Swampland in Florida

A Note on Crypto, circa December 2024

“Frothy Assets”?

“Crypto winter” is so over that many people no longer even remember crypto winter. Of course, no one can be surprised about the most recent boom or mini-boom; I’m certainly not.

Even those of us who remain deeply skeptical that there is any such thing as a “crypto industry,” those who keep reminding everyone else that Bitcoin doesn’t do anything, those who grasp that Bitcoin can never be money (never), could easily see that the election of Donald Trump would lead to a large, perhaps even massive, inflow of real money into the crypto “space.” Trump was funded by crypto bros and promised to be/become/support crypto bros. This is not to mention that the one thing Trump 1.0 delivered was massive tax cuts for the rich, and all he has to do to deliver them again is to prevent the initial cuts from expiring.

This is a massive redistribution of wealth upwards. And as I constantly remind my students of capitalism, if you want to make sense of apparently curious phenomena in capitalism today – from NFTs to the GME short squeeze; from the art market to furious buying of Hertz stock after Hertz announced they were bankrupt – you must constantly remind yourself of this key fact: there are a whole lot of people with way too much money who have no idea what to do with it. If you are rich, capitalism constantly poses the problem to you of where to put your money.¹

In that context, you don’t have to believe any of the hype about crypto – you can absolutely know it’s mostly scams and bullshit – and still see it as a wise move to have bought Bitcoin (or some vehicle that contains it, including MicroStrategy) – in November. If the number is going up and you can manage to buy low and sell high, then it matters not why the number goes up.

“Matters not” to the individual investor, that is. It matters a very great deal to everyone else who lives in capitalist society, because most money markets are always doing two things at once: acting as a crazy casino for degenerate gamblers, one; allocating capital for a capitalist mode of production, two. Let me be clear: that second point might sound hollowly formal, but it means something very concrete, something quite literally as essential as bread. The money markets help decide whether a capitalist society produces enough food, clothing, and shelter – and not just for the society’s own citizens but for most people on the planet.

But crypto isn’t like most money markets.

We can see how by drawing a series of comparisons between types of money-market investments.

First, let’s compare something utterly basic (a municipal bond) with something super fun (zero day call options, 0DTE). The first is boring as mud: you buy the bond, it pays you a very low interest coupon every 6 months (with, perhaps, some tax benefits for you), and in 5 or 10 years you get your money back. The second is super cool: it lets you use ridiculous acronyms like YOLO and HODL, and if you do it right you can be part of outrageous online communities.

Despite these differences, both of these investment options are bound up with the complicated process by which capital gets allocated across the economic order. Here’s the key: despite those stark differences, both of them are part of a larger, significantly more complicated process of allocating capital. In each case I’m taking a sum of money, some credits I hold on a debtor, and transferring them to an entity that can mobilize them as capital: to build a road, open a factory, or start a new venture.

Second, let’s compare and contrast two different types of fun investments, our zero-day call options above and crypto. Both of these let you hang out in fun online communities. Both of these are, at root, mostly gambling. That is, buying Dogecoin is like placing a silly prop bet with your friend: it is a zero sum game between you and your friend that has nothing to do with the rest of the community. And day-trading stock options is also gambling: you risk a small amount of money that is likely to disappear, with the hope that it pays off big. DraftKings and RobinHood offer very similar products: apps you can gamble on. Both institutions are playing the role of the house, taking the other side of your bet, and making lots of money because the game is pretty much rigged against you.

Despite these many important similarities, there’s a crucial difference between Dogecoin and 0DTE. At best, Dogecoin is nothing other than pure gambling (at worst, it’s a better-fool’s scam). But to day-trade stock options, while still mostly gambling for the folks doing it, is still to participate in the larger allocation of capital that is a primary function of money markets. This can work out in myriad, often complicated ways, but we can clarify with one stark example, our 0DTE.

A refresher for those who need it: an “option” is a contract giving the purchaser the right (but not the requirement) to buy (call option) or sell (put option) a specific asset (“underlying”) at a specific day/time (expiration) for a predetermined (strike) price. The seller of the option gets cash and takes on the legal responsibility to buy or sell the underlying asset should the buyer exercise her option. “0DTE” is ridiculous jargon because all it means is “an option contract that expires today.” Options are derivatives: the options buyer is not buying the stock (or other underlying asset), but merely placing a bet on its movement.

On first glance, our intuition might be that as derivatives, options contracts are nothing but bets – purely secondary or epiphenomenal. That is, they are bets on the market, but they do not constitute the market any more than betting on football games constitutes the reality of the games – or that buying Dogecoin has anything to do with any larger reality other than Dogecoin.

But our intuition would be wrong:

1. First, options buyers and sellers are not buying and selling options contracts from/to one another; they do their buying and selling with dealers. And as I often like to remind readers, dealers make a market by always standing ready to buy or sell (at the appropriate bid/ask spread which is their bread and butter).

2. Second, being a money market dealer is way better than being a bookie, because there are so many great ways to hedge in the money markets. A bookie has to balance out their book by trying to get enough customers to take both sides of the bet: they can shift the odds (or the point spread) in order to encourage more action on one side rather than the other, and eventually they can just stop taking bets on one side. But ultimately, if everyone wants to bet on the Steelers, no matter how high the spread goes, then the bookie while find themselves with “exposure” – that is, if the Steelers win, the bookie will lose money. The bookie can’t be both “long” and “short” the Steelers at the same time: if everyone wants to be “long” (by betting on the Steelers) then the bookie gets forced into a “short” position (hoping the Steelers lose).

3. What if everyone wants to buy 0DTE calls on Nvidia? (And let me assure you, lots of people do.) If the overwhelming majority of customers want the dealer to write them (sell) calls, then the dealer seems to be forced into taking a “short” position (betting against Nvidia) just like the bookie did with the Steelers. Enter the magic of the money markets: unlike the bookie, the dealer can be both short and long Nvidia. In selling calls, the dealer builds a short position, which they balance simply by buying Nvidia stock.

That last move is the game-changer: our gambling (by YOLOing 0DTEs) leads indirectly, but nonetheless, to a greater allocation of capital to Nvidia. The hedging of money market dealers changes the calculus of derivatives: they can never be fully understood as merely secondary phenomena, because they affect the market in the so-called “underlying” asset. The gamification of the money markets still takes place within their terms. While the dealers and platforms are making money off the day-traders they are also helping to distribute capital to some companies, municipalities, and government entities – and away from others.

Lest there be any confusion, let me say it loudly: by no means do I think this is the best way to allocate capital. My point is that crypto is not “allocating capital” at all. In the best-case scenario we might say the crypto domain works to de-allocate capital by taking money away from the money markets. Again, in the best-case scenario that money goes into the “investment” in Bitcoin as digital gold (buying real gold is also capital deallocation!).

But we should never forget the worst-case scenarios, and they are rampant right now. Here’s the FT from earlier this month:

Cryptocurrencies representing a euthanised grey squirrel, a Thai pygmy hippopotamus and a cartoon dog have exploded in value since last month’s US presidential election, as Donald Trump’s victory triggers a surge in speculation in so-called memecoins.

The market for tokens representing online viral moments has expanded rapidly since early November as traders bet that Trump’s administration will usher in more crypto-friendly attitudes and regulation in Washington.

More established memecoins such as Dogecoin have outperformed bitcoin, the world’s biggest cryptocurrency, over the past month and have been joined by a plethora of new coins that have been launched in the days following Trump’s win.

…The market size of PNUT has hit $1.2bn, while PEPE, referencing a comic frog character, has a market cap of $8.2bn — more than that of British supermarket chain Sainsbury’s. BONK, a cartoon dog made after the collapse of exchange FTX in an effort to cheer up traders using the Solana blockchain, has a market cap of $3bn.

It’s hard not to detect a deserved sardonic tone from the FT’s reporter, Nikou Asgari, as he describes cartoon frogs and dogs. But I worry that the tone proves far too subtle and does too little to specify the actual worldly phenomenon here. Worse still, Asgari repeats “market cap” numbers that are utter bullshit, without (other than the tone) even suggesting that they are bullshit.

The piece does offer a nice quote from a derivatives trader, Ilan Solot: “Ninety-nine per cent of them [memecoins] are pump and dumps.” YES. But the FT fails to explain to its reader what that actually means, especially as Asgari also describes the claim of “critics” as being that memecoins are “little more than frothy assets.”

No no no no no. Tulips were frothy assets. Maybe bitcoin is too. Memecoins, NFTs, and all the rest are sometimes silly fun, but usually they are, at root, criminal behavior. As I was about to queue this post for publication, my new fellow substacker and Nobel laureate) Paul Krugman, posted an incisive “Crypto is for Criming” (which I’ll intentionally misread as an allusion to my own “Tether for Terrorists.”)

To call memecoins a “pump and dump,” as Ilot rightly does, is to point out that they are frauds. Some humans are cheating other humans. The observed phenomena – e.g., high quoted prices for PEPE – does not emerge because of natural economics forces. These are not normal, or even extreme money market events. We are witnessing crime. And it is absolutely not “victimless” crime: pump and dumps and rug pulls steal real money from the people who are left holding the bag of worthless tokens.

If I start a scam to sell swampland in Florida and you check the prices posted in my land office and they are high, does that mean sentiment about swampland has gotten “frothy”? No, it means I’m engaging in fraud to cheat people out of their money. Should you write an article about “high prices for Florida swampland”? No, you should write an article about fraud in Florida.

1. To be clear, David Harvey has been teaching this lesson far longer than I, and I surely learned it first from him (though my version involves a lot more Perry Mehrling).