There Are Too Many Cryptocurrencies, and Investors Are Paying the Price
The new world of ‘shit coins’ is fertile ground for pump-and-dump schemes
Last Wednesday was a rough day for cryptocurrency investors. Cryptocurrencies fell across the board, losing more than $500 billion in value at one point, with Bitcoin plummeting more than 20%. And while the market stabilized near the end of the day and bounced back some over the next couple of days, Bitcoin is still down almost 35% over the past two weeks, with other cryptocurrencies tumbling even more. Dogecoin, most notably, is down 55% since May 8th (that dark day when Elon Musk appeared on Saturday Night Live and joked — or rather, said accurately — that dogecoin was a “hustle”).
This precipitous decline in value in such a short period of time of course underscores why cryptocurrencies are so ill-suited to being actual currencies: no one is going to regularly exchange goods and services for a currency whose value can plummet 25% in a single day simply because Elon Musk said something. But that’s unimportant to most cryptocurrency investors, who see Bitcoin, et.al., not as currencies, but as speculative assets, and also see this kind of massive volatility as par for the course. Painful as these sell-offs are while you’re in the middle of them, they’re relatively easy to shake off for most crypto enthusiasts, who dismiss them as a mere blip.
That’s an understandable response, given that if you look at the history of Bitcoin specifically, you’ll see more than a few massive sell-offs, none of which ended up stopping Bitcoin from rising ever upward. And yet those sell-offs occurred in a very different investing environment for crypto, one where there were few alternatives to Bitcoin, and where cryptocurrencies were, in that sense, scarce. That’s no longer true. The most striking development in crypto in recent months is the relatively sudden, and unprecedented, explosion in the sheer number of cryptocurrencies that are being seriously traded, an explosion that has the potential to cast doubt on the long-term value of cryptocurrencies as a whole.
There are now more than 75 cryptocurrencies that are worth more than a billion dollars. And while most were created a while ago, it’s only relatively recently that they’ve started to be seen as real vehicles for speculation and investment. (Dogecoin, for instance, was created back in 2013, but it wasn’t until this year that its value exploded.) On top of that, it’s become remarkably easy for people to create entirely new cryptocurrencies and have them start trading — Joe Weisenthal wasn’t kidding when he wrote recently: “I just watched two people make me a crypto in less than 10 minutes.” There are now more than 1500 cryptocurrencies out there, and depending on when you read this, there may be already be a couple hundred more.
One obvious problem with this new world of “shit coins” is that it’s incredibly fertile ground for pump-and-dump schemes, as a great Bloomberg piece by Misrylena Egkolfopoulou and Charlie Wells documents. But there’s a bigger, more fundamental problem created by the massive increase in the number of cryptocurrencies, namely that it makes the foundationless, conjured-from-thin-air nature of all cryptoassets, including Bitcoin itself, all too clear, and in doing makes it obvious that the value of these assets depends entirely, and solely, on people’s willingness to treat them as valuable.
In this context, it’s fitting that the big crypto sell-off came a couple of days after Barstool Sports’ founder Dave Portnoy’s self-proclaimed “shitcoin announcement,” when he declared that he had decided to put $40,000 into one of the “new breed of shitcoins,” and revealed that the winner was SafeMoon — a cryptocoin that was invented a whole two months ago. Why did Portnoy choose to put his money into SafeMoon? His answer was, at least, honest: “I don’t know why! I like the word moon, because that’s where I’d like to go.” And he admitted that he had no idea if SafeMoon was a Ponzi scheme, saying if it was a Ponzi, the smart strategy was to “get in on the ground floor.”
What Portnoy’s announcement (which has gotten 2.5 million views on Twitter) captured perfectly was the utter arbitrariness of crypto valuations, and the way investing in any of these assets is ultimately just a bet that in the future people will be willing, for whatever reason (maybe because they really like the word “moon”), to pay more for it. And if the answer to “Why buy SafeMoon?” is “I don’t know why,” then “why not buy SafeMoon?” can turn, in a second, into “why not sell SafeMoon?”
This was, of course, always true in a theoretical sense. But when there were many fewer cryptocurrencies, Bitcoin in particular benefited from a sense of scarcity (amplified by its design, which permanently fixes the number of coins that will ever be issued). Cryptocurrencies were rare and exotic, two things that often confer value on assets. But that’s no longer the case. Cryptocurrencies have become increasingly common and familiar, and the decision to buy one rather than another looks increasingly arbitrary. The only thing that keeps crypto valuations up, in the end, is faith. The problem cryptoinvestors are now facing is that you’re given a choice of a thousand different things to believe in, it’s easy to end up believing in nothing at all.