Cryptocurrencies celebrate comeback

Cryptocurrencies have seen a steep rise this year. "It 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 got bigger and bigger and then burst - simply because prices couldn't keep rising. Now the crypto markets are suddenly making a comeback, with Bitcoin back above 40,000 dollars. What do you think of this?

Zeke Faux: The fact that crypto prices are now rising again really amazes me, especially as it's not just about Bitcoin, but also obscure cryptocurrencies like Dogecoin, which has no stated purpose other than to be a kind of fun game of chance. Dogecoin was at a record $0.10 a few days ago, higher than in the last crypto bubble. No real use has been invented for any of these currencies, yet people are buying like crazy again. Even some scene heads are asking: is it really going up again? This could end badly.

After all your research, you still don't have an explanation?

I spent two years traveling the world to find out what all these coins were for and to see if there was anything behind this crazy bubble. And all I saw was hype and fraud. Sam Bankman-Fried, one of the most respected entrepreneurs in the industry, turned out to be one of the biggest scammers of all time. The head of Binance, the largest crypto exchange in the world, has just pleaded guilty to really serious charges including money laundering, sanctions evasion and financing terrorism. The Securities and Exchange Commission (SEC) has announced that it will be taking very aggressive action against crypto exchanges. I really don't see why crypto should be appealing 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?

Yes, there is. Bitcoin has long since crossed the line into a cult, into a religion, and 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 stopped trying to predict what will happen to Bitcoin a long time ago. But the other coins are either obviously useless or they are a kind of share in a start-up or project. I have repeatedly asked the founders there the question: Assuming the value of your currency would not continue to rise, what would be the appeal of your product? No one could answer that. Worse still, some of those I asked not only had useless products, they later turned out to be fraudsters.

You really think the products are all useless?

For crypto to be a success, the industry really needs to come up with use cases that are interesting for normal people. And they haven't done that yet. That's why it's simply not sustainable that the numbers keep going up for no reason. Compare crypto with artificial intelligence: there was also a lot of hype, but there was also ChatGPT, which became the fastest-growing end customer product of all time after its launch. Everyone wanted to try it out. Something was created that people wanted to use. The crypto companies didn't manage that.

And yet people continue to buy cryptocurrencies.

They buy them, but they don't use them for anything! What's more, the crypto market is quite small compared to the stock market. This means that money flows that would not have a major impact on the stock market can trigger major market movements in the crypto world. Altcoins are highly volatile - and they can plummet for almost no reason.

Let's talk about the fundamental ideas behind blockchain and crypto. One big advantage, they say, is their decentralization.

A good point. But during my research for the book, I learned to appreciate the advantages of centralization in a whole new way. If everything is decentralized, there's no customer service, if you lose your coins, they're 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, artwork stored on the blockchain.

Exactly. I wanted to buy one of these mutant monkeys from the famous Mutant Are Yacht Club collection. 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 the wrong link, my precious monkey could be stolen. This drove me crazy. You know what really helped me during my research?

What was it?

My Visa card. I could use it 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 will want to use their products. But they are competing with centralized systems, which are very fast and cheap. Decentralized systems are clunky and slow and expensive - and consumers don't really care about the benefits that crypto advocates cite.

Bitcoin, however, works amazingly well as a decentralized system.

It's also pretty impressive that Bitcoin has existed in 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 handle a fraction of the transactions that Visa or Mastercard can. The validation system for the payments needs crazy amounts of energy. And another thing: if a guy comes to me and claims that he has created this decentralized, autonomous system - how do I know that's true?

What makes you so suspicious?

I've often heard that and then had to realize that there were either gross errors 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, so crypto can fill a gap here.

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 merchants should accept it.

Exactly, that's where I went. And I experienced that the population totally rejects Bitcoin. There is zero interest in using it for anything. There is a small surfing town on the coast that is considered the Bitcoin center of the country. Even there, many merchants are so annoyed by it that they have put up signs: No Bitcoin 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 really useful?

Well, cryptocurrencies are very convenient for scammers and fraudsters... They used to need middlemen to make their bank accounts available for payments. Today it's easier and more anonymous. For citizens in authoritarian states, however, it is actually a good way to hide their money. And then again, there are indications that Russians have transferred large sums to the Middle East using stablecoins such as Tether, whose value is said to be linked to the dollar.

You describe the crypto world in rather gloomy colors, full of criminals and fraudsters and naive investors. Why did so many people get involved?

You know, scammers always sell a story. Crypto was just such a good, powerful story. It was always about the future of money, promising high value growth. Everyone knows someone who made a lot of money with Bitcoin or Ethereum. And the regulators never really looked at it. That is one of the important lessons from all this: It makes sense to regulate the financial markets.

Will we see another crash after the current rise, a spectacular bursting of the bubble? Or how will the crypto age end?

I can't predict that, 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 fall. Prices can't keep going up and up. Of course, there are a lot of smart people working in the field, maybe they will invent something new, but I don't see anything at the moment.

Niklas Wirminghaus spoke with Zeke Faux

The interview first appeared on capital.de