After twelve years of writing about bitcoin, here's how my thinking has changed

What follows is an essay on how my thinking on bitcoin has changed since I began to write on the topic starting with my first post in October 2012. Since then I've written 109 posts on the Moneyness Blog that reference bitcoin, along with a few dozen articles at venues like CoinDesk, Breakermag, and elsewhere.

An early bitcoin optimist

I was excited by Bitcoin in the early days of my blog. The idea of a decentralized electronic payment system fascinated me. Here's an excerpt from my second post on the topic, Bitcoin (for monetary economists) - why bitcoin is great and why it's doomed, dated November 2012:

"Bitcoin is a revolutionary record-keeping system. It is incredibly fast, efficient, cheap, and safe. I can send my Bitcoin from Canada to someone in Africa, have the transaction verified and cleared in 10 minutes, and only pay a fee of a few cents. Doing the same through the SWIFT system would take days and require a $35 fee. If I were a banker, I'd be afraid." [link]

I was relatively open to Bitcoin for two reasons. First, I like to think in terms of moneyness, which means that everything is to some degree money-like, and so I welcome strange and alternative monies. "If you think of money as an adjective, then moneyness becomes the lens by which you view the problem. From this perspective, one might say that Bitcoin always was a money," I wrote in my very first post on bitcoin. Second, prior to 2012 I had read a fair amount of free banking literature—the study of private money—so I was already primed to be receptive to a stateless payments system, which is what Bitcoin's founder, Satoshi Nakamoto, originally meant his (or her) creation to be. 

A lot of bitcoin-curious, bitcoin-critics and bitcoin-converts were attracted to the comments section of my blog, and we had some great conversations over the years. My bitcoin posts invariably attracted more traffic than my non-bitcoin ones, all of us scrambling to understand what seemed to be a newly emerging monetary organism.

My early thoughts on the topic were informed by having bought a few bitcoins in 2012 for the sake of experimentation, some of my earlier blog posts describing how I had played around with them. In 2013 I wrote about the first crop of bitcoin-denominated securities market (which I dabbled in)—predecessors to the ICO market of 2017. I also used my bitcoins to buy altcoins, including Litecoin, and in late 2013 wrote about my disastrous experience with Litecoin-denominated stock market speculation. In Long Chains of Monetary Barter I described using bitcoin as an exotic bridging currency for selling XRP, a new cryptocurrency that had just been airdropped into the world. I didn't notice it at the time, but in hindsight most of these were instances of bitcoin facilitating illegal activity, i.e. unregistered securities sales, which was an early use case for bitcoin.

Although Bitcoin excited me, I was also critical from the outset, and in later years my critical side would only grow, earning me a reputation among crypto fans as being a salty no-coiner. In a 2013 blog post I grumbled that playing around with my stash of bitcoins hadn't been "as exciting as I had anticipated." Unlike regular money, there just wasn't much to do with the stuff, my coins sitting there in my wallet "gathering electronic dust."

 "...the best speculative vehicles to hit the market since 1999 Internet stocks."

What my experimentation with bitcoin had taught me was that the main reason to hold "isn't because they make great exchange media—it's because they're the best speculative vehicles to hit the market since 1999 Internet stocks." But that wasn't what I was there for. What had tantalized me was Satoshi's vision of electronic cash, a revolutionary digital payments system. Not boring old speculation.

In addition to my practical complaints about bitcoin, I also had theoretical gripes with it. The "lethal" problem as I saw it back in my second post in 2012 is that "bitcoin has no intrinsic value." Over the next decade this lack of intrinsic value, or fundamental value, would underly most of my criticisms of the orange coin. Back in 2012, though, the main implication of bitcoin's lack of intrinsic value was the ease by which it might fall back to $0. As I put it in a 2013 article:

"Bitcoin is 100% moneyness. Whenever a liquidity crisis hits, the only way for the bitcoin market to accommodate everyone's demand to sell is for the price of bitcoin to hit zero—all out implosion" [link]

But if the price of bitcoin were to fall to zero then it would cease to operate as a monetary system, which would be a huge disappointment to those of us who were fascinated with Satoshi's electronic cash experiment. Adding to the danger was the influx of bitcoin lookalikes, or altcoins, like litecoin, namecoin, and sexcoin. In theory, the prices of bitcoin and its competitors could "quickly collapse in price" as arbitrageurs create new coins ad infinitum, I worried in 2012, eating away at bitcoin's premium. The alternative view, which I explored in a 2013 post entitled Milton Friedman and the mania in copy-paste cryptocoins,  was that "the earliest mover has superior features compared to late moving clones," including name brand and liquidity, and so its dominance was locked-in via network effects. Over time the latter view proved to be the correct one.

The "zero problem"

Despite my worries, I was optimistic about bitcoin, even helpful. One way to stop bitcoin from falling to zero might be a "plunge protection team," I offered in 2013, a group of avid bitcoin collectors that could anchor bitcoin's price and provide a degree of automatic stabilization. In a 2015 post entitled The zero problem, I suggested that bitcoin believers like Marc Andreessen should consider donating $21 million to a bitcoin stabilization fund, thus securing a price floor of $1 in perpetuity. 

No fan of credit cards, in a 2016 post Bitcoin, drowning in a sea of credit card rewards, I suggested that bitcoin activists encourage retailers that accept bitcoin payments to offer price discounts. This carrot would put bitcoin on an even playing field with credit card networks, which use incentives like reward points and cashback to block out competing payment systems.

My growing disillusionment

By 2014 or 2015, I no longer saw much hope for bitcoin as a mainstream payments system or generally-accepted medium-of-exchange. "For any medium of exchange to displace another as a means for buying stuff, users need come out ahead. And this isn't happening with bitcoin," I wrote in a 2015 post entitled Why bitcoin has failed to achieve liftoff as a medium of exchange, pointing to the many costs of making bitcoin payments, including commissions, setup costs, and the inconveniences of volatility.

In another 2015 post I focused specifically on the volatility problem, which stems from bitcoin's lack of intrinsic value. If an item has an unstable price, that militates against it becoming a widely used money. After all, the whole reason that people stockpile buffers of liquid instruments, or money, is that these buffers serve as a form of insurance against uncertainty. If an item's price isn't stable—which bitcoin isn't—it can't perform that role. 

Mind you, I did allow in another 2015 post, The dollarization of bitcoin, that bitcoin might continue as "an arcane niche payments system for a community of like minded consumers and retailers." I even tracked some of these arcane payments use cases, such a 2020 blog post on retailers of salvia divinorium (a legal drug in many U.S. states) falling back on bitcoin for payments after the credit card networks kicked them off, followed by a 2021 post on kratom sellers (a mostly-legal substance) doing the same. But let's face it, a niche payments system just wasn't as impressive as Satoshi's much broader vision of electronic cash that had beguiled me in 2012, when I had warned that "if I was a banker, I'd be afraid." 

The dollarization of bitcoin

By 2015 a lot of my pro-bitcoin blog commenters began to see me as a traitor. But I was just changing my thinking with the arrival of new data.

Searching for Bitcoin-inspired alternatives: Fedcoin and stablecoins

Bitcoin's deficiencies got me thinking very early on about how to create bitcoin-inspired alternatives. By late 2012 I was already thinking about stablecoins:

"What the bitcoin record-keeping mechanism needs is an already-valuable underlying asset to which it can be tethered. Rather than tracking, verifying, and recording the movement of intrinsically worthless 1s and 0s, it will track the movement of something valuable." [link]

Later, in 2013, I speculated about the emergence of "stable-value crypto-currency, not the sort that dangles and has a null value." These alternatives would "copy the best aspects" of bitcoin, like its speed and safety, but would be linked to "some intrinsically valuable item." A few months later I predicted that "Cryptocoin 2.0, or stable-value cryptocoins, is probably not too far away." This would eventually happen, but not for another few years.

My dissatisfaction with bitcoin led me to the idea of decentralized exchanges, or DEXs, in 2013, whereby equity markets would "adopt a bitcoin-style distributed ledger." That same year I imagined central banks adapting "bitcoin technology" to run its wholesale payments system in my post Why the Fed is more likely to adopt bitcoin technology than kill it off. In 2014 I developed this thought into the idea of Fedcoin, an early central bank digital currency, or CBDC, for retail users.

If not money, then what is bitcoin?

By 2017 or so, even the most ardent bitcoin advocates were being forced to acknowledge that Satoshi's electronic cash system was not panning out: the orange coin was nowhere near to becoming a popular medium-of-exchange. This was especially apparent thanks to a growing body of payments surveys (which I began to report on in 2020) showing that bitcoin users almost never used their bitcoins to make payments or transfers, preferring instead to hoard them. So the true believers pivoted and began to describe bitcoin as a store-of-value, or digital gold. It was a new narrative that glossed over Satoshi's dream of electronic cash while trying to salvage some monetary-ish parts of the story.

I thought this whole salvage operation was disingenuous. In 2017 I wrote about my dissatisfaction with the new store-of-value narrative, and followed that up with a criticism of the digital gold concept in Bitcoin Isn’t Digital Gold; It’s Digital Uselesstainium. (The idea that store-of-value is a unique property of money is silly, I wrote in 2020, and we should just chuck the concept altogether.)

But if bitcoin was never going to become a generally-accepted form of money, and it wasn't a store-of-value or digital gold, then what exactly was it? 

I didn't nail this down till a 2018 post entitled A Case for Bitcoin. We all thought at the outset that bitcoin was a monetary thingamajig. But we were wrong. Of the types of assets already in existence, bitcoin was not akin to gold, cash, or bank deposits. Rather, it was most similar to an age-old category of financial games and zero-sum bets that includes poker, lotteries, and roulette. The particular sub-branch of the financial game family that bitcoin belonged to was early-bird games, which contains pyramids, ponzis, and chain letters. Here is a taxonomy:

A taxonomy showing bitcoin as a member of the early-bird game family

Early-bird games like pyramids, ponzis, and chain letters are a type of zero-sum game in which early players win at the expense of latecomers, the bet being sustained over time by a constant stream of new entrants and ending when no additional players join. Pyramids and ponzis are almost always administered by thieves who abscond with the pot. Bitcoin, by contrast, was not a scheme nor a scam. And it was not run by a scammer. It was leaderless and spontaneous, an "honest" early-bird game that hewed to pre-set rules. Here is how I described it in a later post, Bitcoin as a Novel Financial Game:

"Bitcoin introduces some neat features to the financial-game space. Firstly, everyone in the world can play it (i.e., it is censorship-resistant). Secondly, the task of managing the game has been decentralized. Lastly, Bitcoin’s rules are automated by code and fully auditable." [link] 

This ponziness of bitcoin was actually a source of its strength, I suggested in 2023, because "it's tough to shut down a million imaginations." By contrast, if bitcoin had an underlying real anchor, like gold, then that would give authorities a toe hold for decommissioning it.

Bitcoin-as-game gave me more insight into why most bitcoin owners weren't using bitcoin as a medium-of-exchange. Its value as a zero-sum bet was overriding any functionality it had for making payments. In a 2018 post entitled Can Lottery Tickets Become Money?, I worked this out more clearly:

"Like Jane's lottery ticket, a bitcoin owner's bitcoins aren't just bitcoins, they are a dream, a lambo, a ticket out of drudgery. Spending them at a retailer at mere market value would be a waste given their 'destiny' is to hit the moon." [link]

If bitcoins weren't like bank deposits or cash, how should we treat them from a personal finance perspective? Feel free to play bitcoin, I wrote in late 2018, but do so in moderation, just like you would if you went to Vegas. "Remember, it's just a game."

Bitcoin is innocuous, don't ban it

By 2020 or 2021, the commentary surrounding bitcoin seemed to be getting more polarized. As always there was a set of hardcore bitcoin zealots who thought bitcoin's destiny was to change the world, of which I had been a member for a brief time in 2012. But arrayed against them was a new group of strident opponents who though bitcoin was incredibly dangerous and were pushing to ban it.

A vandalized 'Bitcoin accepted' sign in my neighborhood

I was at odds with both sides. Each saw Bitcoin as transformative, one side for the good, the other for the bad. But I conceived of it as an innocuous gambling device, one that only seemed novel because it had been transplanted into a new kind of database technology, blockchains. We shouldn't ban bitcoin for the same reason that we've generally become more comfortable over the decades removing prohibitions on online gambling and sports betting. Better to bring these activities into the open and regulate them than leave them to exist in the shadows.

Thus began a series of relax-don't-ban-bitcoin posts. In 2022, I wrote that central bankers shouldn't be afraid that bitcoin might render them powerless. For the same reason that casinos and lotteries will ever be a credible threat to dollar's issued by the Fed or the Bank of Canada, neither will bitcoin.

Illicit usage of bitcoin was becoming an increasingly controversial subject. Just like casinos are used by money launderers, bitcoin had long become a popular tool for criminals, the most notorious of which were ransomware operators. My view was that we could use existing tools to deal with these bad actors. Instead of banning bitcoin to end the ransomware plague, for instance, I suggested in a 2021 article that we might embargo the payment of ransoms instead, thus choking off fuel to the ransomware fire. Alternatively, I argued in a later post that the U.S. could fight ransomware using an existing tool: Section 311 of the Patriot Act. Which is what eventually happened with Bitzlato and PM2BTC, two Russian exchanges popular with ransomware operators that were put on the Section 311 list.    

Nor should national security experts be afraid of enemy actors using bitcoin to evade sanctions, I wrote in 2019, since existing tools, in particular secondary sanctions, are capable of dealing with the threat. The failure of bitcoin to serve as an effective tool for funding the illegal Ottawa protests, which I documented in a March 2022 article, only underlined its low threat potential:

"Governments, whether they be democracies or dictatorships, are often fearful of crypto's censorship-resistance, leading to calls for bans. The lesson from the Ottawa trucker convoy and Russian ransomware gangs is that as long as the on-ramping and off-ramping process are regulated, these fears are overblown." [link]

Other calls to ban bitcoin were inspired by its voracious energy usage. In a 2021 blog post entitled The overconsumption theory of bitcoin, I attributed bitcoin's terrible energy footprint to market failure: end users of bitcoin don't directly pay for the huge amounts of electricity required to power their bets, so they overuse it. No need to ban bitcoin, though. The way to fix this particular market failure is to introduce a Pigouvian tax on buying and/or holding bitcoins, which I described more clearly in a 2021 blog post entitled A tax on proof of work and a 2022 article called Make bitcoin cheap again for cypherpunks! 

Lastly, whereas bitcoin's harshest critics have been advocating a "let it burn" policy approach to bitcoin and crypto more generally, which involved leaving gateways unregulated and thus toxic, I began to recommend regulating crypto exchanges under the same standards as equities exchanges in a 2021 article entitled Gary Gensler, You Should be Watching How Canada is Regulating Coinbase. Yes, regulation legitimizes a culture of gambling. But even Las Vegas has stringent regulations. A set of basic protections would reduce the odds of the betting public being hurt by fraudulent exchanges. FTX was a good test case. After the exchange collapsed, almost all FTX customers were stuck in limbo for years, but FTX Japan customers walked out unscathed thanks to Japan's regulatory framework, which I wrote about in a 2022 post Six reasons why FTX Japan survived while the rest of FTX burned.  

So when does bitcoin get dangerous?

What I've learnt after many years of writing about bitcoin is that it's a relatively innocuous phenomena, even pedestrian. When it does lead to bad outcomes, I've outlined how those can be handled with our existing tools. But here's what does have me worried. 

If you want to buy some bitcoins, go right ahead. We can even help by regulating the trading venues to make it safe. But don't force others to play.

Whoops, You Just Got Bitcoin’d! by Daniel Krawisz

Alas, that seems to be where we are headed. There is a growing effort to arm-twist the rest of society into joining in by having governments acquire bitcoins, in the U.S.'s case a Strategic Bitcoin Reserve. The U.S. government has never entered the World Series of Poker. Nor has it gone to Vegas to bet billions to tax payer funds on roulette or built a strategic Powerball ticket reserve, but it appears to be genuinely entertaining the idea of rolling the dice on Bitcoin.  

Bitcoin is an incredibly infectious early-bird game, one that after sixteen years continues to find a constant stream of new recruits. How contagious? I originally estimated in a 2022 post, Three potential paths for the price of bitcoin, that adoption wouldn't rise above 10%-15% of the global population, but I may have been underestimating its transmissibility. My worry is that calls for government support will only accelerate as more voters, government officials, and bureaucrats catch the orange coin mind virus and act on it. It begins with a small strategic reserve of a few billion dollars. It ends with the Department of Bitcoin Price Appreciation being allocated 50% of yearly tax revenues to make the number go up, to the detriment of infrastructure like roads, hospitals, and law enforcement. At that point we've entered a dystopia in which society rapidly deteriorates because we've all become obsessed on a bet.

Although I never wanted to ban Bitcoin, I can't help but wonder whether a prohibition wouldn't have been the better policy back in 2013 or 2014 given the new bitcoin-by-force path that advocates are pushing it towards. But it's probably too late for that; the coin is already out of the bag. All I can hope is that my long history of writing on the topic might persuade a few readers that forcing others to play the game you love is not fair game.

Memecoins are the point

Cypherpunks wanted to change the world. We ended up with memecoins.

Our story begins with some very smart and idealistic developers, known as cypherpunks, creating a new technology know as a blockchain. Blockchains are databases, but decentralized. Advertised as being "censorship-proof," they reduce the possibility of users being subjugated to third-party interference.

Cypherpunks have always wanted their tamper-proof databases to flourish, go mainstream, and improve regular people's lives. A video from 2015 pans out from an interconnected power plant, grocery store, hospital and airplane before loftily declaring that Ethereum, one of today's largest blockchains, will be "the secure backbone for everything from e-commerce to the internet of things."

Some of you may remember another famous video from the mid-2010s, in which a young Vitalik Buterin, co-creator of Ethereum, challenged viewers: "What will you build on top of Ethereum?"

The world has responded. Forget interconnected power plants and grocery stores. The most popular thing being built on top of blockchains are memecoins. 

A memecoin is a pure gamble. These valueless tokens, typically created anonymously, usually have a mascot, or meme, loosely associated with them, some well-known examples being dogecoin, pepe, HarryPotterObamaSonic10Inu, gigachad and dogwifhat. A memecoin provides no dividends and leads to no productive activity. Its price depends entirely on subsequent players emerging to repurchase it at a higher price. The result is a hyper-volatile pyramid betting game.

via Twitter

Memecoins don't quite jive with the cypherpunk dream of creating a fairer system, one in which everything, including all of high-finance—and by that I mean banking, payments, insurance, and investments—has migrated over to blockchain nirvana. A memecoin is the epitome of low-finance. It belongs in the same gutter as some of the grimiest members of the financial world: lotteries, slots, chain letters, raffles, HYIPs, and other zero-sum games.

Cypherpunks and their fellow travelers are offended by memecoins. They want their blockchains to be used for more noble reasons:

• it’s sucking the energy out of crypto [link]
• it is a complete bastardisation. a total mockery, a clown show [link]
  
• things have hit an all-new bottom with 2024: racist, sexist, and other shitheaded memecoins which are merely a vehicle to transfer wealth from the many to the most obnoxious people on the planet [link]
  
• besides undermining the long-term vision of crypto that has kept so many of us in the space, memecoins aren't very technically interesting [link]

Buterin, too, gripes that "even the non-racist memecoins often seem to just go up and down in price and contribute nothing of value in their wake." Trying to find a silver-lining, he implores memecoin makers to donate a portion of their supply to charity, sort of like how raffles are used to fund good works. 

Cypherpunk's frustration with memecoins understandable. But I don't think the cypherpunks should be complaining. Guys, what exactly did you think your zero-rules financial substrates were going to be used for?! Memecoins are the point.

Memecoins as the fundamental unit of blockchains

People have a natural predilection to gamble, but gambling has a bad wrap and so many gambling games have been declared illegal. Memecoins are a great example of this, their presence being prohibited on society's official financial venues including its stock exchanges and commodity markets, as well as its casinos and online betting sites.

Up in Canada, which has historically been a haven for scummy finance, the closest you can get to floating a memecoin is by taking the junior gold route. Start by incorporating a gold exploration company, buy the rights to some worthless property in an isolated region of northern Canada, list the company on a junior stock exchange, promote your sham as the next big gold mine, and sell out to the latecomers. You're basically created a memecoin; a token based on nothing. 

But this is an arduous way to run a memecoin. You still need to disguise yourself as a regular firm, publish audited financial statements, and hire a board of directors, plus you'll have to provide your real name, which means potential lawsuits or criminal charges. A pure memecoin, say like dogwifhat, which isn't burdened by any of these costly real-world obligations, would never get permission to be listed, even on Canada's shadiest junior stock exchange.

Enter blockchains, which are inherently anarchic. Blockchains allow folks to deploy illegal and unregulated betting games without the authorities being able to step in and say: "Hey, you can't do that." With mainstream exchanges and casinos being closed off to them, it's no wonder that memecoins have come to dominate the new medium.

If your blockchain doesn't experience a constant stream of memecoin issuance, it's effectively dead. Hordes of crazy gamblers buying and the selling meaningless, non-productive coins is a sign of a flourishing and fertile censorship-resistant financial medium. Sleezy promoters competing to draw attention to their favorite memecoin on social media isn't "sucking the energy" out of crypto; it's the whole point of crypto.

Source: Twitter

As for the cypherpunk idealists complaining about memecoins, they need to accept the fact that blockchains will probably never become the "backbone of everything." Instead, blockchains will continue to serve as a major hub for grimy low-finance; stuff like memecoins and ponzis that can't make the jump to official venues. Many of these low-finance services will be illegal or shady or distasteful, because those are precisely the things that need protection from third-party interference. (And to be fair, certain banned low-finance services can be quite useful.) If you're going to hock censorship-resistance to the world, don't grumble about who shows up at the table.

Memecoins have sometimes been described as a potential gateway drug or Trojan horse for broader adoption of blockchains. "Once they try dogwifhat, they won't be able to resist my quadratic voting project." But that's just wishful thinking. Serious and "respectable" high-finance services, say like insurance and banking—the stuff we all need for day-to-day life—are by necessity legal and thus welcome on mainstream habitats, and so these services and their users need never gravitate to the same rule-free substratum that memecoins have.

What will you build on top of blockchains? Memecoins. Memecoins are the fundamental financial unit of crypto.

---

P.S. I must be running out of material because I wrote an early version of this post back in 2018 for Breakermag

A big chunk of crypto is gambling. Why not regulate it that way?

[This article was published last week in CoinDesk.]

The Pluses and Minuses of Regulating Crypto as Gambling

In the wake of FTX's shocking collapse, a new idea for regulating crypto has begun to take form: Let's regulate crypto like we regulate gambling.

Todd Baker, a Senior Fellow at the Richman Center for Business, Law and Public Policy at Columbia University, recently writes that "crypto trading should be regulated for what it is – gambling emulating finance and not what its advocates say it is or what people believe it to be."

The European Central Bank's Fabio Panetta suggests that "regulation should acknowledge the speculative nature of unbacked cryptos and treat them as gambling activities." And here is a recent American Banker article on the topic.

There are some good aspects to the idea of regulating crypto as gambling, and some bad.

First, the bad.

Crypto is too diverse for one regulatory framework

Any claim that we should regulate crypto as X isn't very helpful, and that's because the stuff we call "crypto" has long ceased to be a single-issue product that can be conveniently boxed into any one framework. Maybe back in 2012 and 2013 it could have been. And gambling might very well have been the best fit back then.

But, at its core, crypto consists of a bunch of programmable databases, which means they can host all sorts of applications – not just gambling applications. Zoom forward to 2022 and the range of activities occurring in the crypto space has become quite broad and diverse.

Take MakerDAO, for instance. MakerDAO is built on a blockchain, and so it falls under the “crypto” umbrella. But it isn't a gambling product. Functionally, MakerDAO is a bank that makes loans by issuing deposits in the form of dai (DAI), a stablecoin.

To make things more complicated, ownership of MakerDAO is represented in the form of MKR tokens, also residing on a blockchain, which allow holders to vote on how the bank operates. MKR also provides holders with a claim on bank earnings. In effect, MKR tokens are like shares in Wells Fargo or Bank of Montreal. They are investments.

To regulate MakerDAO and the tokens associated with it – DAI and MKR – as gambling products just wouldn't make sense, for the same reason that regulating Wells Fargo or its underlying shares as a casino would be a clumsy fit.

Or take decentralized tools Aave and Compound, which have been built on blockchains. Both are lenders. While these two tools certainly service a gambling clientele, they aren't themselves gambling apps and shouldn't fall into that category.

Or consider centralized exchanges such as Coinbase. Coinbase lets customers directly buy and sell crypto with cash, combining in one platform the roles of a traditional broker like E-Trade with a trading venue like Nasdaq. However, we apply securities regulation to E-Trade and Nasdaq, not gambling regulation, and should probably do the same for Coinbase.

In sum, to regulate crypto it'll take more nuance than just throwing it all into the gambling category. There are many different existing regulatory frameworks that can be applied to emergent blockchain-based products, of which gambling is just one.

Next, here’s what’s good about regulating crypto as gambling.

A long overdue recognition of crypto problem gambling

Dai, MKR, Aave and Compound may not be gambling. But a large proportion of crypto is gambling. That's because a big chunk of the people who engage with blockchains are doing little more than betting on the very volatile prices of first-generation unbacked volcoins like dogecoin, floki inu, and shiba inu. Let's not forget bitcoin, bitcoin cash, litecoin, xrp, and ether.

The crypto industry has tried its hardest to elevate volcoin betting from gambling to "investing." Coinbase, for instance, loftily sees its mission as to "increase economic freedom in the world."

But if you look under the hood, a volcoin such as dogecoin is little more than a never-ending 24/7 lottery on what average opinion thinks the price of dogecoin will be. This same recursive betting process is what drives the prices of bitcoin, litecoin and other volcoins. Users can sell their position in these never-ending lotteries to other players, and in some cases the casino chips get used as a payment token – but the payments functionality of volcoins has always run a distant second to their primary lottery function.

The benefit of officially recognizing volcoin-based betting as a form of gambling is that it would import into the world of crypto society’s already-existing protections for problem gamblers and children.

Problem gambling is a disorder characterized by a persistent and uncontrollable urge to gamble despite negative consequences or attempts to stop. It can lead to financial difficulties, relationship problems, and mental health issues such as depression and anxiety.

In many jurisdictions, gambling operators are required to address problem gambling by implementing self-exclusion programs that allow customers to voluntarily ban themselves from gambling establishments or betting sites. By regulating volcoins as gambling, venues that offer these products – say like Coinbase, PayPal and Kraken – would be required to set up exclusion programs of their own.

Gambling venues are often required by law to display responsible gambling messages such as "Play Responsibly. Remember, it’s just a game." The MegaMillions play responsibly page, for instance, provides information about problem gambling and a confidential 24-hour hotline.

Applying these messaging standards to crypto, it would no longer be permissible to represent volcoin purchases to clients as a form of investment. Rather, venues like Coinbase and PayPal would have to provide disclaimers along the lines as: "Play bitcoin responsibly. Remember, it’s just a game."

In many jurisdictions, a recognition of volcoins as gambling would limit opportunities for public advertising. In 2021, ads for floki inu flooded London. "Missed Doge? Get Floki," the ads said, appealing to peoples’ base fears of missing out. However, the United Kingdom has a very strict code surrounding gambling advertisements. Had floki and other volcoins been properly categorized at the outset as betting games, then floki’s advertising campaign would have had to pass many more hurdles.

Or take Matt Damon's notorious "fortune favors the brave '' ad for Crypto.com from early 2022. The ad tried to analogize volcoin buyers to intrepid explorers. By regulating volcoins as betting, ad creators could no longer draw these sorts of dubious analogies in an attempt to attract bettors to their platforms.

In particular, gambling regulatory frameworks in places such as the U.K. explicitly prevent gambling operators from reaching out to children through advertising. If volcoin betting were to be deemed a form of gambling, then crypto platforms that court users under the age of 18 (say like Block and Kraken have done in the past) would be required to put an end to this practice.

Finally, some U.S. states limit the ability of gamblers to fund their activities by credit, as does the United Kingdom. The idea is to prevent a problem gambler's addiction from snowballing into a much larger crisis for the family's finances. Translating this rule over to crypto could mean no longer allowing customers to buy volcoins with credit cards and/or restricting access to margin.

To sum up, the idea of applying crypto regulation to crypto needs to be fleshed out. There are many blockchain-based activities that are not gambling, and shouldn't be regulated as such. But a big chunk of what occurs on blockchains is gambling, and it's about time we recognized it as such – and regulated it accordingly

Play Bitcoin: Remember, It's Just a Game

[[My first article with Breakermag was published in September 2018. Alas, Breakermag closed its doors in 2019. The website remained up for a while but it seems to have recently been decommissioned, so I'm salvaging this story from the abyss of disappearing internet content. I think it succinctly captures a point I make over and over. When we go to a casino, the verb we use to describe this activity is 'playing,' not 'investing.' Likewise, we should be using the word 'play' when we talk about what we do with crypto. Drill into what crypto is about and it's mostly (not always) gambling games—yes, novel games, but gambling nonetheless. Getting the semantics right is important. Owning crypto is fun and entertaining (and potentially problematic). So is going to the casino. But players shouldn't be fooled into thinking that they are engaging in a productive and socially beneficial enterprise.]]

No one invests in the lottery; they play it. Rather than investing in bitcoin, let’s play bitcoin.

On December 8, 2017, just a few days after bitcoin crossed the $10,000 mark for the first time, Coinbase CEO Brian Armstrong published a blog post asking customers to “invest responsibly.” A week after Armstrong’s appeal, the price of bitcoin hit $19,801, paused, and then proceeded on what has been nerve-wracking decline ever since.

In hindsight, Armstrong’s “invest responsibly” post seems timely. Any novice would have saved themselves much money and stress if they’d taken his advice to be careful and had either reduced the amount they purchased or stayed entirely out of the market. These days, Reddit is littered with stories of disillusioned buyers who diverted large amounts of their savings into bitcoin or some other cryptocurrency near the December 2017 highs. One story, recounted in the New York Times, describes a 45-year-old Korean teacher who borrowed money to buy $90,000 worth of cryptocurrencies, only to lose most of it.

I have a problem with the words that Armstrong chose for his blog post. Most people do not invest in bitcoin. They play bitcoin. Using the correct word to describe the relationship that the great majority have with their bitcoins would be a powerful way to ensure that new buyers of bitcoin do not get the wrong expectations about what they are getting into.

Bitcoin lies in the same economic category as financial games like poker, roulette, and the lottery. These are all zero-sum games. The property binding all zero-sum games together is that the amount of resources contributed to the pot is precisely equal to the amount that is paid out. Because nothing additional is created in a zero-sum game, for every player who wins something from the pot, there must be a loser.

Compare this to win-win financial opportunities like stocks or bonds. In the case of a stock, each shareholder’s contribution is used to support the underlying firm’s deployment of capital. This cocktail of machinery, labor, and intellectual property is combined to create products, the sale of which generates a return. Put differently, as long as the firm’s managers deploy the money in the pot wisely, the firm can throw off more cash to shareholders than the sum originally put into the pot.

This generative capacity does not exist with zero-sum games. Take poker, for example. If five players have all bought into a poker game for $1,000, there is no way that the winner of the game can get more than $5,000. A zero-sum game cannot generate more than the sum of its parts. Likewise with bitcoin. The only way that a buyer at today’s price of $6,442 can avoid being a loser is if someone else is willing to buy that bitcoin at a higher price, say $6,995. Unlike a shareholder in a firm, bitcoin holders have not bought into a value-creating business. Their only escape is the next person in line.

What makes bitcoin different from other zero-sum games is the method for splitting the pot. Poker awards pots to whoever ends up with the best hand of cards. In the case of the lottery, the pot goes to the lucky number. Bitcoin divides pots on the basis of entrance order. Early birds are rewarded by late-comers.

This first-in-line redistribution mechanism is by no means bitcoin’s only unique feature. Rather than being hosted at a Las Vegas casino, bitcoin is a decentralized online game. This means that there is no way for the authorities to march into the casino and shut the game down. Nor can the system operator prevent people from participating. Whereas casino operators regularly bar people from entering, bitcoin is maintained by a network of independent validators that cannot easily censor users from making bitcoin wagers. Finally, bitcoin is automated by open source code, unlike say a human croupier who can make mistakes in redistributing a roulette pot. This code is fully auditable. Everyone can see what the rules are and check that they are being abided by. Contrast this with a lottery which reveals nothing of its inner workings.

In suggesting that bitcoin should be labelled a game rather than an investment, I don’t mean to belittle it. Financial games provide value. A casino employs not only croupiers but also managers, marketers, cooks, cleaning staff, programmers, security guards, and more. These jobs help the economy. People fly to Vegas for a reason. In moderation, financial games are fun, sort of like how going to a horror movie provides thrills.

Likewise, bitcoin’s price contortions can be entertaining. Combine this with the constant soap opera generated by the personalities involved in the space, and you’ve got a form of recreation that competes head on with Netflix, League of Legends, or the NFL. Bitcoin and its many ancillary services—exchanges, payments processors, and wallet providers—create jobs for programmers, marketers, lawyers, and economists.

If financial games were illegal, then the provision of lotteries, poker, and other forms of betting would shift to the underground economy. Not only would the quality of the product decline, but violence could rise as criminal organizations fight to control their gaming turf. Bringing these activities into the light—in bitcoin’s case by implementing an open and transparent online version—makes society safer.

And of course, there are times when bitcoin serves as more than just a financial game. In 2011, for instance, Wikileaks relied on bitcoin to maintain its connection to donors after being cut off from the banking system. This payments function was why bitcoin was originally created, but it has taken a distant back-seat to the technology’s dominant role as a decentralized financial game. Indeed, what makes bitcoin such a thrilling game—its rollercoaster peaks and troughs—is the very feature that militates against its usage as a medium of exchange. People don’t want volatile money, they want stable money.

This gets me back to Brian Armstrong’s admonition to Coinbase’s customers to invest responsibly. His warning label just doesn’t cut it. No one invests in a zero-sum game, they play it. A casino owner daring to suggest that playing roulette is akin to investing would be justifiably pilloried for engaging in purposeful deception or, at best, sloppy word usage. Same with a lottery operator who advertises Powerball tickets as an investment. Likewise, people buying bitcoins should not be encouraged to believe that they are engaging in the age-old art of investment appraisal. They are playing a zero-sum game. The word “investment” should be reserved for the act of allocating capital to win-win games like shares in private businesses, publicly traded stocks, and bonds.

I am not singling out Armstrong. The idea that bitcoin is an investment plagues the entire sector. Chris Burniske, a well-known bitcoin trader with more than 100,000 Twitter followers, has entitled his book (written with Jack Tatar) Cryptoassets — the innovative investor’s guide to bitcoin and beyond. Or take the recent CNBC interview of Meltem Demirors, CoinShares chief strategy officer, in which she made the curious analogy between bitcoin—a zero-sum game—to Amazon, a security that falls within the realm of investment analysis. I am also reminded of Litecoin creator Charlie Lee’s own “invest responsibly” moment on Twitter last December, even as he was dumping his holdings on novices at prices that would eventually prove to be near their peak.

The majority of newcomers are attracted to the crypto scene not for ideological reasons, but by the scent of big winnings. Many are betting a big part of their wealth on bitcoin or other cryptocurrencies. And no wonder. If a 20-year old with life savings of $1,000 can turn that amount into $10,000 in just a few weeks, they will have advanced their financial status far faster than by toiling away at a job, or putting it in a savings account. The dark side is that this $1,000 in savings can just as easily be destroyed by bitcoin’s inherent volatility. Dropping the word “investment” and replacing it with “game” would be a more accurate description of the activity in which bitcoin owners are participating. The flocks of new entrants might get a better inkling what kind of door they are entering. Maybe they will avoid doing serious damage to their futures.

With a game, nothing is assured. Games are something to dabble in, not vessels for one’s retirement savings. A problem gambler, someone who continuously bets their savings on zero-sum financial games despite the financial harm being inflicted on themselves and their family, doesn’t need the affirmation that the word “investing” brings to their activities. Instead of asking Coinbase users to “invest responsibly,” Armstrong should have used a version of the disclaimer that most American lotteries use, including Powerball: “Play Responsibly. Remember, it’s just a game.”

From Circle-of-Gold to Mega$Nets to Bitcoin

We tend to dismiss chain letters as mere scams or frauds. In this post I want to get readers thinking about chain letters as a type of financial innovation, one that has been steadily updated over the decades.

Chain letters are lists. Players own a spot on that list. That list is governed by a rule: the first people on the list are to be paid by the latecomers. The chain letter stop working, or paying out, when no one else wants to join up.

The amount of money flowing to early-birds who joined the list is equal to the amount arriving from latecomers. No additional value gets created. That's why chain letters are zero-sum games.

The greatest technological strength of a chain letter is its decentralization. Each node, or participant, is independently responsible for receiving, copying, updating, distributing, and marketing the chain letter. Without a central schemer to indict, it's almost impossible for the authorities to stop the letter from propagating. Think of chain letters as the honey badgers of the financial world: tough, indestructible, and durable.

One of the most famous chain letters was the Circle of Gold letter. It reportedly started out in San Francisco and ripped through the rest of the U.S. in 1978. Here's how it worked:

In brief, I'd buy a copy of the Circle of Gold letter from you for $50 cash, and then mail $50 to the name at the top of the list, for a total outlay of $100. I'd then make two copies (removing the name at the top of the list an inserting my own at the bottom) and sell each for $50 to friends/family, for a total of $100, thus breaking even. The buyers in turn made copies and sold them on, the chain continuing. At some point my name would arrive at the top of the list and the money would begin to arrive in my mailbox.

Law enforcement declared the Circle of Gold letter to be illegal. But there was little they could actually do to stop it.

Chain letters like Circle of Gold may be difficult to eradicate, but they suffer from two big problems. I'll explain each of these problems, and also show how they were eventually fixed.

If decentralization is a chain letter's greatest strength, it is also the root cause of its main weakness. A buyer of a Circle of Gold letter had an incentive to break the rules by sneaking their name to the top of the list. Without a centralized administrator, there is no one who can prevent players from cheating.

This is the first weakness of chain letters. We'll call it the dishonesty problem. The dishonesty problem undermines a chain letter's credibility. If everyone knows that cheating will be rampant, they won't bother getting involved at all. Thus the odds of a letter widely propagating is going to be quite low.

To help make a chain letter more transmissible, what is needed is some sort of procedure that solves the dishonesty problem while preserving decentralization.

Enter Mega$Nets.

Mega$Nets was an ingenious 1990s-era chain letter that relied on software to prevent cheating. Here's how it worked:

• I buy a $20 Mega$Nets disk $20 from you
• After booting up the software I'd be asked to input my name and address, which was now locked into the program
• Before I could make copies of the disk, I had to mail $20 in cash to five others above me on the list. Once the $20 was received, these people would mail a code back to me.
• Only after I had entered the codes into the software could I duplicate the disk and sell it for $20. If the chain grew and my name worked up the list, I'd eventually start receiving a stream of $20 payments in the mail.

Mega$Nets software prevented names and addresses from being erased, thus preserving the list order. Importantly, it solved the dishonesty problem without compromising the decentralized nature of a chain letter. After all, Mega$Nets software ran independently on each individual machine, not from a central server.

Source: Donald Watrous's chain letter links

If Mega$Nets solved the dishonesty problem of chain letters, it didn't stay around very long. Eventually a programmer hacked Mega$Nets and figured out how to cheat the system. To undermine trust in the chain letter, he published his crack to the internet so that others could download it.

Now let's get to the second major weakness of traditional chain letters. Even if a chain letter manages to solve the dishonesty problem, it still suffers from another big weakness: lack of fungibility.

Fungibility is the idea that all members of a population are perfectly interchangeable with each other. Rice is fungible because one grain of rice is pretty much identical to another. My Tesla shares are fungible with yours. Dollar bills are fungible.

But positions in a chain letter like Mega$Nets are not fungible. A spot at the top of a chain is more valuable than a spot further down. And a spot on branch A of the Mega$Nets chain may have a different value than a spot at an equivalent height on branch B of Mega$Nets.

This lack of fungibility impinges on a players' ability to sell their spot in the chain letter to someone else. With every position in a chain letter being radically different, it's a huge chore for potential buyers to evaluate the market value of any single spot. And so a healthy resale market for chain letter spots can never develop.

Why would we want to be able to sell out of a chain letter? One of the big attractions of buying stocks, ETFs, bonds, gold, or currency is that we can resell these instruments, maybe two minutes later, maybe two decades later. If we are locked into an investment forever, we probably wouldn't want to invest very much in the first place. Likewise with chain letters. If a spot in a chain letter can be easily resold at a later time, then making an initial investment in the chain letter becomes a much more attractive proposition.

But is it possible to design a fungible chain letter? And if so, can we also solve the honesty problem while preserving decentralization? It sounds impossible.

Enter bitcoin, the world's first honest & fungible chain letter.

The novelty with bitcoin is that there is a fixed number of spots in the list.* New players can only join by purchasing a pre-existing position in the chain.** 

This approach is different from a more traditional chain letter like Mega$Nets or Circle of Gold. With Mega$Nets, the list is dynamic, not static. The number of spots in the list starts out small and expands organically as people join up, append their name, and generate a new spot in line. No need to buy someone's position out. Just add your own. New spots, however, are subservient to old spots

But Bitcoin software creates all spots on the list ahead of time, so no spot is superior or inferior to the others unlike . All bitcoin positions are fungible from the get-go.

As with every other chain letter, players "win" at Bitcoin by being early. The difference is that with bitcoin, winning is achieved by being one of the first to buy up a spot in a fixed non-hierarchical list. With a traditional chain letter like Mega$Nets, winning is achieved by creating one of the first entries in a hierarchical list that lengthens over time. Either way, the earlier one arrives, and the more latecomers who join up down the road, the richer one gets.

Because every single spot on the bitcoin list is fungible, buyers can easily appraise the worth of any single bitcoin (i.e. chain letter spot). And so a robust secondary market for bitcoins has developed where early bitcoin players fluidly auction off their positions to newer players. This marketability is one of the things that has turned bitcoin into such an incredibly contagious chain letter.

Bitcoin doesn't just solve the fungibility problem. It also fixes the dishonesty problem. Bitcoin software ensures that it is impossible for anyone to conjure up a new spot on the bitcoin list, or re-arrange the distribution of existing spots. (Some people describe this as solving the double-spending problem of electronic cash, but in this blog post it is the honesty problem of chain letters that is being fixed).

Finally, bitcoin achieves all this while being just as decentralized as its chain letter predecessors. 

Bitcoin is decentralized because individual participants can buy and sell bitcoin (i.e. spots in the list) in bilateral pairwise meetings. No need to rely on a central planner to distribute funds from late entrants to early birds. Secondly, much like Mega$Nets software, bitcoin software is deployed on thousands of computers all over the world. No central server. So like its traditional chain letter predecessors, bitcoin is very difficult for the authorities to attack.

In conclusion...

At first blush bitcoin seems like an entirely novel financial technology. But as I suggested in my post, it's just a meaner & badder version of chain letters like Circle of Gold and Mega$nets. 

What is revolutionary about bitcoin is how it has modified the chain letter model in order to solve the dishonesty and fungibility problems. Until bitcoin arrived in 2009, we had never seen the full capabilities of chain letters. Sure, chain letters regularly popped up, but they never lasted for more than a year or two. They were niche financial games played by odd people. Upstanding folks didn't touch them.

By solving the two problems of chain letters, bitcoin has radically dialed up the contagion factor for chain letter technology to a degree never experienced before. Bitcoin has become the first chain letter to go mainstream. It is the first chain letter to go global. Your sister is playing, your cousins are in, and so is your neighbour. Old-fashioned chain letters were for folks on the fringe. But playing bitcoin is something that regular people do. The abnormal ones are those who haven't yet secured a spot in line.

 

*Bitcoin has a 21 million cap. These 21 million coins were not created at inception. However, the protocol sets out the rules for their creation ahead of time.

** Players can also join by "mining" bitcoins. Mining is one of the processes that updates & secures the chain letter. Computers that engage in mining are rewarded with new bitcoins and/or a small fee out of the existing stock of bitcoins.

Ponzis and bitcoin as a response to a bad economy: the case of Nigeria

Usually when I think about gambling and speculative excess, I've always associated it with giddy prosperity. When an economy is doing well, productivity is improving, new technology is being introduced, and unemployment is low, people have extra income that they can throw away at the casino. Or they put it into their brokerage account and, with the help of margin, generate speculative bubbles.

But lately I've been rethinking this view. Speculative bubbles and over-gambling are just as likely to be driven by sick and decaying economies as they are by prosperous ones. And Nigeria is a prime example of this.

Nigeria, one of Africa's largest major oil producer, plunged into recession in 2015 as oil prices collapsed. It saw only anemic growth from 2017 to 2019 before COVID-19 pushed it back into a much deeper recession.

Over that period Nigeria has seen an explosion of ponzi schemes. It started with MMM in 2016. Since then Ultimate Cycler, Icharity Club Nigeria, Get Help World Wide, Givers Forum, Twinkas, Crowd Rising, and Loom have all ripped through the country. Jack & Ibekwe (2018) provide a full list below, although it misses a large chunk of ponzis since it doesn't go past 2018.

Jack & Ibekwe (2018)

Jack & Ibekwe's paper is just one in a burgeoning Nigerian academic literature on ponzi schemes. This body of work provide us with plenty of useful information about what sorts of Nigerians are participating in ponzis and why.

How many Nigerians participate in ponzis? In a survey of 287 Port Harcourt business students, Bupo & Abam-Smith (2017) found that an astonishing 72% of students were involved in various ponzi schemes. Onoh's (2018) survey of 230 Nigerians found a participation rate of 78%.

The high participation rates that Bupo & Abam-Smith and Onoh pinpoint are confirmed in a 2016 poll run by NOIPolls, an established Nigerian polling agency. After querying 1000 Nigerians, NOIPolls found that 68% of survey participants had either participated in a ponzi, or knew someone who did. I would find a 5-10% national ponzi participation rate to be mindbogglingly high. But if the above data is correct, Nigeria far exceeds this. Given a population of over 200 million, tens of millions of Nigerians have participated in ponzis.

Who are the Nigerians that are playing? In their survey of 135 ponzi investors, Jack & Ibekwe found that young Nigerians aged 20-29 were most likely to be involved in ponzi schemes. Participants tended to be students and had post-secondary education. In a 2018 survey of 190 ponzi investors in the city of Calabar, Agba et al (2018) reported similar results. Most investors were unemployed, held a Bachelor of Science degree, and had a low income.

Another fact that blew my mind away is that many of the Nigerians who are involved in ponzis are self-conscious ponzi investors. That is, these aren't dupes. They know the nature of the game they're playing.

For instance, 66% the university students that Bupo & Adam Smith surveyed were aware that they were participating in a scam, one that would soon crash, but they played anyways, presumably because they believed they were skilled enough to get out before the end. Onoh found somewhat less ponzi self-consciousness in his survey of 230 Nigerians, with 34% realizing at the outset that the scheme made high returns by re-cycling contributions. But that's still a lot of savvy players.

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Let's back up a bit and define the term ponzi scheme. A ponzi is a type of zero-sum game, much like a lottery or a casino game such as roulette. By zero-sum, I mean that nothing of value is created. For each person who makes a profit, there is necessarily someone who loses. Put differently, ponzis and lotteries don't generate funds, they redistribute funds.

All zero-sum games have an algorithm, or sorting method, for figuring out who will lose and who will win. A lottery, for instance, redistributes funds from all losing ticket numbers to the winning ticket. A poker game redistributes the pot from bad card hands to good hands. A ponzi scheme's unique algorithm is to pay early entrants at the expense of late entrants.

What attracts people to zero-sum betting games is the allure of massive returns. Buy the right lottery ticket and your life will change. Choose the right number on the roulette table and you earn an immediate 3400% return on your investment. Get in early on the right ponzi, and you'll be vaulted into a totally different socioeconomic class. Of course, on net these schemes don't generate any wealth.

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Back to Nigeria. What the Nigerian ponzi scheme literature suggests is that ponzi schemes were self-consciously used by Nigerians as a coping mechanism for economic malaise.

For instance, in their survey of ponzi investors Jack & Ibekwe found that 60.3% cited harsh economic conditions as their reason for joining ponzi schemes. In a survey of 384 ponzi investors, Obamuyi et al (2018) found that one of the most popular reasons for participating in ponzis was the "current economic situation." And in Bupo & Abam-Smith's analysis of 287 Port Harcourt business students, 231 agreed that the scheme helped reduce the impact of the present recession.

So let me paint a picture. Nigeria has always been a highly unequal country. The poor are very poor, the rich are very rich. There is plenty of poverty (although this is improving) and not much of a government-run social security net. Nigeria also suffers from endemic corruption, and this impedes the ability of regular folks to improve their lot.

The yearning and frustration that this creates gives rise to a constant demand for quick financial escapes, or zero-sum games. But what sorts of zero sum games? Nigerian authorities take a relatively paternalistic approach to gambling. Depending on the game, Nigerian law either prohibits it outright or limits it. For instance, Nigeria has only three land-based casino for 200 million people. Non-skill based card games are illegal. Apart from sports betting, online casinos are prohibited, and many foreign websites don't accept Nigerians. 

So a big part of the demand to play life-changing betting games gets channeled into whatever the underground market can provide, like ponzi schemes.

If you start with a large population of unhappy young people who want to play life-changing zero-sum games, combine that with limitations on legal gambling, and add in a massive economic collapse which only makes their lives worse, you're going to get a big wave of illegal ponzi schemes cropping up.

Canada and the US also have problems with inequality and poverty, albeit not as extreme as Nigeria. Our economies have also been hit by the biggest shock in decades.

But unlike Nigeria, Canada and the US have well-developed capital markets. So when desperate Canadians and Americans look for long shot life-changing bets, they needn't limit themselves to traditional gambles like lotteries, casinos, or online poker. Online brokerages like Robin Hood and Wealthsimple make it easy for us to make hundred-to-one bets in options markets or leverage up on Tesla or GameStop stock.

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In addition to embracing ponzi schemes, Nigerians have also become the world's most prolific owners of cryptocurrencies, as the chart below illustrates. This data comes from Global Web Index via this article.

[Source]

I've been tracking bitcoin usage in Nigeria for a while now. We know that bitcoin is being used in combination with gift cards by Nigerian-based business email compromise and romance scammers as a convenient way to repatriate extorted funds:

"Paxful portrays itself as bringing financial services to the world’s unbanked, and perhaps they are, but the US-based company has become a bazaar for West African scam artists selling stolen gift cards."

How Nigerian BEC gangs launder money via Paxful: https://t.co/5XGRuwNJ6w pic.twitter.com/SsFK1eVNbz

— John Paul Koning (@jp_koning) October 15, 2020

We also know that Nigerians living in the US are making remittances to their Nigerian friends and family using this same combination of gift cards and bitcoins. Buying gift cards and exchanging them for bitcoin and then Nigerian naira may sound like a circuitous way to make remittances. But it is economical because families get the superior black market exchange rate rather than the official rate.

Great article by @MattAhlborg. He documents an exotic remittance corridor that has sprung up between US and Nigeria to avoid exchange controls:

US cash → Gift cards (iTunes, Amazon, etc) → Bitcoin → Nigerian naira deposits. Quite the crazy journey.https://t.co/2yQ5Urwemg

— John Paul Koning (@jp_koning) December 5, 2019

Nigerians who shop at foreign online stores face monthly card limits, some as low as US$100. Again, this is because Nigeria's central bank rations access to foreign exchange. Cryptocurrencies may be a hack around this. Also, Nigerian importers have been using cryptocurrency as a trade currency for Chinese imports. Rather than having to rely on acquiring carefully-rationed foreign exchange from the Central Bank of Nigeria, they can offer a Chinese exporter some bitcoins and the goods will be shipped.

So cryptocurrency is certainly being used as an alternative form of doing payments. But this can't explain why 20% of Nigerians (around 40 million people) hold some of the stuff. After all, unofficial imports, scams, and remittances are a small part of economic activity.

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I'd suggest that Nigeria's cryptocurrency adoption is a natural extension of its earlier ponzi scheme addiction. 

Like a poker game or roulette or the lottery, cryptocurrencies such as Bitcoin or Litecoin are zero-sum betting games. They redistribute a fixed pot among participating players. Of all types of zero-sum games, cryptocurrencies are most similar to ponzi schemes. Both use an "early bird" redistribution algorithm: late entrants' funds are paid out to early birds. But cryptocurrencies are not quite ponzi schemes. Whereas ponzis such as MMM or Ultimate Cycler are centrally managed by a coordinator, a cryptocurrency is spontaneous and decentralized.

In the same way that young Nigerians turned to ponzi schemes as an economic drug for coping with the 2015 collapse and ensuing lack of opportunity, they may be doing the same with cryptocurrencies. COVID-19 has pushed Nigerian unemployment to its highest level in a decade, the young being hurt the most. And so once again desperate Nigerian students are on the hunt for life-changing zero-sum bets. This time they've settled on cryptocurrency, the decentralized nature of which renders them almost impossible for authorities to stop.

My "ponzi" interpretation of Nigerian cryptocurrency adoption runs counter to the crypto-optimist view.

Cryptocurrency advocates see adoption of cryptocurrencies in developing nations like Nigeria as a vindication of cryptocurrency-as-monetary technology. Their thesis is that legacy payments systems and central banks in developing countries are failing at their task, and so cryptocurrencies like bitcoin are being adopted because the offer a better monetary alternative.

The crypto-optimist view overestimates the usefulness of cryptocurrency-as-currency. There are certainly some cases where Nigerians are using cryptocurrencies for payments, and I presented them above. But the main reason that cryptocurrencies are popular is why any zero-sum game is popular: they intoxicate players with the promise of huge price gains.

Viewed in this light, Nigerian adoption of cryptocurrencies isn't a bitcoin fixes this moment. Rather, it's a repeat of Nigeria's earlier adoption of MMM and Ultimate Cycler. That these games keep sweeping through Nigeria is a symptom of underlying economic misery. Desperate to escape their plight, young Nigerians are once again making last-ditch bets on zero-sum betting games.

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There is a silver lining.

Traditional ponzi schemes are often run by scammers rather than honest game managers. In an honest ponzi, 100% of the invested funds are paid out by the manager before the game closes down. But in a ponzi scam, the game manager absconds with the pot. And so ponzis often collapse before coming to their inevitable, natural end.   
 
Cryptocurrencies aren't run by a central game manager. As long as players custody their own coins, there is no one who can abscond with players' funds. So a desperate Nigerian student who wants to make a potentially life-changing zero-sum bet may do a bit better buying ₦10,000 of bitcoins than putting ₦10,000 into the next version of Ultimate Cycler, since bitcoin is more secure. (See this post for more).

But let's not kid ourselves. A nation of desperate gamblers, ponzi players, and cryptocurrency punters is a sad development. It is a symptom of a sick economy, one in which unemployed young people are flocking to make zero-sum bets because that is the only way they see their lot in life improving.