I have seen one fool’s gold rush from up close in the lead up to the 2008 financial crisis. It feels like we may be on the cusp of another with cryptocurrencies and decentralized finance. – Michael Hsu
Michael Hsu, the chief of the Office of the Comptroller of the Currency (OCC), has warned speculators that digital currencies are fool’s gold.
The statement comes amidst a volley of negative official statements about the industry, including a vow to up the ante against rogue actors and bring in stricter regulations by the U.S. securities regulator, another harsh crackdown by China, and a wave of investigations by officials across the globe into the conduct of exchanges, insider trading, and potential criminal activity by Tether and others.
Noting the speculative fever gripping the industry today, Hsu told The Blockchain Association that today’s climate reminded him of the frenzy that led to the 2008 financial meltdown. When the 2008 crash occurred, Hsu worked as an economist for the U.S. Securities and Exchange Commission (SEC), giving him an insider’s view of what happened then and what’s likely happening now.
Old wine in new bottles
Dr. Craig Wright has been warning about exactly this for years now. He’s repeatedly likened the digital currency industry to old wine in new bottles or old Ponzi schemes dressed up in high-tech garb.
Ask yourself why the one man calling BS on all of this is labeled as a fraud and viciously attacked by those who stand to gain from things as they are.
Dr. Wright’s sentiments were echoed by Hsu in his recent speech. “[Credit derivatives] relied heavily on math and financial engineering. The intellectual challenges and the money attracted the brightest minds from finance to physics. They believed that they were leading a financial revolution, creating an entirely new asset class, using an entirely different set of models,” he said.
Sound familiar? Thought leaders and social media personalities in the digital currency industry use many of the same mantras and talking points, claiming that the normal rules don’t apply to this supposed new asset class. Any talk of the whole thing being an unsustainable speculative bubble is dismissed as FUD. Those like Dr. Wright who call out the lies and expose the fraudulent narratives are labeled as scammers and are maligned and slandered by the powerful publications owned by vested interests like the Digital Currency Group.
Yet, anyone who digs and conducts independent research finds that it’s not at all clear why there are thousands of digital currencies, and as Hsu said in his speech, there are no clear answers as to how the massive returns available in DeFi are generated.
When will the fool’s gold rush end?
It’s difficult to pinpoint an exact timeframe for when all of this speculative madness will come to an end. It could be a year from now or it could be next week. However, at some point, speculators are going to start asking fundamental questions about what all these tokens are worth, what real problems they solve, and how they are supposed to earn a return on investment other than selling the tokens to a greater fool.
The statements made in this speech by Hsu and recent statements made by SEC Chairman Gary Gensler and others suggest that the end is nearer than the beginning. As regulators begin to crack down and prosecute those who fall afoul of the law and begin passing new legislation that will require greater transparency and compliance with existing and new financial laws, questions such as how the outsized returns in DeFi are generated or what commercial paper really backs Tether will finally have to be answered.
It’s highly likely that when these questions are forced, and the answers are either not forthcoming or are unsatisfactory to market participants, then the final crash will occur. Those who get out before the bubble pops will no doubt make a fortune, as they did in the Dot Com bubble, but the vast majority of speculators will be left holding the proverbial bag.
Will the crash be the end of digital currencies?
No, and that’s the good news. Despite some claiming that the gravy train can go on forever, and others at the opposite end of the spectrum claiming that the entire industry is vaporware, the truth is that the true era of building, solving problems, and creating scalable businesses will truly begin after the big crash happens.
When the inevitable meltdown occurs, people will begin wondering what it was really all about. The brightest will realize that there was only ever a need for one protocol; the original Bitcoin (BSV), which scales infinitely and upon which every other use case can be built, and that everything and everyone else was riding on its coattails and lying about its technical limitations.
And then the golden era of Bitcoin will begin. The sooner the fool’s gold rush is over, the better for everyone.
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