Understand Cryptocurrency, but Don’t Invest in It

@glennf - Nice article. Helped me to clarify some of my addled thoughts about cryptocurrencies.

One small correction: it wasn’t the wallet developer who removed Moxie Marlinspike’s poo-emoji-swapping NFT, it was OpenSea the NFT marketplace! And, to top it off, they made it disappear from all crypto wallets.

So much for write-once, immutable register-of-record.

More blockchain related than cryptocurrency, but anyway. You’re more into blockchain and Web3 than I am. Is this domain service for real and legit? I have no way to judge.

Warren’s Buffett’s take on Bitcoin:


Thanks for this informative article. I’ve got a question…
PoW mining advocates say that blockchain security is so much better with PoW than with other methods of consensus like Proof of Stake.
I’m not saying I buy it, but I’ll go with it…
But is there any benefit to the security of the blockchain (or any other benefit) from having more and more rigs, more and more hash power, more and more mining farms getting into the game - or is it all just a money grab?

The argument is that PoW produces a sort of active contention for control that’s mediated by the desire of all parties to not destroy the value of the blockchain or associated cryptocurrency. So because you cannot reverse blocks out of the blockchain or fork it without having 51% control (and theories suggests 40%+ is enough), you must demonstrate your work through investment in continuous calculation. You can’t just manipulate the records. The encryption is underpinned by the enormous amount of work that can’t be reproduced except through comparable work.

Proof of Stake requires an anti-fraud/anti-collusion system in which people are risking value they put into the system by being unreliable. With a majority of reliable actors, it’s impossible (they say) for an unreliable party with skin in the game to overcome the reliable actors and manipulate the contents of the blockchain or fork it. However, this has never been tried, and a new protocol that’s that complicated and doesn’t rely on brute force could have flaws that would lead to exploitation without risking stake.

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Yup. I get that. But if the hashrate in the world never increased from what it is now, and the mining pools stayed as diverse (or even increased their diversity) so 51% attack was not possible - would there be any harm vs the option of more and more hashing, more and more energy consumption…

The mining pools aren’t diverse. There’s a widespread understanding that the current ownership consolidates control into a handful of parties.

Still not good:

  • Maintaining the current hash rate has a massive environmental toll from electrical usage.
  • Equipment burns out constantly, continuing to generate the same e-waste burden.
  • There’s no productive purpose to this excess and waste because the scale is a million times or maybe a billion higher than any sensible, rational expenditure of effort.

However, there’s no likelihood of a point of stasis: either Bitcoin grows in value and drives an ever high hashrate or it shrinks into obscurity and the hashrate could drop to something that isn’t nearly as horrible.


Ok. That’s what I’ve been trying to get at. There is no point, no “productive purpose” to the increasing hash rate, and massive energy waste from more and more mining. The blockchain isn’t any more secure, or any better off because another 10,000,000 ASICs have joined the game.


Thanks Glenn, useful as always and a handy article to point to when it comes up in conversation.

I can’t help but observe that it is far removed from regular folks understanding of economic transactions and wealth. Further, it is a set of technologies that will not gain public confidence from being foregrounded or explained. If anything going into detail on them makes them appear worse.

It’s a big ugly bad mess, we can do better.

Hi Glenn,

I shared your article with a coworker who’s into crypto currency. Here are some comments he wrote, and which he “authorized” to publicly share with you:

I did read the whole thing, and overall think he did a good, honest job of writing a realistic piece. Maybe it’s my own bias, but I wish he had done a better job of presenting opposing arguments on a few topics:

  • Energy use: switch to PoS as a consensus mechanism to mitigate energy usage (he did mention Ethereum’s v2.0 plans, but obviously took the pessimist’s view). Bitcoin is an old lame duck, and unfortunately that community doesn’t seem interested in changing consensus mechanisms. I agree though: there are better ways to come to consensus than PoW.
  • Anonymity: Monero was mentioned, and he’s absolutely right that chain doesn’t have the usage larger chains like Bitcoin or Ethereum have. I’d argue though, not everyone cares about remaining completely anonymous, so IMO, the usage meets the demand. I also wish he’d have mentioned zero-knowledge proofs, which is an outstanding development in cryptography that is being incorporated into other blockchains as optional transaction types where legit use cases exist.
  • Cheap transactions: no denying this - especially in the top 5 blockchains by market cap, transactions are almost never fractions of a penny, and can be tens of $$ or more. It was irresponsible for early adopters to tout that, because of course the popularity of the tech vastly outgrew its scalability. Similar to the scaling of the web itself though, I see this as a good and predictable problem. E.g. while dial-up bandwidth let you communicate text/pics across the globe, it wasn’t until decades later when we got broadband/fios/etc and could share video, MMO gaming, streaming, etc. Solutions like side chains, “Layer 2” chains, and sharding should have been mentioned. All but the latter exist already.
  • Volatility: “stablecoins” (pegged crypto assets) exist to allow for stable trading and for citizens of smaller economies to hedge against inflation. DAI, sUSD, and USDC are mammoths in that space, and (at least in the case of DAI and sUSD), have clever, programmatic mechanisms to keep the token “pegged” to the USD.

In case you’d like to respond to any of his points, I’ll very gladly pass those responses back to him. :) Thanks!

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This is awesome—particularly because he’s clearly a realist!

100% agreement. Bitcoin has all the attention and Ethereum has had governance issues and PoS is always six months away. It’s hard to believe in a better proof-of when nobody feels particularly motivated who has money in the game. (The stakes in Ethereum 2.0 are real, but we are years into a promised transition that’s always just that far away.)

I am actually very interested in this and have interviewed some of the people who created things like ZCash on previous projects (pre-crypto). I think it’s very difficult to explain and the mojo doesn’t seem to be going that way. But it is absolutely an interesting counter-argument to a lack of true anonymity. However, if Monero et al succeeded, I think governments would go absolutely insane and create mass enforcement actions to prevent exchanges from trading in and out due to the threat of how it might be used for illegal transactions.

Absolutely. Is that where more than a fraction of activity is occurring? Absolutely not. So it’s one of those “the solution exists; nobody is using it” (where nobody = it’s a side issue compared to the main solutions). I think Layer 2 solutions have the problem of building on a landfill of rotting timber: if your problems exist in Layer 1, a second layer isn’t the solution. But it has an appeal in terms of transaction speed and cost.

Stablecoins are all extremely suspect because of the cash reserve issue. Some stablecoins hedge and use cryptocurrency as a method to reduce the cash they keep in reserve. As a result they are using imaginary money to peg their imaginary money to real money. Tether is the poster child for this with USDT, not one of the ones listed, but it’s the biggest by far and is one of the key liquidity players in Bitcoin. If it were to collapse, and I predict it will based on its shaking footing, it will cause a massive drop in $-to-Bitcoin valuation.

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Gruber linked to this interview with a computer scientist who studies cryptocurrencies today. The money quote:

He argues that cryptocurrency is useless and destructive, and should “die in a fire.”


Yes, he’s pretty smart on this. Strident! I disagree with how he says “buybacks and dividends” make the stock market a positive-sum game. The ever-increasing value of the market does that mostly. It seems like a small point, but if you’re comparing crypto, which has no intrinsic value and it’s valuation is always marked through illiquid exchanges based on stress—no central bank can shore up Bitcoin, etc.—then the stock market is based on the continuous value of underlying assets combined with the optimism of future earnings growth.

If you say “crypto has winners and losers and the stock market doesn’t [for long-term investors]” that’s not totally it. Crypto has no reason why some people are winners and losers, and the rapid climb in value means that it’s a Ponzi scheme, as people cash out only by hyping more people to come in so they can take those people’s money via those limited exchanges that allow cashing into fiat.

The stock market also picks winners and losers, but because on average over any reasonable period of time (like any 15-year period), it has a significant average positive return, the losers are only the ones who stay in for short periods. If you climb on the ride at any point and stay on it, you exit at a higher level. (Based on the last century, including the Great Depression.)


Excellent response and explanation. My investment advisor says the same thing. People only lose money in the stock market if they sell their stock.

Until you sell, you haven’t lost a penny despite what your brokerage statement says today’s value is. If the reason you bought a stock is still valid, there is no reason to sell. Let it sit and grow long enough and you can take out money monthly and never lose your principal.

This was a hard lesson to learn when I look at my 401(k) and see 4 figure losses every day from panic selling. But I have learned from a great investment adviser the truth of what you wrote.

Within 18 to 24 months of every market crash over the last 100 years, if you have good stocks, the market comes back and the stock goes higher than it ever was before the crash.

Buy, hold, and grow richer. Apple, Amazon, and Google are not going out of business anytime soon.


Another important lesson that’s hard to internalize is that your portfolio value moves in percentages, not absolute dollar amounts.

If your portfolio is worth $10,000, then a 1% swing equates to $100. But if your portfolio is worth $250,000, that same 1% swing now equates to $2500. And if your portfolio is with $1.5M, that 1% swing now equates to $15,000.

The overall impact on your net worth is the same in all three cases, but when your portfolio gets large (which is not unusual if you’ve been steadily contributing to a retirement plan for over 20 years), those swings can seem really scary. You just need to remember that the market swings both ways, and that large portfolio will translate to similarly large (in absolute dollar amounts) gains when the market recovers later on.

Which is why most advisors today recommend against picking individual stocks. It’s very hard (nearly impossible over long periods of time) to figure out which stocks will win and which will lose. But the aggregate behavior of the entire market is quite predictable (over long periods of time). Hence the advice to invest in passive mutual funds and ETFs - so you have a little bit of everything and can therefore benefit from the general upward trajectory of the market as a whole.

But also rebalance. Otherwise, your portfolio ends up getting skewed away from the asset allocation you want (or that your advisor is recommending).

For example, let’s take a trivial example where you want to have 50% stocks and 50% bonds. Now let’s say that the stocks outperformed the bonds one year - they grew in value faster than the bonds did. So after a year, your portfolio is now (for example) 60% stocks and 40% bonds. And if this happens again for another year, you may end up with 70% stocks and 30% bonds - which is a far more aggressive portfolio than you wanted.

The solution is to rebalance. Sell some of the stocks (the “winners”) and buy bonds (the “losers”) with the proceeds, so you end up once again with 50% of each. And when the market swings in the opposite direction in the future, only 50% of your assets (the stocks) will be affected, instead of 70%.

Any brokerage firm should be able to set up your account this way. Tell them what investments you want, and at what percentage of your portfolio. And then tell them to periodically rebalance (perhaps quarterly or monthly) in order to keep the overall allocation similar to your chosen percentages.

Some financial companies can even monitor your asset allocation and trigger rebalancing when the pattern drifts more than some percentage from your chosen allocation, instead of based on time elapsed, which is even better, if you have the option.

It’s not just about being broad. It’s about going passive because of much lower cost. If you’re targeting net 4% revenue, but your commission comes in at ~1% (instead of say 0.03%), that’s devastating over the course of 20 years. You want something like an ETF on the S&P500 (on the stocks side) to get both broad coverage as well as lowest possible cost. And then if you want to go really broad you can start worrying about mixing in some non-US/Japan/EU based stocks. There’s of course ETFs that target exactly that too.

Passive is definitely important. Although some fund managers claim to be able to beat the market, and advertise such an objective, no manager has ever been able to do this consistently over time. They may get lucky for a few years, but then they will also have plenty of years where they are not so lucky.

But you don’t want only an S&P 500 fund. That will get you the 500 biggest US large-cap stocks, but you also want small-cap and mid-cap. You want some growth stocks and some value stocks. You want US, developed foreign markets and emerging markets. You also want some bonds - government, corporate and maybe others. Real estate and precious metals are also important. And you want coverage in all market sectors - consumer staples, energy, finance, healthcare and many others.

Fortunately, there are ETFs for all of these. You can probably cover everything with a dozen or so carefully-selected funds. As for which ones to hold and in what proportions - that’s what you need a good financial advisor for. The mix should be custom tailored for your specific goals, objectives and risk tolerance.

Yes to all the above. After years of using the late, long-term Yale endowment investment manager David Swenson’s advice for individual investors—a carefully adjusted, ruthless balancing of stocks, bonds, domestic, and international—I finally shifted nearly everything in the retirement account into a Vanguard target date retirement fund. They basically do all the work for me and the fee right now is, IIRC, .08%, down from .1% a few months ago.

I realized they were using very much the same strategy. I’d already moved all my accounts to Vanguard after reading Swensen’s book, as he explained some of what everyone did just above: management fees are the killer without producing better returns on average over the long haul than passive investment in low-fee funds.

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Vanguard does indeed make a lot of this fairly simple, without requiring you to pay $$$ for somebody else to do it for you.

A not insignificant part of my retirement is in the UC system (which is managed by Fidelity) and they make a big deal about how they change the bond/stock/cash ratio as you get closer to retirement age. It’s of course a perfectly sound idea to have more stocks (with their higher expected returns over longer investment periods) when you’re farther from retirement, and then increase the bond ratio as you get closer and need more security because you’re about to start drawing down.

But, honestly, most of that anybody can do themselves without a paid manager or a fancy brokerage. You’re rebalancing anually anyway (assuming you’re not being borderline reckless), so you can include in that another step where your balancing also takes into account the stock/bond split. Naturally, financial people like to also drag in real-estate and metals and yada yada, but truthfully, that’s icing. For most people, if they just gave up on individual stocks, actively managed funds, and reduced instead to roughly 2-3 bond ETFs plus 2-3 stock ETFs, they’d be 90% of the way. You can always do better, but I’d never advocate for letting perfect be the enemy of good (where good is already much better than what likely most regular Joes are doing today).

All good advice, folks, but let’s keep it focused on cryptocurrency going forward. :moneybag: