The Internet’s Casino Boats

It’s impossible to understand the societal risk posed by crypto assets without understanding something about the economics of the gatekeepers of the crypto ecosystem-offshore crypto exchanges. It’s probably even a stretch to call it gambling given how variably-rigged it is. It’s unclear what “fair” would even mean on an investment which has no fundamentals, no intrinsic value, whose market arises from the theory of the greater fool, and whose price action is only based purely on sentiment predictions on infinitely recursive speculation. The point of the stock market is to enable price discovery and encourage capital formation. Although two financial products both have a ticker, a OHLC chart, and you should “buy low sell high”, there is a vast universe of difference between Apple stock and Shibu Inu token. The majority of speculators enter the crypto asset market through centralized exchanges, which at face value might look somewhat like normal brokerage accounts, but are in fact quite different in both the products they sell and the regulatory circle they fall under. Every day on my commute home in London I see an endless barrage of crypto app advertisements on the tube, and every single one of them is characterised by naked psychological appeals to fear of missing out wrapped in the clever facade of presenting the illusion of trading normal financial instruments.

On normal assets this is illegal since it only results in wealth transfers from less sophisticated participants to market manipulators. Exchanges really want the public to believe they offer a valuable market making service and that they should be valued as technology companies, however the truth is far from that. This is vastly different from the framework that regulates market makers, brokerages and clearing houses for public equities which have far stricter consumer protections and controls on price making. This is where the moral hazard of this entire ecosystem and the false advertising of these platforms as markets comes into the realm of public policy. What public good do highly manipulated markets for speculating on dog memes and hot air serve other than separating fools from their money? The purpose of a dog meme coin is simply to make the creators of the coin rich off some nihilistic parody of markets. Crypto is a cesspit of people swapping claims on non-economic nonsense in one giant orgy of internet memes and fools trying to screw each other playing mutual harm negative-sum games while chanting “we’re all going to make it”.

The scofflaw crypto exchanges fall under no regulation and simply try to push the boundaries of whatever they can get away with while playing cat and mouse games with banks and legal entities set in the Caribbean islands. The few that try to operate in United States and Europe come under a patchwork of very loose money service business licenses which don’t regulate ANY price making or trading activity. The answer is simple: they need it to come from you. Where will all the money come from to pay out all these new paper bitcoin millionaires? The answer to that question will really depend on what the product and alleged “market” is being advertised as. Exchanges can wash trade, which means being the buyer and seller of buy sides of a trade to create the illusion of market activity. Exchanges can front-run their own customers by putting their own trades in before client execution and trade on their advance knowledge of their customer order flow. If you work at the exchange, or are friends with someone there, you have foreknowledge about every listing and you can insider trade with no consequences.

Is it good for society to have these smartphone casino boats running? Jurisdictions like Wyoming have hilariously lax licensing requirements that can be bought for a few thousand dollars. Exchanges can offer 100x leverage on derivatives which allows them to liquidate their customers’ funds if the price (which the exchange sets) of the underlying moves by even 1% out of range. Exchanges can arbitrarily halt trading or cancel trades if any market conditions aren’t to their liking and there’s no obligation on them to report any accurate price information or give any kind of best execution. And then there’s the pump and dump schemes which are rampant coordinated buying activity by insiders to synthetically manipulate the price of a token upwards while simultaneously selling it. In principle there’s nothing wrong with gambling as a form of entertainment if done responsibly. So why is that different from gambling on negative-sum crypto investments where most people are guaranteed to lose money as well?

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