Digital gold or magical internet money – The ever-shifting narrative of crypto

Digital gold or magical internet money – The ever-shifting narrative of crypto

Crypto is once again the talk of the town. The rollercoaster ride that is crypto pricing has once again risen from the valley of despair to new records. BTC is closing in on the 100 000 USD mark, and meme coins are once again flourishing. At the same time, we are still short of any mainstream practical use cases for crypto and its underlying technology.

Avid crypto evangelist insist that it is still early days, and the future will reward the true believers that are hodling despite what anyone else says.

The underlying narrative of cryptocurrencies has shifted significantly over the years, and many of the potential benefits of using crypto over regular money has been falsified.

In the early days cryptocurrencies like Bitcoin were heralded as tools of financial freedom, decentralization, and resistance to centralized authority. This first wave of crypto was primarily embraced by technology enthusiasts, libertarians and those critical of centralized governments.

Key drivers in the conception phase of cryptocurrencies were a general distrust in banks and governments fueled by the bailouts from the financial crisis of 2008. The promise of a fully decentralized financial system spoke to the heart of technologist where technology could make up for and cut out centralized institutions.

As interest in cryptocurrencies grew, focus shifted rapidly from ideology to the potential of the underlying technology. The rise of Ethereum introduced the world to the concept of “programmable money”, smart contracts and other blockchain use cases. Although few knew exactly how and why this would play out, everyone was convinced that blockchain was the future of almost everything.

Blockhain was supposed to bring trust to a trustless world, as well as making global finance, faster, better, cheaper and more secure than incumbent systems and solutions. Venture capitalists got in on the bandwagon and things really started to move.

At this point, not even the sky was the limit for cryptocurrencies, and we saw a boom of altcoins and speculative use cases. Most notably, the boom of Initial Coin Offerings (ICO) and Decentralized Autonomous Organizations (DAO) where posed to upend the traditional way to do fundraising and corporate governance.

At the same time some of the early use-cases for blockchain turned out to be too good to be true. The DAO, an organization built on smart contracts, had been robbed of more than $60 million through a code exploit in the underlying smart contracts, and around $70 millions were stolen from Bitfinex due to a flaw in the storage of private keys. In the financial sector banks are struggling to reap the benefits of the technology without modifying it to a point where it starts to resemble traditional systems. 

In this phase, opportunistic investor and speculators got in on the show until the bubble burst in late 2017 as bitcoin prices reached its all-time high of 20 000 USD. A price point that would look cheap by comparison of todays prices.  

Cryptocurrencies got its first course correction, but the hype was far from dead, and the narrative moved away from potential use cases towards btc as digital gold and an alternative asset class as the primary argument to defend the longevity of crypto. This narrative was strengthened by companies such as MicroStrategy, Tesla, and Square investing in Bitcoin.

Central banks took an interest and started researching Central Bank Digital Currencies (CBDC). While some saw this as a validation of cryptocurrencies, purists despised the idea that centralized institutions should have a role in their vision of a perfect decentralized future where technology (and of course a small elite of crypto evangelists), not banks and governments should manage the flow of value.

People started fearing inflation, and evangelists went out and convinced the public that cryptocurrencies were inherently anti-inflationary.For those who were more into art than gold, the NFT-crazy got people convinced that a digital picture of some monkey was worth millions of dollars.

A-list celebrities endorsed crypto exchanges and wallets, and those who didn’t understand it rode along thinking that who were they to question the technology when so many were standing on the barricades creating a conception that showing a healthy scepticism towards crypto equals calling the internet a fad back in the ninetees.

As inflation hit post-covid, crypto proved to be as susceptible to rising interest rates as most asset classes. As for NFTs, the prices dropped by 90 percent as soon as the pandemic ended, and people could spend money on useful stuff again. There was no use for an overpriced digital image file, and putting concert tickets on the blockchain proved to be a solution looking for a problem.

While that clearly didn’t work out, crypto enthusiasts were not sitting idle by without looking for new problems to solve, and the narrative circled back to decentralization as the primary driving force for why cryptocurrencies was the future and prices should once again soar to the moon. In this period the headlines were dominated by the promise of a new internet, web3 where our digital identities were decentralized and self-sovereign. Traditional banking would eventually vanish as decentralized finance (DeFi) were the future of finance.

This era was not only fueled by the need for a compelling narrative to support why crypto still is the future despite several hits and misses, but a growing distrust in technology companies like Alphabet and Facebook and the monetization of user data. Facebook even went to great lengths to try and establish their own digital currency in order to take part in a potential future where digital currencies dominated the internet.

El Salvador adopted bitcoin as legal tender, and even though the unrealized profits today exceed 500 MUSD, the experiment was a spectacular failure that nearly bankrupted the country back in 2022. However, what is most notable is that even though the government promised free money for everyone that downloaded he official digital wallet app, it is widely considered a widespread failure in the wake of the rollout.

And this was far from the worst crypto scandal of the period. Signs started to point towards the fact that DeFi was far from as decentralized as promised. In many cases, the tendency for blockchain consensus mechanisms to concentrate power also makes it easy for a small number of stakeholders to make big decisions. The existence of so-called governance tokens which are cryptocurrencies that represent voting power in decentralized systems is one of the factors the report highlights as a threat to the promise of decentralization.

The warning signs were there, and shortly after, a series of curtain calls exposing the fraudulent nature of several DeFi initiatives were unveiled, with the complete collapse of FTX and crypto’s wonderchild, Sam Bankman-Fried at the main stage.

The technological marvel that was supposed to create trust in a trustless world was in a state of disillusion. Real people had lost a lot of real money, and the face of crypto had been discredited as a fraud. At the time, this seemed like this was the obituary for the crypto markets as a whole.

However, this was not the case. As true believers insisted that this was just another bump in the road, and the future still lies ahead for crypto as a whole, the entire sector has once again risen to new heights, in large degree fueled by the results of the presidential election.

The narrative is now more multi-faceted where various faction cling to their own version of the truth.

So-called bitcoin maximalists insists that bitcoin is the only path towards salvation, and all other cryptocurrencies are distractions along the way. Although bitcoin is the crypto O.G., it has been surpassed by other coins like Ethereum, Solana, Tether, Cardano in terms of scalability as well as potential use cases. By insisting on bitcoin being the only true path towards salvation, bitcoin maximalists are by definition rejecting technological innovation.

Others claim that it is still early days, and the technology is just another patch away to become the backbone of a crypto-fueled technocracy. The problem with this narrative is that cryptocurrencies has been around for 15 years already, and still have not managed to turn out a viable mass market use case. As of now, most use cases are being used withing the crypto community itself, which givens its sheer size is a sustainable market of its own. But still not sufficient to defend the combined market cap of all cryptocurrenices.

SECs greenlighting for crypto ETFs might for others be viewed as a sign of traditional finance giving in to the narrative of if you can’t beat ‘em, join ‘em, thus legitimizing crypto  as the coming paradigm of finance. This of course requires that there is some kind of inherent fear among banks and financial institutions that crypto will somehow eat their lunch, which is widely believed withing the crypto community. The fact is that the world of finance is opportunistic and will not stand idly by and leave money on the street.  Crypto trading is already easily available through several platforms, so it would only make sense to extend exposure through ETFs for the mainstream market. As a result, the crypto market is provided with additional liquidity.

Nevertheless, even though bitcoin is still useless as anything other than a speculative object. The metaverse was proven to be stillborn. Decentralized finance was proved to be even more vulnerable to fraud and deceit than the incumbents it was set up to disrupt. The NFT market rose like a phoenix, but eventually fell like a stone. Crypto markets continue to go up, up, up. Once again prominent voices are backing crypto, and mainstream investors are starting to feel the fear of missing out. And that is the true innovation of crypto. -The compelling narrative that as long as you believe, all of the true believers will all become crypto billionaires. Superior to all those who dare to question why and how the value of a seemingly magical technology with no intrinsic value or proven use cases continue to rise.

Although crypto is inflated with a lack of mainstream use cases, I would be careful not to dismiss the thought entirely, as there still might be a chance there are potential use cases in a possible decentralized future. However, just because it is possible doesn’t mean it probable.