Crypto: A Novel Bet When Everything Burns. It Remains When Governments Fail

Originally published 17 August 2022 in be[in]crypto.

Even countries in the EU can fail their citizens and freeze their money in banks.
Crypto is the only way to be sovereign from banks and government failures.
Forget trading, remember what crypto was created for in the first place.

Crypto is the only way to truly own your wealth, say Jarek Hirniak, CEO and Founder of Generation Lambda, and Marc Dumpff, Chief Strategy Officer of Generation Lambda.

For most of history, there was little that people could say truly belonged to them. Personal property was a privilege bequeathed by authorities, and this right could be relinquished just as easily. Until the Dutch East India Company – relatively late in human history – the idea of owned value was that which could be held.

The invention of cryptocurrency is novel beyond its ability to utilize blockchain technology to create value. It also managed to take the abstract notion of value itself and tokenize it, thus making it tradable while avoiding issuance by an authority. Now, if one memorizes the seed phrase that unlocks a crypto wallet, one could feasibly move the GDP of an entire country across borders without a trace.

You do not own your money

This matters because crypto offers a way to store and protect assets outside government-issued currency. At first, this sounds unnecessary, even alarmist. But recent history has shown just how quickly citizens’ assets can be restricted or frozen. A range of possibilities in which the ability to store value separate from any issuing authority would be useful.

Even the most self-proclaimed democratic countries aren’t immune from the forces of history. In 2012, Cyprus’s banking system went bankrupt. Despite being a member of the European Union, Cyprus wasn’t immune to a potentially catastrophic economic crisis. The seemingly impossible became reality, and the perceived aegis of security conferred by the EU never manifested.

This revealed that when a series of malinvestments force regulators to act, they may act with such force that, even after the fact, the restrictions seem unthinkable in a tier-one economy:

  • Cash withdrawals were limited to €300 a day;

  • Card transactions were restricted to €5,000 per month but ‘graciously’ unrestricted within the country;

  • Transfers over €5,000 required the authorization of the central bank;

  • Transactions abroad were capped to €5,000 a month; and

  • Citizens were only allowed to carry up to €3,000 in cash abroad.

For all intents and purposes, despite account statements saying otherwise, the money didn’t belong to the account holders. It was the government’s to issue or withhold at will.

Not only that, but after all this had been said and done, depositors in the banking system over a specific wealth threshold were “bailed in,” a euphemism for having their money stolen and replaced with shares of the banks whose bad debt they had now collectively paid off.

When financial institutions are too big to fail, consumers pay the price

The restrictions lasted for years, despite depositors being told they would last for a week. Put simply, when the going gets tough, even supposed tier-one economies belonging to major regulatory bodies like the EU, aren’t immune to expropriation and severe capital restrictions in order to protect their best interests – interests that often differ from those of its citizens.

The banks know this for a fact. Once an entity’s operations are large enough, they become “too big to fail.” It’s in their best interest to act as risky as possible in service of expanding profits. They’re not ultimately accountable for any negative consequences, but they get to reap all the benefits if the bets pay off. This is such a well-studied phenomenon that it’s known as a “moral hazard” and taught to undergraduates in their entry-level economics classes.

Crypto is a hedge against government-backed currency collapse

What does this have to do with cryptocurrency? Crypto is a hedge against government overreach and potential default, whether you are in Cyprus or Venezuela. It’s in these beleaguered countries and in unexpected scenarios where crypto’s pragmatic use truly shines.

Even a decade ago, during the Cypriot crisis, many people moved their wealth to Bitcoin in an attempt to escape the regulator’s reach. In fact, the flight to safety was so intense that the fledgling Bitcoin rose by 176.2% in March 2013 alone.

The rise of communist governments, a war in Europe, widespread hyperinflation, and expanding economic restrictions have also incidentally made Venezuela one of the top ten economies for crypto adoption. This is according to blockchain analysis company Chainalysis in their 2021 Global Crypto Adoption Index. Political volatility begets crypto’s essential usability.

The reason why crypto excels during such circumstances is that it functions independently from the desires of any authority. While the world of Web3 fixates on discussions of specific cryptocurrencies to invest in, the fundamental principle worth highlighting is decentralization. Decentralization is crypto’s insurance from counterparty risk, whether it is a central bank or irresponsible government actions.

Beyond that, it’s worth considering that for crypto to function as a currency, it must have the trust of a community. Money cannot exist without a large enough group of people willing to exchange value in that specific form. Presently, it is impossible to fully transition one’s life to be “on-chain.” Most (if not all) of daily expenses are transacted in government-backed currency. It is not prudent to go all-in on a constantly evolving and recently volatile asset class.

Instead, cryptocurrency can be viewed as insurance. What percentage of one’s wealth can one truly call one’s own? And how does that percentage change, given the instability of current political conditions?

Crypto is a novel bet when everything else burns

That is the core promise of cryptocurrency. It is not stellar returns, existing at the cutting edge of finance, or anything truly unprecedented. It’s genuinely revolutionary. Beyond all pretensions, the true thing that the industry can offer to all people is this: For the first time in history, people can truly own their wealth, and no king or government can take it. They can’t even touch it.

About the Authors

Jarek Hirniak, MInf, CQF, CEO and Founder of Generation Lambda: Jarek is a certified quant with over 20 years of software development experience. He spent six years working on trading systems at Citadel Securities and UBS bank, where he developed a series of novel trading systems and trading-related software platforms.

Marc Dumpff, Chief Strategy Officer of Generation Lambda: Marc has over fifteen years of experience in traditional finance as a senior finance professional, advisor, consultant, strategist, and hedge fund and asset manager. He started his first hedge fund when he was 20 and then branched into consultancy. He has managed portfolios of multinational corporations and ultra-high-net-worth individuals with funds in the billions of dollars (USD).