Crypto and the Dead Man's Switch

Speculation, Politics, and the Seeds of Financial Contagion

Cryptocurrencies have been an unstable financial asset since they started, experiencing wild swings in market valuation. That’s unsurprising given the lack of production value. They don’t produce anything, nor control anything that does produce things, nor are integrated into the conduct of any legal business that does produce things.

For the most part, crypto has existed in two worlds, one where it’s traded speculatively, and a second where it’s integrated into illicit money laundering and drug economies. The first is by default unstable, and the second is one we actively want to disrupt, when we can. This is different from other currencies that are integrated into their local economies, or for a few, like the US dollar, into global economies. To continue doing business, those economies must settle transactions, and their currencies have been integrated into that settlement process. While in theory you could substitute any other currency, a process of substitution that wasn’t driven by a simple fiat would introduce disruptions as one set of expectations struggled to replace another.

Integrating cryptocurrencies into legitimate business transactions has been a goal of crypto advocates since they were created. That’s not nefarious, it’s what they legitimately should be doing if they believe in the ability of cryptocurrency to legitimately contribute to an economy’s value. I don’t share their view that this will contribute to an economy's overall value; to do so it would have to lower transaction costs, increase trust, or somehow drive new efficiencies or enable productive work that would not have otherwise happened. Instead, many cryptocurrencies currently suffer from high transaction costs, with fees for networks like Bitcoin or Ethereum sometimes reaching prohibitive levels during peak usage, and face significant trust issues stemming from numerous high-profile exchange hacks, rug pulls, and the general volatility and lack of regulatory oversight. Sure, that could change, but it hasn’t yet. In terms of efficiency, crypto advocates think it’s more effective to not allow central banks to apply macro-economic policy. I disagree strongly there, as macro-economic policy, while far from perfect, has at least had a stabilizing effect, superior to what any more primitive system before central banks achieved.

There’s plenty of good words covering both sides of those debates, so I’ll avoid the rabbit hole of dealing with that extensively here. Instead, I want to point out a worrying aspect of the current Trump actions. Crypto is getting tied to the political system in both direct and indirect ways. In the most direct ways, Trump companies have issued meme coins tied to Trump. It’s pretty worrying that this development creates a mechanism that could be perceived as, or function similarly to, a form of influence peddling or soft bribery, where financial support via memecoin investment might be seen as an attempt to gain favor. It hardly matters if that bribery is legal or illegal, in many ways it’s worse if it is legal. But aside from that, consider what happens at the end of his term? If the value of $TRUMP is based on the influence it provides with Trump, its exchange value will plummet as soon as his influence goes down. The size of that market is small enough that the primary concern might be for less experienced investors drawn into a highly speculative memecoin that appears to function as an bribery device.

But consider also the effect on the much larger cryptocurrency market. Next consider the possibility that cryptocurrencies become deeply integrated into financial markets. For instance, if financial institutions hold more and depend on them for solvency, conducting business, a large change downward could force other business to slow or stop. Finally, think of the public changes in public perception that are predictably going to happen when Trump’s term ends. First, you’ll have a collection of memecoins take a dive. Since there’s an overlap between those with irrational expectations of that and expectations of Bitcoin, the loss of trust will spillover. Second, unless all other politicians and parties normalize to the Trump administration's view on integrating crypto into our economy, a de-integration should be expected, or at the least future expectations of more integration should disappear.

The effect is a bit like a terrorist who’s planted bombs holding a dead man's switch while he builds more bombs. At the end of the term, any integration of crypto, especially that part tied to Trump, sets off an uncontrolled demolition. If that integration links with any other key aspects that are wobbly themselves, the effect could be contagion.

There is a moderately simple counter to this. Even without the ability to limit integration from a policy perspective, we might hope that financial institutions, businesses and individuals would avoid integrating crypto in a way that makes them unable to conduct regular business after a dive. That seems quite rational to me, but we’ve been surprised by integration already, and we don’t know what kind of destructive policies are still to come from the Trump administration that will either enable, encourage, or even mandate that kind of problematic integration.