Hello, friends,
For the past two years, cryptocurrencies have soared, fueled by celebrity endorsements and easy money from Silicon Valley. But now, as crypto coin prices plummet and crypto companies announce layoffs, investors are talking about a “crypto winter.”
This past week, Bitcoin prices dropped from $29,000 last Friday to settling slightly above $20,000 this Friday, while leading crypto trading platforms announced layoffs and froze withdrawals. This came after the collapse of two cryptocurrencies last month. All told, the crypto market is down $2 trillion from its peak in November, according to CoinMarketCap.
Some crypto advocates said that the downturn was to be expected as part of the industry’s growth. “The crypto revolution is well underway and its impact will continue to be profound. But its trajectory has been anything but gradual or predictable,” crypto entrepreneurs Cameron and Tyler Winklevoss wrote in a letter announcing layoffs at their company, Gemini.
But the crypto collapse comes amid growing concerns from computer scientists, engineers, and other technologists about the rise of this unproven, unregulated technology. An open letter to Congress, signed by 1,500 technologists so far, urges lawmakers to “take a critical, skeptical approach toward industry claims that crypto-assets (sometimes called cryptocurrencies, crypto tokens, or web3) are an innovative technology that is unreservedly good.”
To understand the case against crypto, I spoke to one of the letter’s authors, leading crypto skeptic Nicholas Weaver. He is a researcher focusing on computer security at the International Computer Science Institute and founder of Skerry Technologies, a developer of small autonomous drones.
We spoke before the market crashed this past week, but his case against crypto remains as much or possibly more relevant today.
Our conversation, edited for brevity and clarity, is below.
Angwin: You are one of the most vocal critics of crypto and have said that crypto should die in a fire. Can you tell us about some of the harms of cryptocurrency?
Weaver: Cryptocurrency does not actually work for its intended purpose. It was clear right from the start that cryptocurrency could never work for payments, as long as payments are processed by the normal banking system. Because the price is so volatile, you have two currency conversion steps, which makes getting money into cryptocurrency difficult and inefficient. It was basically only ever usable by drug dealers, ransomware purveyors, etc.
That’s partially because we’ve actually had digital money for decades now. Credit cards provide digital money, things like PayPal, Venmo, M-Pesa, and Zelle all do as well. These systems work for payments because most payments we care about are consumer to business, and we’ve had consumer to business electronic money in the form of credit cards for decades. Crypto can’t enable anything new on the financial front in terms of payments.
So what is it good for? Well, nothing because the utility value is zero. Append-only data structures—that is, a data structure where you can only add data—are decades old. Anything that can be solved with append-only data has already been solved. The git archive itself does the same thing: “git” is a version control tool; it is used to record the history of all changes you make. Among other things, this allows you to “go back” to the prior history because it doesn’t delete things, only adds changes. All the blockchain hype is hype because we’ve known how to build equivalent systems for decades.
Angwin: Append-only means that the transactions are irreversible right? Can you talk about the irreversibility problem that cryptocurrencies have?
Weaver: Yes, cryptocurrency by design is irreversible, and this leads to catastrophic consequences. Say somebody transfers you $70,000 through PayPal, and then you send them $70,000 in Bitcoin only to later find out that the PayPal payment was compromised. Now you’re out $70,000. This actually happened to Steve Wozniak.
In the modern financial system, we have a design requirement that anything electronic needs to be reversible for at least a short period of time. There’s a limited window of undo. This is to mitigate problems. This is to fix the “oops, you forgot a zero on a transfer” or “you added an extra zero on a transfer” problem. It’s also used to mitigate fraud. This is the reason why the bad guys aren’t breaking into people’s bank accounts, because if you break into somebody’s bank account, you can do electronic transfers, but those electronic transfers are reversible.
Angwin: You have talked about how cryptocurrencies enable ransomware and other criminal behavior. Can you explain their relationship?
Weaver: Back in 2016 and 2017 we had our first ransomware epidemic. This ransomware epidemic targeted individuals. The bad guy would break into a whole bunch of computers, encrypt all the data, and say, “Give us $200 or you will never see your data again.” Eventually, this form of ransomware faded because, at the time, the bad guys would generally accept two forms of payment. They would accept Bitcoin, which nobody used because it was such a pain, or they would accept Green Dot cards, which are prepaid credit cards. At the time, you could get a Green Dot card in Europe without any know your customer (KYC) guidelines. Congress realized this was a problem and pressured Green Dot into cleaning up their act, which they did. That killed the first gen ransomware wave.
Recently, we’ve seen the rise of what’s known as big-game ransomware. Instead of targeting individuals, people are targeting businesses. You break into a business, steal the data, and encrypt it, and then say, “Give us $10 million in Bitcoin, or you’ll never see your data again.” The problem is, how do the bad guys get paid?
You’ve got three choices: the banking system, cash, or cryptocurrency. The banking system will flat-out refuse. The banking system does not tolerate this because they know they would be in deep trouble if they process these payments. What about cash? Well, cash is great from an anonymity standpoint, but it has a few problems. From a criminal’s point of view, the main issue is you have to pick it up physically, and it’s heavy. Five million dollars in cash is 50 kilograms [110 pounds]. That’s basically two checked bags of maximum weight, and you have to send somebody to physically pick that up.
Cryptocurrency is the only game they’ve got. It’s the only game in town for them. The reason why it works for them is because not only does cryptocurrency not have mechanisms to block ransomware, but there’s enough garbage going on that they can hide in a crowd. The bad guys can hide their million-dollar flows amongst all the rest of the garbage going on. If the cryptocurrency space dries up, which I’d love it to just because it’s provably harmful from a financial standpoint, it would have the wonderful collateral effect of basically draining the swamp where the ransomware purveyors get their money.
Angwin: For those of us who are not malicious hackers, why is crypto nevertheless a bad investment?
Weaver: Crypto has no utility value, so from a financial standpoint, it is a self-assembled Ponzi scheme. Let me explain what I mean. I’m a savvy investor, and by savvy I mean that I put my money into index funds and ignore it for a decade or three because there’s plenty of math that says you can’t beat the market. If I put $10,000 into my index fund, sit on it for a decade, and then I sell it for $15,000, my gain is not just the difference between what I sold it for and what I bought it for, but also all the dividends and share buybacks. This means that investing in the stock market over a long term basis (so not Robin Hood) will result in more winners than losers.
This is in contrast to any dollar that you make trading cryptocurrency, which comes at the expense of somebody else. This is gambling, this is a casino, this is a Ponzi scheme. Cryptocurrency starts with zero sum because there’s no utility value, unlike gold, which ends up in electronics. In fact, it actually isn’t just zero sum but a deeply negative sum because mining burns a measurable amount of the world’s electricity and those power bills need to get paid somehow.
The cryptocurrency edifice starts with the rule that every winner is paid by a loser. The early winners are paid by later losers, and basically, the only way people can make money is to get more suckers into it. And that is before you add the huge drag from cryptocurrency mining, and that’s billions of dollars being thrown up the smokestack burning coal.
Angwin: What was the thinking behind the letter that you co-wrote and sent to Congress? What prompted it, and what are you hoping to achieve?
Weaver: It was prompted by a Jorge Stolfi Twitter thread where he pointed out that, technologically, this space is absolute garbage. The problem is that, for a very long time, the only technical people that spoke to the government about the cryptocurrency space were those invested in it. It was the people who have their startup of privacy preserving machine learning on the blockchain, or those who have their holdings in the privacy preserving Bitcoin fork that they released.
This produced a distorted view of the space and gave regulators and those in Congress the false belief that there’s actual innovation here. The Twitter thread Diehl started got so many quote tweets of other technologists saying, essentially, “Yes, this space is garbage.” We realized there needed to be a clear collective statement that, from a technical perspective, this space is a mess. I mean, Bitcoin can only handle three to seven transactions per second worldwide, and people think you can help unbanked people with this technology!
That was the origin of the letter. Approximately 1,500 technologists have now signed on to it. It’s important for lawmakers and regulators to understand that if you ask people who aren’t invested in this space but who understand it, there’s almost universal consensus that it’s a trash fire.
Angwin: Last but not least, if anyone reading this has cryptocurrency, do you urge them to sell?
Weaver: Yes. The market can stay irrational longer than you can stay solvent, which is why you don’t short it. I have no cryptocurrency holdings. I have no short position either because shorts are gambling and I don’t want to gamble with my money. If I want to gamble, I’ll go to Vegas where at least the food is good.
When the market is irrational and you’re currently solvent, get to the exits now because collapses happen quickly, and there’s a lot of potential bombs in the market that can drive the price down really fast.
For example, miners have been mostly holding onto their cryptocurrency, borrowing against it to pay the power bills. These loans require real money. One of these days, one of the cryptocurrency miners is going to have to sell a significant amount to the point where it grinds down the market a little too far. Another cryptocurrency miner or somebody else gets a margin call because they no longer have enough collateral. This creates a feedback loop where basically each sale drives the price down, forces more sales, and then the system collapses. The lesson of Terra is that catastrophic collapses move very quickly in the cryptocurrency space. You may think you can be fast enough to get out the door after the fire starts, but you’ll just get burned.
As always, thanks for reading.
Best,
Julia Angwin
The Markup
Additional Hello World research by Eve Zelickson.