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Opinion Maybe the volatility of cryptocurrencies is a feature, not a bug

A commuter passes a digital display for bitcoin on Jan. 27 in Hong Kong. (Paul Yeung/Bloomberg News)
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Crashing crypto markets have cost investors hundreds of billions in value, and Facebook is reportedly pulling out of Diem, the cryptocurrency project it launched 2½ years ago. People seem to be pondering the questions I’ve spent the better part of a decade trying to answer: What is this stuff worth? What is it good for?

I’ve always fallen on the skeptical side. But I am also mindful of the possibility that I am a blinkered fogey missing the Next Big Thing. And I am starting to think that one of the things I thought was a drawback for cryptocurrencies — their extraordinary volatility — might actually be a major selling point.

It’s not that I can’t think of anything cryptocurrency is good for. If a country is experiencing runaway inflation, bitcoin is probably a good alternative to the local currency (though note that during Venezuela’s epic bout of hyperinflation, people mostly dollarized rather than turning to crypto). Cryptocurrencies might also be a better option than jewelry for smuggling wealth out of countries with strict currency controls. And cryptocurrency is absolutely essential to anyone collecting on a ransomware attack.

Yet those uses don’t seem as though they’re worth trillions, as the cryptocurrency market is currently valued. To justify those kinds of valuations, crypto needs to at least partially replace major currencies such as the dollar, or payment systems such as Visa, or investments such as gold, or some other fairly important economic activity yet to be named. Ideally, that activity would be legal, because, otherwise, there’s a high risk that governments will get together and do to cryptocurrencies what they are trying to do to offshore tax havens.

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Unfortunately, cryptocurrencies are too volatile to serve for most of those uses. Nobody wants a currency or credit card that might lose a third of its purchasing power in the space of a couple of months. Stablecoins get around that problem by pegging their value to currency such as the dollar or commodities like gold, but why would anyone prefer that over the actual dollars and euros in their bank account?

And because a lot of cryptocurrency investors seemed willing to pay top dollar on the assumption that it would eventually replace cash and credit cards, I have also been skeptical that crypto would make a good long-term investment, another use that’s often floated. That leaves me wondering if crypto isn’t ultimately some sort of collectible hobby, like Beanie Babies or Hummel figurines.

Still, I remain haunted by the possibility that I’m missing something. A lot of talented people, many of them smarter than me, are working on crypto, eagerly seeking new ways to use it. It’s hard to rule out the possibility they’ll succeed. Besides, after a decade of doomsaying, the crypto market has resolutely refused to go away. Bitcoin might have lost much of its value over the past couple months, but it’s still worth $36,000 apiece, more than 300 times its price when I first expressed skepticism.

On the other hand, the persistence of crypto despite many wild fluctuations and few real-world applications should probably make its boosters ask whether they might be missing something. Markets like gambles, after all. And in particular, they like the kind of gamble that a volatile asset class like bitcoin offers.

It has long been known that intermittent, variable rewards are more motivating than steady ones. (That might be one reason that bitcoin has a higher valuation than stablecoins.) Something about randomness seems to enchant us, commanding our attention even over activities that are potentially much more rewarding overall. If you’ve ever watched the eerie fixed stare of people playing the slots, or found yourself repeatedly flipping over to Twitter to check out the new outrage of the hour, then you know the seductive, destructive allure of random rewards. This is why games that include a random element, such as cards or video games, tend to be more addictive than backgammon or chess.

Over the past decade, bitcoin and other cryptocurrencies have been a good source of that delicious randomness. There was always a techno-futurist story about why crypto would eventually pay off big. But because all this was sometime in the future, the current price was free to float unmoored from dull reality, gyrating seductively with each passing market wind.

Gambling is a sustainable market niche even if it never pays off. Casinos have been big business for decades even though everyone involved knows that the percentage is always to the house. And there’s a lot of money in that business; in the United States alone, casinos reportedly took in $43.6 billion in 2019. So it’s possible cryptocurrency has a future even if its purported valuable uses never materialize. Though, of course, individual investors might be better off just taking the money to Vegas, where they can at least enjoy a show and a complimentary beverage before they start pulling the lever on the slot machines.

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