By Steven Zeitchik
Maybe it was when the author of the influential book "Black Swan" said Bitcoin was worth "exactly zero."
Perhaps it was the assessment from a billionaire hedge-fund manager that cryptocurrencies are a "limited supply of nothing."
Or it could just be one of those cultural shifts that happens when one too many celebrities tries to convince us of something.
Whatever the turning point, a growing group is sounding dire warnings about the dangers of cryptocurrency investment. Call them the crypto-catastrophists – bloggers and billionaires, mathematicians and economists, computer-scientists and 2008-crisis prophets and, even, a 2000's-era Hollywood personality – who have all come together to unleash a warning to government and citizens about cryptocurrency investment. And their voices have, slowly, begun to rise above crypto's evangelist din.
"For a long time it felt like just a few of us shouting from the rooftops," said Nicholas Weaver, a computer-security expert from the University of California at Berkeley, who has long mounted both a financial and ethical case again crypto investment. "But I think there are more of us now, and hopefully that will help us be heard."
On Wednesday last week, Weaver was one of 26 influential technology personalities to direct those cries to the US Congress.
In a letter addressed to Senate Majority Leader Chuck Schumer, Senate Minority Leader Mitch McConnell, House Speaker Nancy Pelosi and other congressional leaders, the group outlined what it described as potentially grave dangers of cryptocurrencies.
"The catastrophes and externalities related to blockchain technologies and crypto-asset investments are neither isolated nor are they growing pains of a nascent technology," it said. "They are the inevitable outcomes of a technology that is not built for purpose and will remain forever unsuitable as a foundation for large-scale economic activity."
The missive, which was titled "Letter in Support of Responsible Fintech Policy", did not spell out many policy proposals. But it was clear the group wants dramatic moves to rein in, if not outright eliminate, crypto investing.
"We need to act now to protect investors and the global financial marketplace from the severe risks posed by crypto-assets," it said.
On Thursday, New York Attorney General Letitia James joined the skeptics, sending out an "investor alert" about the fundamental nature of crypto risks.
"Even well-known virtual currencies from reputable trading platforms can still crash and investors can lose billions in the blink of an eye," she said, citing conflicts of interest and limited oversight. "Too often, cryptocurrency investments create more pain than gain for investors. I urge New Yorkers to be cautious before putting their hard-earned money in risky cryptocurrency investments that can yield more anxiety than fortune."
The alert goes further than a warning James issued last year, which focused more sharply on explicit crypto scams.
The catastrophists are, to be sure, still a shaggy group. Members have few formal ties to one other, engaging mainly on social media – a sharp contrast to the coordination by adversaries like crypto platforms FTX and Coinbase, which form an industry that spent $5 million on lobbying efforts last year.
But they can inject urgency into their plea, gathering growing followings with dramatic descriptions of worst-case scenarios. Many traditional economists are not outspoken, they say. And so it is up to them to take up the role of Jeremiah in Jerusalem, warning of a Babylonian reckoning for a society that has slouched into crypto sloth.
Besides Weaver, the letter's signatories include Harvard cryptographer Bruce Schneier, Google engineer Kelsey Hightower, Netscape Navigator pioneer Jamie Zawinski, the England-based blogger and author David Gerard, "The O.C." actor Ben McKenzie and Molly White, the popular blogger and social media presence who was one of crypto's earliest critics.
But the larger group of catastrophists goes beyond the signatories and includes a number of finance-world veterans who helped foresee the 2008 subprime-mortgage crisis, including the economist Nourel Roubini, the hedge-fund manager John Paulson and Nassim Taleb, the author and mathematician who wrote the best-selling "Black Swan," which posits that many of the most impactful events of history were unpredicted.
While disparate of profession, the catastrophists have come to very similar conclusions about the 2020s digital-coin investment craze. A crater is coming, they say. And it's going to be big.
Many others of course don't agree. Mayors from Miami to New York are embracing crypto with vigor, while both forward-looking financial firms like Silvergate and blue-chip tech companies like IBM have thrown in with it. A trillion-dollar market capitalization is not going away anytime soon, they say, nor should it.
But the catastrophists say the market's size only reinforces the stakes. They cite a lack of regulation, a product devoid of inherent value or cash flow, a system whose solvency depends on an ever-larger number of new players and markets manipulated by a few financial elites. All of that, they say, makes for a de facto Ponzi scheme that can only crash.
"You have extremely shoddy traders who are taking advantage of an unregulated market, and they want to skin you and they want to skin you again, and then they want to skin your friends, family and pension funds until eventually there's nothing left to skin," said Gerard, a longtime financial blogger and author, offering a colourful version of the catastrophists' message. "So I and others feel like we need to stand up and say something about it."
It was a remote prehistoric time (all the way back in 2021) when cryptocurrency seemed to be ascendant in the mainstream. A new Pew Research study had concluded that 16% of Americans used or invested in crypto. Venture capital giant Andreesen Horowitz was humming with a crypto fund. Jack Dorsey was telling Cardi B that Bitcoin would replace the dollar.
Shortly after, Larry David went viral with a Super Bowl commercial that only Luddites avoided crypto, while Matt Damon suggested non-crypto investors were cowards. Suddenly that nice couple at the block barbecue was tossing off words like "stablecoin."
But a crash of Terra's Luna by more than 95%, a drop in Bitcoin of 56% off its all-time high and a continued hammering of their message seems to be tilting the narrative in the catastrophists' direction. The climate now seems more conducive to the group's message than ever – maybe.
"Those voices are certainly getting louder," said Edward Balleisen, a Duke professor and historian of financial bubbles. "But the classic thing in any bubble is there are going to be a lot of people who wave it off and say 'It's just a correction' so keep going."
He noted that the catastrophists must contend with beloved names sending people the opposite message. "I mean, even with all these warnings you're going to have Stephen Curry on TV in the NBA Finals this weekend telling people how easy it is to invest in crypto," referring to the Golden State Warriors star's high-profile FTX ad.
Of course, it's not at all resolved that crypto-catastrophists are right, and a whole industry is predicated on the idea that they're not. Crypto executives point to a long history of skepticism where new technology is concerned. Befuddlement characterized Web 1.0 in the mid-1990s, they note, a position that now seems laughably out of touch.
To the skeptics, though, far more economic fundamentals are at play here. They argue that the lack of inherent value makes crypto a "zero-sum" game in which for every winner there's a loser (akin to gambling) instead of stocks, which not only rely on underlying earnings to determine their price but reward shareholders with dividends, buybacks and other benefits.
Far from saying there are simply some scams within crypto that need to be rooted out – the common refrain of crypto executives – they argue the entire operation is built on sand.
"Investing in crypto is just like what investing in [Bernie] Madoff's fund in the 1990s would have been – if he had openly admitted, since the beginning, that there was no portfolio, no stock or options trading, not even a small cash reserve," says the pinned tweet of Jorge Stolfi, a Brazil-based computer science professor, referring to the man who ran the largest Ponzi scheme in history.
Stolfi, a signatory of Wednesday's letter, is among the most pointed of the crypto catastrophists. Stolfi did not reply to a request from The Washington Post seeking comment. But shortly after the letter went out, he began promoting it, retweeting the messages of a London software engineer named Stephen Diehl. Diehl has become a social media star among the catastrophist set, drawing some 60,000 followers with his own crypto-warnings. (After the letter went out he posted that "Crypto fraud is spiralling out of control" and "regulators are paralysed and people are getting hurt left and right." He said it fell to "us as citizens and responsible engineers to help fix the problem we created.")
Stolfi's tweet last month asking computer scientists to call out the "dysfunctional payment system" and "technological fraud" around crypto kick-started the letter, which was organized among the signatories with the input of the liberal non-profit Americans for Financial Reform, an umbrella group advocating for more banking regulation.
Especially noteworthy has been the 2008 crisis prophets, who collectively form a chorus that may prove harder for some serious investors to ignore.
Paulson, who made billions shorting the housing market, told Bloomberg News last August that crypto was "a limited supply of nothing." He added that cryptocurrencies, "regardless of where they're trading today, will eventually prove to be worthless."
Taleb goes a step further, offering a mathematical postulate. Despite calling bitcoin the "first organic currency" as recently as 2018, he now believes it should, mathematically speaking, be worth nothing.
"Any probabilistic analysis means zero valuation," Taleb said in an email to The Post.
His research paper builds the case probabilistically, the mathematical term for extracting likelihood from chaos. Essentially it argues that since there is no possibility of dividends, buybacks or any other revenue to shareholders in the future, it must mathematically be worth nothing now because there is no value to build into it besides subjective demand.
"Owing to the absence of any explicit yield benefiting the holder of bitcoin, if we expect that at any point in the future the value will be zero when miners are extinct, the technology becomes obsolete, or future generations get into other such 'assets' and bitcoin loses its appeal for them, then the value must be zero now," he wrote. Gold, with its real-world uses, is also distinct from cryptocurrency in this regard, he said.
Roubini, who appeared before Congress in 2018 calling crypto the "Mother of All Scams and (Now Busted) Bubbles" has continued the drumbeat, saying another bust is coming and will be even worse than the "crypto winter" that began in 2018.
The critics are also hopeful that environmental concerns might sway public opinion. Creating bitcoin infamously consumes more energy annually than Argentina as it uses massive amounts of computing power to generate the calculations required to mine coins – a point they say should resonate with anyone concerned about the environment.
Even the most dire crypto catastrophists say it is unlikely, at least at the moment, that a crash would bring much contagion to the broader economy. The S&P 500 has a market cap of $40 trillion, dwarfing crypto's $1 trillion. But they say that doesn't mean Americans shouldn't be on guard for such spillover.
"The biggest fear is if it does get into the mainstream economy via retirement funds, it could start bringing other things in the system down with it, like with Fidelity," said Gerard, noting that company's plan likely to go into effect later this year that would allow participants to allocate as much as 20 percent of their 401(k) to crypto. "That's why we have to stop it now."
Another fear, he cited, would be a run on Tether, which if it is not properly backed by assets, as some say, could domino into credit markets, a possibility that credit-ratings giant Fitch has raised.
If a financial shock wave is looming, it is unclear how much these voices will help head it off. Duke's Balleisen notes that 2008 was filled with people warning about a housing bubble for at least four years before the collapse, and it did very little.
Then again, he noted, "the big difference is that you have many people in positions of influence now who remember 2008, where you didn't have anyone in 2008 who remembered 1929."
Many of the crypto-catastrophists say they know authorities might be slow to act but also say plummeting value could rein in the market on its own. In the past, crypto sell-offs have been curbed as either bargain-seeking investors poured in or, as one University of Texas research paper argued, inside players coordinated purchases to manipulate the market back to an appearance of health.
But that can't go on forever, the catastrophists say; beyond a certain point, it will just become a self-reinforcing plummet.
"I don't think you need the government for the crypto space to essentially disappear - people losing a lot of money will do that too," Weaver said. "Unfortunately that's a very painful way for it to happen."
WASHINGTON POST