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Updated: February 15, 2022 @ 12:17 am
In a not-so-distant past, some top universities around the United States decided it was time to embrace the latest scourge built at the intersection of computer science and finance economics: cryptocurrency.
At their core, cryptocurrencies are a crossbreed between speculative assets, whose entire value is derived from speculation about what their price will be in the future, and digital assets, which exist only in the digital space. They rely on creations referred to as blockchains – ledgers of transactions stored and maintained on multiple linked systems with various verification methods – to decentralize currency, reducing regulation and, ideally, inequality in the process.
Conceptually, the idea of reducing economic inequality through use of decentralized finance is a noble one, not least because of the vast amount of wealth inequality in the United States that has only been exacerbated by the COVID-19 pandemic. Unfortunately, the systems that cryptocurrencies use to solve these problems tend to do the opposite – they echo and outpace the levels of wealth inequality present in centralized finance, and their lack of regulation makes them a festering ground for scam artists.
In relation to wealth inequality, Bitcoin, the cryptocurrency that currently holds the highest market cap, appears to be orders of magnitude worse than the U.S. dollar. While roughly 1% of households control around 30% of total US household wealth, a staggeringly small 0.01% of bitcoin holders control 27% of the currency.
Some may contend that while wealth inequality is more rampant in crypto, the decentralized nature of cryptocurrencies makes sure that those with vast stores of wealth are unable to control the economy in the way that an average megacorporation can with lobbying, tax loopholes and lack of adherence to regulations in favor of paying fines. However, that theory also doesn’t hold up in reality – bitcoin miners are heavily concentrated, and the more access someone has to the technology necessary to obtain bitcoin, the more wealth they gain from mining and the more verification power they have regarding the blockchain.
The scamming side of crypto, on the other hand, comes largely from its status as a speculative asset and its lack of regulation, while also massively benefiting from the concentrated nature of the currency.
Pump-and-dump schemes manifest as yet another way that massively popular figures within the crypto space – especially those that have substantial amounts of the currencies they’re pumping – can increase wealth inequality and make a quick buck. The speculative nature of crypto allows these celebrities to push certain currencies in the public eye, leading to an increase in their prices. Once the prices have been artificially inflated, the large stock held by the individual or group pumping the currency will be sold, causing a crash that devastates other, usually smaller, investors.
Although certain scams, such as pump-and-dump schemes, are only common consequences of near absence of regulation, cryptocurrencies themselves require a ubiquitous form of scam within the space: Ponzi schemes facilitated by the greater fool theory.
While it can be argued, rightfully so, that not every crypto interaction is a pump-and-dump scheme, the same cannot be said for every type of scam. As with any other speculative form of currency, the principles of blockchain investments are based on the concepts of the greater fool theory – the idea that profits can be made from the purchase of overvalued speculative assets so long as the investor can convince a “greater fool” to purchase the asset for even more money. Because of this foundational principle of earlier investors profiting at the expense of the latest investors – the “greater fools” – crypto is unable to escape the biggest flaw in any speculative market of its caliber: the Ponzi scheme.
It shouldn’t have to be said that with the overwhelming number of flaws and scams present in the blockchain environment, it is more than disheartening to see members of the University of Cincinnati’s faculty promoting the newest facet of speculative blockchain assets – non-fungible tokens. With one event already completed and another event on the way, it doesn’t seem likely that this will stop anytime soon.
Speculative assets facilitated by blockchain technology, be it cryptocurrency or non-fungible tokens or something else altogether, are a case study on the dangers of deregulation and value brought about by pure speculation. Our university should not be encouraging them, but rather teaching students to disparage them as the scam-ridden, inequality-intensifying, dangerous entities that they are.
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