Ask HN: Why crypto is rising so fast when its not creating value?

[tuyguntn]

We all talk about how startups and companies create value, how monetary system backs value in the form of money to be able to exchange it.

Why cryptocoins are rising so quickly when they are actually not creating any value? Or do they create value?

[spicyusername]

- Excessive Liquidity: There's money sloshing around the global economy looking for a place to go.

- Crypto Marketability: It's become very easy for people to buy and sell cryptocurrency.

- Speculation: Regardless of what problems cryptocurrencies pretend to solve, their actual value so far has only been as a speculative investment. Like traditional equities, cryptocurrency is benefiting from the highly speculative market we live in right now and the FOMO of investors trying to make a quick return.

The situation that you're seeing with cryptocurrency has historical precedent with investment bubbles involving other technologies that were perceived to be "world changing". The bicycle mania [1] of the late 19th century and the dotcom bubble [2] of the late 20th century being notable examples.

1: https://www.nasdaq.com/articles/revisiting-the-great-british...

2: https://en.m.wikipedia.org/wiki/Dot-com_bubble

[imtringued]

> - Excessive Liquidity: There's money sloshing around the global economy looking for a place to go.

Here is an intuitive explanation: China runs an trade surplus vs USA. China gets USD and USA gets products. Because of the trade surplus there is no reason to invest into USA because as long as China is sending products to the US there is no reason to produce those products in the USA. Yields for conventional domestic industries drop as they move to China. The problem is quite obvious. If China spends its money on American capital it is inherently engaging in speculative investment. A basic understanding of economics tells you money should go where the highest yields are, in other words, the money should stay in China until their wages rise and they have no competitive edge.

Well, but the trade surplus is born from foreign exchange policy. So the money comes rushing into American stocks and housing regardless of the risks. It's plausible that Bitcoin is just being used to evade capital controls. The speculative nature of Bitcoin isn't a downside, it's actually a nice bonus to them.

[swalsh]

I think Crypto is a bunch of things to a bunch of people. Some see it as a fun way to make a quick buck, some see it as an alternative to gold in a time with unusual inflation of the dollar.

I see it as the future of the web. There's a lot of energy coming around the concept of Decentralized Apps. or Web 3.0, today we have web 2.0 with large centralized websites ran by huge tech monopolies. Regardless of your political affiliation, you probably dislike them. Though the exact reason you hate this is probably different.

Web 3.0 offers us a way out... and crypto is one of the critical underlying infrastrcuture components. A lot of people see things this way, and are trying to get in early on it. Chances are the markets will crash before the majority of people understand what web 3.0 is. But while the market is down, a lot of cool stuff is going to be built, and when more people start to discover it again, the market will shoot back up. This cycle happens every time we make progress. Of course, the markets are pretty amateurish right now so we also tend to overshoot it, leading to huge bull markets and big crashes.

[mohanmcgeek]

Even if we assume cryptocurrencies have some role to play in the future dWeb, wouldn't that be the new currencies created by those dWeb services and not these ones being hyped right now?

[Liron]

Because we currently live in a world with: 1. A high-liquidity environment for VC firms 2. A high-liquidity environment for retail investors 3. Unprecedentedly easy, fun and addictive speculation tools

Once the crypto bubble took off thanks to this unprecedented bull market, it also attracts many smart engineers, businesspeople and entrepreneurs who jump into the gold rush hoping to sell picks & shovels.

There's one more aspect here. I've coined the term "Bloated MVP" [1] from years of watching startups that lack a coherent value prop, and don't know who their first user will be, and never get any traction whatsoever, but nevertheless manage to raise $millions and suck up smart people's time and energy. I've also spent years founding such companies myself. The reason people work on bloated MVPs is because they don't realize that an idealized abstract vision is very different from a value prop.

So to summarize: The crypto space is a massive ecosystem-level bloated MVP, intermingled with the biggest liquidity bubble of all time, and unprecedented speculation opportunities

[1] https://bloatedmvp.com

[58x14]

We’re in a hyperinflationary period. Loans are extremely inexpensive, cash is cheap. I suspect the majority of influx in crypto is due to an abundance of fiat.

With that said, there’s quite a lot going for Ethereum and defi as a sector. Major tech players like Google are funding many web3 startups. Facebook is fully embracing the “metaverse,” whatever the f** that is.

Tesla is trading at some ridiculous multiple of earnings for the same reasons. Yes, there’s likely much future value in Tesla and web3. But the rapid recent growth is mostly indicative of the fed money machine going brrr.

[PaulHoule]

People frequently mistake "inflation" for "hyperinflation".

Zimbabwe had hyperinflation. Zimbabwe had a $100 trillion dollar bill:

https://www.dallasfed.org/assets/documents/institute/annual/...

If we had 20% inflation per year for the next decade in the US that would be high inflation but wouldn't be hyperinflation. We are nowhere near that.

I wonder if the crypto bubble creates a "wealth effect" that makes people feel richer, spend money, and drive inflation.

[SubiculumCode]

hyperinflation is hyperbole. Our inflation: 5% since last year. Hyper inflation: ~50% per month https://www.investopedia.com/terms/h/hyperinflation.asp

[keyle]

It's true. Every time governments have given a cash bonus away, these "instruments" took a major lift for no fundamental reason.

[jazzyjackson]

Highly recommend episode #231 of Lex Fridman talking to Alex Gladstein - it's a long but interesting discussion on human rights, democracy, totalitarianism, and how money fits into the picture. Alex describes BTC as a trojan horse, a "number go up" technology that attracts buyers by being the best performing asset (certainly a tautology, it keeps performing well because it's been performing well) - once it becomes the currency du jour of dictators, those very dictators that instituted it as currency may find that they've lost control of their citizens, since they can more easily exfiltrate their wealth. (my answer to your question is, people value money that is not controlled by their government, and also serious Fear-Of-Missing-Out)

Don't come counter-arguing to me tho, I'm not the Chief Strategy Officer of the Human Rights Foundation, Alex Gladstein is, he makes the argument better than I.

[mohanmcgeek]

> people value money that is not controlled by their government.

And that's how banknotes came into being

Reserve banks are banks, not their respective countries governments

[a_square_peg]

I think crypto space has managed to create a class of unregulated financial instruments and markets - I feel like I'm watching what would happen if the stock market was not regulated at all. If I were Wall Street trader, I think this is really fascinating - sufficient amount to be interesting (billions of dollars at play) and regulators are yet to make sense of what's going on.

FYI, there are less than 5000 publicly traded companies in the US but more than 6000 cryptocurrencies.

[matt_s]

Your comment maybe implies that maybe Wall Street is watching from a distance. I think Wall St and large banks are deep into crypto, they have to be the cause of large swings in price movement, individuals rarely have $billions that can be moved around.

A financial market with zero regulation and full anonymity? I bet it has brought all sorts of normally illegal money movements and transactions to it. Even coordinated pump and dumps are 100% possible without legal repercussions, as far as I understand it.

[moepstar]

Actually, it's way more than 6000..

CoinMarketCap lists 13684, Coingecko lists 10394 - which probably includes a truckload of BSC "shitcoins", getting more by the minute...

[PaulHoule]

https://en.wikipedia.org/wiki/Extraordinary_Popular_Delusion...

[ttyprintk]

Quite a storyteller

https://www.gutenberg.org/files/24518/24518-h/24518-h.htm

[10000truths]

Cryptocurrency is backed by the same thing as any other currency: popularity and consumer confidence. Whether such sentiments are "warranted" or "deserved" is a subjective matter, but that is irrelevant to determining its economic influence - enough people have invested in it for network effects to all but guarantee its continued relevance.

[civilized]

> Cryptocurrency is backed by the same thing as any other currency: popularity and consumer confidence.

I don't think currency is just a confidence game. The most important thing is that the currency is actually used to make transactions that are meaningful to human life. A currency that isn't used to exchange goods is just a collectible. There is no such thing as an abstract "store of value" that has no actual utility other than as a store of value. Crypto will fail when people tire of owning the collectible and want to exchange it for something useful.

[imtringued]

Most fiat currencies are backed by the fact that people made themselves liable to accept that currency. It's a literal "I owe you". A restaurant owner promises to work to earn money, the bank gives the restaurant owner money via a loan. The money is spent on a bigger restaurant, the construction workers who built the restaurant get the money and they can then go to the restaurant and pay to eat there. They don't have to worry whether their shiny rock is currently worth something. The restaurant owner has a loan he wants to repay. He'll gladly take your money. At the end of the day it is just delayed barter.

Except, nothing forces people to spend their money so the barter transaction may never conclude which allows economic imbalances to build up over the short term which violentely resolve themselves through a crash. Inflation could be interpreted as a tiny crash every year that rebalances transactions made in the economy.

[thoughtstheseus]

The one exception is when you go to pay your taxes.

[lifekaizen]

I'm on the pro-crypto side, but the US dollar has more than consumer confidence, it has the largest armed forces the world has ever seen. So a better comparison is something like gold, I think, that has value because we say it has value (it's shiny! and rare...)... which is fine, just different.

[mohanmcgeek]

> the same thing as any other currency: popularity and consumer confidence

Real money is backed by your obligation to pay taxes in that currency.. not popularity or confidence.

[belltaco]

You mean speculator confidence.

[rhizome]

Because it's a pyramid scheme that is powered by hype. It just so happens that the exponential requirements for the number of participants has grown to the point where you'll start to see ppl talking about it more and more and in everyday conversations.

[aliswe]

are you sure the word pyramid scheme is actually accurate?

[jackcosgrove]

Crypto at its best is a use case and driver of investment in decentralized databases.

However, that leads to the question of whether we need decentralized databases. Networked computing tends to lead to centralization of services, if not at a single node then in a collection of nodes each of which is the best at what they do. Google is for search, Amazon is for e-commerce, etc.

Given the tendency towards natural monopolies, do decentralized databases make sense? They are slower and more duplicative than centralized databases.

Decentralized databases shine when a multiplicity of providers reduces the power of each node. In the parlance of monopoly, the node operators of a decentralized database are price-takers not price-setters.

Decentralized databases make economic sense when the operational costs associated with them are offset by the lower prices on offer compared to a monopolistic price-setter.

However, the tech monopolies currently offer their services free or at cost, with all the efficiencies that come with scale. I don't think we need decentralized databases now.

Still I think it's something good to have in your back pocket if the state of monopolistic software gets worse. I see the crypto market as crowd-funding R&D for something that may be needed in the future.

[MisterBiggs]

Speculation of meme coins has dominated the news recently but there are some amazing coins with real utility. Ethereum tends to get viewed negatively because it can become so insanely expensive to do anything on the chain but in reality that means that the market is willing to pay for those transactions to occur which suggests that there is some real utility to the ecosystem that has real world value.

[belltaco]

But those people are speculators looking to make a quick buck.

[rvz]

> in reality that means that the market is willing to pay for those transactions to occur which suggests that there is some real utility

It means that it is useful for those who can afford the absurd gas prices for just about any operation on Ethereum than those who are sending small amounts to perhaps test before permanently sending their money to a dead wallet and paying the gas fee too.

So it makes sense for someone to pay >= $1,000 in fees to approve and move / swap $1 - $100 worth of tokens? That is not 'real utility'. It makes it really useless.

[imtringued]

If those coins have real utility then the amount of utility you can get out of it goes down as the coin goes up in value.

Expensive Ethereum leads to expensive gas prices. If you want to play an NFT game then the speculators are just middleman that want to insert themselves between you and the game.

[philosopher1234]

It’s a fallacy to think that just because people want to do something it is valuable. People have wanted to do some insanely wasteful or horrible things in the past.

[firecall]

Such as?

[shishy]

Valuations going up even when value is not being generated by a company is happening across the board; not just crypto.

[fuzzfactor]

Theoretically, if you're going to sell something the most profit would fundamentally be made from products which had the least cost or value at the source.

When the floor represented by underlying value is not very significant compared to retail price, then the sales bonanza should be expected to propagate further along a chain of middlemen, so more fun for more enthusiasts the more valueless you can get.

[travisgriggs]

Speculation.

It’s the new form of gambling.

[asdfsd234234444]

Just because you don't see it, doesn't mean others don't.

[Irongirl1]

As a non-techie and a member of a minority class, I am going to say that the reason crypto is rising so fast is: ACCESS.

We can finally gain access to banking services desperately needed <on our terms> rather than some arbitrary check box designed to keep us from making progress and improving our communities and the lives of those around us.

Let's say as an example, that I need $1M to fix some buildings I own. But my personal credit is crappy, I'm BROWN and a Woman. In the regular financial markets, I would either get turned down flat or my rates would be so high that there wouldn't be any point to my borrowing the money. But in the DeFi World, I might find an investor willing to negotiate better terms with me. That back and forth and the possibility of that back and forth is important. Before, there was just a closed door. Now, there might be a window open or a huge truck bay left wide.

If I decide to create a product, now I can guarantee that my audience is not filled with trolls or dangerous people who are hiding in my email list under false pretenses. I can sell them access to my way of thinking and be assured that I am delivering the value where I intended. That is VALUABLE.

I could list tons of reason why CRYPTO Is valuable, but in looking at all the answers already here I can tell that none of you really seem all that interested in the 80/20 problem. Currently, 80% of financial services goes to 20% of the marketplace (in general terms). That 20% don't actually need more services. The bulk of us who might can't get reasonable help on any terms. Projects like this that make it possible only have one trajectory: UP.

[forgotmysn]

before getting into your points themselves, the validity of your arguments are based on the merits of your arguments themselves. they aren't any more or less valid because of your status as a minority.

but onto your arguments, I don't think you've listed anything that didn't already exist. again, not to invalidate, but I don't think anything you've mentioned is a result of crypto itself.

regarding alternative liquidity, there has always been alternative investment and liquidity available outside the structured financial industry. private investors or money lenders, often times related to the mob or sketchy individuals, have been available long before crypto, and will continue to be available. often times, alternative investors using crypto to move funds are not much safer or more credible than the mobsters of old.

your second point refers to KYC, or Know Your Customer. this has been a legal requirement in the financial industry for decades, and certainly aren't a result of any innovation or achievement in the crypto space.

again, not to invalidate any of your arguments, but I'm not sure any of them answer OP's question.

[lifekaizen]

Unfortunately we are seeing a lot of hype and dubious projects, we're in an asset bubble with intense FOMO. I try to ignore that and think about the promise of crypto.

As compared to equities. Remember, equities took decades before the academic frameworks were established. _Gentlemen own bonds_ was the wisdom, all the Wall Street traders were the Brooklyn street kids, not he Ivy bankers. Present value sums up all future cash flows and gives it a price today - this is very misunderstood, you find reporters saying 'and they're not even making any money!' but we're valuing the total funds made in the total lifetime, discounted to today (I sometimes think if they'd called it financial relativity or finance-time it would have been cooler). I find it useful to try to think about where the comparison object was at this point in its development.

Early stage investments are not available to most. You must be an accredited investor - i.e. already have a certain amount of wealth, you must be connected - this favors certain schools or ethnographic groups. With tokens, you now have access. You can actually participate early along with everyone else. You can join the Discord, participate, and see it through all its stages. This is tremendously powerful, scary, and transformational.

Cryptocurrencies have the dollar figure, but the real value I'm seeing is in the organization and management structures. You are seeing transparency and participation that just isn't how business is usually done, or maybe ever was. If you join the KLIMA Discord, pop into their #policy channel, they are literally having open C-level board strategy discussions you can participate in.[0]

Tokens now are being used for governance and ownership. This is the DAO concept again, which functions something like stockholders getting a vote on certain things, but in crypto it is being pushed further to have 'only' that group run everything. The other strange thing is, to get these tokens, often you have to be a member or customer. There is employee ownership, and customer ownership. Which is unusual and valuable.

[0] https://docs.klimadao.finance/klima.fi-manifesto

[kypro]

The average uninformed retail investor is obviously going to be drawn to investments which are seemingly obvious, making their friends rich and which have low barriers to entry.

What will eventually happen is that the market will run out of greater fools and the obviousness of Crypto as an investment in the future of finance will be brought into question.

At this point the userbase of Crypto will shift from speculators to genuine users and its real value will be better understood as individuals and companies focus on useful products and services rather than pumping meme coins to uninformed investors.

This imo is a classic bubble. I've been saying this for years though and will likely continue saying it for a few more years yet. But I have little doubt that in the long-term that what we're seeing in the Crypto space is unsustainable.

[dgm885]

The comment in this thread are powered by ignorance. Study the history of monetary systems going back around 690 years to present. Fiat currencies eventually fail due to government hubris. Bitcoin's algorithmic cap on units addresses that. Alt-coins are more transactional and many are more like businesses. BTC is going to continue to grow. Some tiny fraction of the alt-coin market will thrive and potentially have even larger market caps than BTC. These coins are getting traction for different reasons but BTC is an asset with staying power that provides a means for hedging against devaluing fiat currencies. Altcoins are going to take margin away from financial services entities by empowering transactions that won't require intermediaries. I think that crypto currencies are an innovation with many positive attributes.

[ivanech]

Crypto has a bunch of narratives around it that are compelling to different groups of people - it should be digital gold, or it will replace centralized applications, or it is a way to bring about a libertarian future, or it'll make transactions cheaper/more accessible, or it'll get you rich quick. They contradict each other, but that's okay because no single person believes all of them. People can hold whichever narrative they want to. Some of them might be true! I don't know.

The other side of this is that certain crypto markets are highly liquid, and liquidity is sticky. Sure, they're subject to high volatility and intense drawdowns, but being a focus of trading is something that lingers a long time. Most traders don't care about fundamentals. This is just another place to speculate to them (that's not a value judgement on my part), and the best places to speculate are places with lots of other participants.

I know that basically boils down to "it's popular because it's popular," but I do think it's self-reinforcing or self-sustaining. Narratives drove money into crypto and to this high point, but I think these reflexive dynamics are also keeping it elevated

[motohagiography]

Some of the value cryptocurrencies create may be that they have become an opportunity for working class people to get exposure to risk, leverage, arbitrage, volatility, and privacy that only very wealthy people had access to previously. Would be an explanation consistent with the Varian Rule. It's the poor(er) persons FX trading, which provides liquidity and price discovery.

What does cryptocurrency move from one place to another? Risk, arguably, and it does it faster, cheaper, farther, and more verifiably than cash. That's probably the most amazing service since the Medici's brought modern banking to the world.

[giantg2]

Personally, I think it's just speculative group-think. Makes me think of tulips.

https://en.m.wikipedia.org/wiki/Tulip_mania