10 Takeaways From Matt Levine’s ‘The Crypto Story’


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Matt Levine’s 40,000-word essay “The Crypto Story” for is a deep examination, analysis, and explanation of the most divisive topic in modern finance: crypto. Where did it come from? How does it work? Is it all a scam? Where will it take us? Also, did we mention it was 40,000 words? And that you should read the whole thing? But in the event you’d like a few of the many highlights …

Databases Are a Foundational Part of Our Existence

“Modern life consists in large part of entries in databases,” Levine’s story begins. Money, homes, identities—almost everything about you is something that can be distilled into a database such as the ones controlled by banks, governments, and corporations. This is significant, because at its heart, Bitcoin and everything else that’s followed are databases.

Listen to a special episode of Bloomberg’s Crypto podcast with Matt Levine.

Crypto Is ‘Trustless’

Because we depend so heavily on databases, we have to trust the institutions that control those databases. But after the 2008 financial crisis, many people lost trust in those institutions—especially in the banking system. So Satoshi Nakamoto came along and wrote his (or her or their) Bitcoin white paper, which created the first cryptocurrency, showing how to run a shared database using “cryptographic proof instead of trust.”

Wait a Sec—Crypto Runs on Trust!

“Crypto is in a way about rejecting the institutions of society, about being trustless and censorship-resistant,” Levine writes. “But it quietly free-rides on people’s deep reservoir of trust in those institutions.” It turns out, he says, that “Trust in institutions is so strong and resilient that all of crypto’s bluster can’t stamp it out. ‘Not your keys, not your coins, put your trust only in verifiable code,’ crypto evangelists yelled, and people heard them and said, ‘Yes, that is nice, but I’m busy, I’m going to trust these nice strangers with my Bitcoin.’”

Yes, You Can Create Your Own Cryptocurrency

Since crypto doesn’t require permission, why not make your own? An “extremely simple generalization of Bitcoin,” according to Levine, is as follows:

That’s how you get Dogecoin, which features Doge, the talking shiba inu meme, and many, many more coins of dubious value.

Bitcoin’s Appeal as a Financial Asset Is Questionable

The first cryptocurrency was originally worth zero dollars; a year ago it peaked at about $67,000 before sinking to less than $20,000. Bitcoin’s extreme volatility makes it a risky and unpredictable investment. It has been pitched as a portfolio diversification tool and a way to protect against inflation, but it turns out to be “pretty correlated with the stock market, especially tech stocks” and “hasn’t been a particularly effective inflation hedge,” Levine writes.

Crypto Can’t Avoid the Real World

So you have Bitcoin. At some point you’ll want to do something with it—maybe buy a sandwich, writes Levine, or real estate or yachts. “A financial system cannot be entirely self-contained; you have to be able to turn your money into actual stuff.” And that means dealing with intermediaries and even governments.

NFTs Take the Bitcoin Idea One Step Further

“If you buy a Bitcoin, your Bitcoin is identical to anyone else’s Bitcoin. If you buy an NFT, it has a number. There will be some series of NFTs … let’s call them Tedious Tamarins,” Levine writes, and each NFT in that series will have a number, and Tedious Tamarin No. 63 will be distinguished from Tedious Tamarin No. 64 by having a different number. The numbers point to pictures you can look at online. It may sound silly, but “people do pay a lot of money for NFTs with the right sort of monkey picture.”

Stablecoins Can Be Deeply Unstable

Stablecoins are crypto tokens whose value is pegged to that of a traditional currency such as the US dollar or euro. You can create a stablecoin by backing each coin with a currency held somewhere safe, but another approach, Levine writes, is to use a little financial engineering. But if anything goes wrong, you could end up in what’s known as a death spiral. “It’s as bad as it sounds,” he writes.

Traditional Finance People Can Feel Right at Home in Crypto

“If you’re a certain sort of financial person,” Levine writes, the crypto world “is incredibly, incredibly beautiful. You wake up one day, and there’s just a whole other financial system. It’s full of smart people building interesting things, and it’s full of idiots making terrible mistakes. People have built brilliant new ways to make financial bets that you can use, and they’ve built insane new ways to make financial bets that you can exploit.”

As Our Lives Move Online, Crypto Could Come Into Its Own

There are a lot of ways that crypto does not work as a replacement for traditional currencies and financial institutions. But, Levine writes, “If you build a financial system that has trouble with houses but is particularly suited to financing video games—one that lets you keep your character on the blockchain, and borrow money from a decentralized platform to buy a cool hat for her, or whatever, I don’t know—then that system might be increasingly valuable as video games become an increasingly important part of life.” It could happen, right?


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