 38% APY on a walk in my neighborhood. It reminded me why collapse is inevitable. The flashing red lights are economic, historical and technical.

Epic Bubble or Distributed Ponzi Scheme?

The first and most obvious reason for the impending demise of crypto—and its bastard offspring, NFTs (non-fungible tokens)–is that they are the biggest speculative bubble since Dutch Tulip mania. Like tulips, bitcoins and other forms of crypto currency have no intrinsic value. They are not gold or pork bellies nor backed by the good faith and credit of any government. A sane person should be wary when multiple prominent economists, including multiple Nobel prize winners, say cryptocurrency has no intrinsic value whatsoever. One explains:

“It’s better if you’re a criminal, I don’t know why else.”

“The only advantage as far as I can see is you can be a crook,” he said. “You don’t want to leave any record. It’s not an accident that people who demand ransoms demand them in bitcoin. I’m not sure anyone else does.

Crypto is the biggest current example of the Greater Fool Theory. It’s based on the idea that you can make a profit even on a worthless asset, if you can only find someone else stupid enough to buy it. As noted by someone who should know, crypto and NFTs are “100% based on greater fool theory.”

I and as well as people who know much more than I about the underlying technology consider the crypto mania phenomenon to be a sort of distributed Ponzi scheme. There’s no central person or organization running the scam, just many people acting independently. Some people do make money on Ponzi schemes, but even if there is no actual fraud, losing your shirt is more likely.

Of course, when actual fraud is involved, you will lose your shirt even faster. The Federal Trade Commission reported that since the start of 2021, Americans have lost more than $1 billion to cryptocurrency scams, nearly 60 times the losses reported in 2018.

How can you identify a Ponzi scheme? A useful Wikipedia article provides some examples, including their tendency to “use vague verbal guises such as ‘hedge futures trading,’ ‘high-yield investment programs’, or ‘offshore investment’ to describe their income strategy.

Given this history, is it surprising that this particular crypto vendor advertisement guarantees “Immutable Code with 100% Uptime”? Most likely no one investing in this product understands what that is supposed to mean, let alone the technical aspects of the blockchain. It’s all just technobabble to them.

Why are so many otherwise intelligent people willing to buy into the bubble? A Financial Industry Regulatory Authority (FINRA) advisory provides a clue as to one reason: “[t]he con artists behind [HYIP-type Ponzi schemes] are experts at using social media — including YouTube, Twitter and Facebook — to lure investors and create the illusion of social consensus that these investments are legitimate.”

One interesting aspect of the crypto puzzle is that a significant number of the investors understand and tacitly admit that their investments are fundamentally unsound and fragile. They just believe they are so smart they won’t get hurt. They frequently explain “Crypto is a great investment, you just have to know when to get out.” Of course, this is just an implicit admission that they are relying on finding a greater fool just before the bubble collapses. It’s a form of personal fable, labeled by Psychology Today as Narcissism and the Myth of Invincibility.

There is another reason why so many people are vulnerable to the crypto scam: The power of wishful thinking. People see what they want to see, believe what they want to believe. When someone tells us there’s an easy way we could make a lot of money, there’s a tendency to convince yourself that what they are saying isue.

This ties into another fascinating aspect of the crypto scene. Significant number of investors who have been defrauded or otherwise lost large sums of money stubbornly continue to defend the scammers. A Michelle Singletary column quoted a classic example:

“I took out at least four loans from different banks to make sure the dream he was talking about, as a family, we were ready,” Victorin said. He still has faith in Alexandre.

“We believe in this guy,” Victorin said. “We believe in our CEO. He is a good guy, a great guy. And we never met somebody like that, very down-to-earth, very respectful, transparent with a lot of charisma.

I’m sure many crypto vendors have lots and lots of “charisma.”

We’ll go into more detail in later articles to explain the historic and technical reason for the impending demise of crypto, including the facts that:

  • “Unbreakable” encryption techniques (the basis for crypto) have historically proven to be quite breakable, and
  • Quantum computers will eat crypto for breakfast