When I was a teenager, I started playing a popular computer game called EverQuest. It was a multiplayer fantasy game where players could create dwarvish knights, elvish wizards, and other genre-appropriate characters and go on adventures. After completing a quest or slaying a monster, you would be rewarded with armor, weapons, or other goods. Most players used these items to advance in the game. Others sold or traded them for what they needed as part of EverQuest’s vibrant internal economy.
Though it was not initially designed with this goal, some EverQuest players could skip most of the quests and adventures by buying fully equipped characters, specific items, or in-game currencies with real-world money. By some estimates, more than 400,000 people, mostly in China, currently work as “gold farmers”—players who repetitively complete in-game tasks to gather in-game currencies solely so they can sell them to other players. In 2002, when it was near its peak in popularity, one economist claimed that EverQuest’s gross domestic product per capita would rank as the seventy-seventh largest in the world, somewhere between Russia’s and Bulgaria’s at the time.
I think about EverQuest whenever I read about cryptocurrencies, or crypto for short. (My condolences to fans of cryptography and cryptids.) Crypto, like EverQuest’s platinum coins, is generally understood to be a form of digital currency. It emerged over the past decade and went mainstream over the last few years. Crypto is both not a real thing and, somehow, a very real thing. Last November, the crypto market was valued at more than $3 trillion, quadrupling its estimated value the previous year. It appeared to be on the cusp of going mainstream—there were stadium naming deals, high-profile celebrity endorsements, and even a string of Super Bowl ads. Financial advisers began asking whether people should include crypto in their 401(k)s. Pension funds made investments in it.
Things look a little different now. The crypto market is now reportedly worth around $860 billion after shedding nearly two-thirds of its value over the past 12 months. Strewn along the road of its decline is the wreckage of once high-flying crypto exchanges and firms. The largest of them, FTX, collapsed in upon itself in a multibillion-dollar black hole. Its new CEO, who was brought on to lead the company through Chapter 11 bankruptcy, told a federal court that it was the worst case of financial mismanagement he had ever seen. He previously oversaw the dissolution of Enron.
Part of the problem is that crypto, as its critics have often noted, doesn’t actually do anything. Unlike many stocks, it does not pay dividends to its purchasers or represent an ownership stake in a company. Unlike bonds, it does not offer a fixed rate of return. And unlike actual currencies, cryptocurrency does not really work as a common medium of exchange. You can’t go down to your local grocery store and buy a loaf of bread with etherium or tether. Elon Musk announced last year that Tesla would accept bitcoin as payment for a vehicle but backtracked a few months later. The company has since sold off 90 percent of its crypto holdings.
Crypto enthusiasts often pitch it as an alternative to traditional financial systems, which are seen as corrupt and untrustworthy, and to fiat currencies, which are seen as vulnerable to inflation and government control. Bitcoin emerged in the aftermath of the 2008 financial crisis, and that zeitgeist persists in almost every crypto project to this day. A healthy amount of skepticism toward banks and hedge funds is understandable and even justified. Crypto, however, has failed on its own merits in a few important ways.
For one, cryptocurrencies have not shown themselves to be a resilient store of value during economic downturns or periods of high inflation. If you had $1,000 in the S&P 500 on the first trading day of January 2022, you would have roughly $850 on the first trading day of December 2022. That’s an ugly 15 percent decline. One thousand dollars’ worth of bitcoin over that same period, however, would be just roughly $360 today. Bitcoin is designed to be inflation-proof—it has a finite supply that can never be increased once created—and yet it lost two-thirds of its value in a year when inflation jumped by the highest levels seen in a generation. (Most other “coins” fared even worse.)
That comparison assumes that the person who had $1,000 in crypto in January still actually had it in December. For a great many crypto investors, that simply isn’t the case. Some crypto owners sought higher yields on their holdings than merely holding them and hoping that the number would get bigger could provide. That led some crypto firms to offer extraordinary yields, with the firms holding the investors’ coins, lending them out, and earning high rates of return, sometimes as high as 8 percent or 12 percent or even more. Some “yield farmers” claimed rates of more than 100 percent.
If you are skeptical of the idea that any investment can guarantee or even promise such rewards, then your instincts would be correct, because it quickly proved to be unsustainable. Crypto’s meteoric rise was largely premised on the idea that more people would keep getting into it and it would keep going up and up and up. When FTX founder Sam Bankman-Fried famously described how his version of it worked, on a Bloomberg podcast in April, veteran finance reporter Matt Levine summarized his explanation as, “Well, I’m in the Ponzi business, and it’s pretty good.” Bankman-Fried replied that there was a “depressing amount of validity” to what he said. (It should come as no surprise that federal prosecutors and the Securities and Exchange Commission agreed that something shady was going on. Bankman-Fried was arrested in the Bahamas shortly afterward; he has been indicted on eight charges, including criminal fraud and conspiracy.)
These firms and similar enterprises in the world of “decentralized finance” have essentially repeated the flaws and mistakes of “traditional finance,” but without any of the regulatory apparatuses that were born from those errors. If your local bank collapses, the Federal Deposit Insurance Corporation will allow you to recoup up to a certain amount, which is usually $250,000. Americans who entrusted their crypto to FTX or Celsius or BlockFi or any of the other collapsed exchanges have no such protection. They may end up considering themselves lucky if they get back even a fraction of what they’re owed in bankruptcy proceedings. Crypto’s backers underestimated the degree to which crypto institutions would resemble the worst cruelties of the traditional financial system that they purportedly sought to avoid.
That brings me back to my original point: Crypto is not real. Like the platinum coins in EverQuest, it has no intrinsic value and is untethered to anything but the shared belief by many people that it is actually worth something. (Neither is the dollar, crypto folks are often quick to note, but cryptocurrencies do not have 12 aircraft carriers and a nuclear arsenal and a system of courts that can enforce debts.) Aside from a few edge cases, crypto’s primary real-world utility is to do exactly what its early developers intended: evade government control. That does not mean living in some Matrix-esque cyberpunk dystopia; that means money laundering and sanctions evasion and other things that are generally considered crimes. And I haven’t even gotten to the ecological damage.
What makes crypto so tragic is that it is not some fringe plaything for tech-minded types. Its enthusiasts have convinced a great number of people that crypto can be a quick and easy pathway to riches—a surefire way to escape the wage stagnation and indebtedness that trapped so many young Americans after the Great Recession. Crypto has surely made some of its early adopters rich, but that number is far outweighed by now by the many thousands of people it has robbed. The only saving grace is that crypto’s collapse this year came before it could literally lobby itself into favorable treatment by Congress and financial regulators.
Indeed, crypto’s collapse might turn out to be bittersweet news in the long run. While watching crypto’s current enthusiasts lose their money isn’t something to celebrate, the alternative is that they find more new marks to replace them. Hopefully Americans exit this year with a healthy dose of wariness toward the crypto “industry” and a deeper skepticism of get-rich-quick schemes. I should add the caveat that maybe someone will someday find a legitimate and societally helpful use case for crypto. Until then, there is little reason to put your money or your faith in magic digital coins. At least EverQuest was fun.
Matt Ford is a staff writer at The New Republic.