Time Will Tell: Irrationality in Crypto Markets Has the Makings of a Trend
If you’ve read these reports with any regularity, then you know how often crypto law functions as my lens for skepticism. The idea is that through the rational perspective of crypto law, we can better perceive irrational activity in the market.
Better yet, we can say that crypto law enables both micro- and macro-economic perspectives. It can be used either like a microscope or as a telescope.
On the one hand, we have the microscope. Seen one way, a familiarity with the minutia of crypto law can help us navigate the shifting maze of buzzwords, endorsements, and individual events that comprise crypto as an industry.
Then we have the telescope. When several events in the crypto market align through shared cause or effect, that’s when we can take the macro-perspective and see these apparently separate events as trends.
Three recent events have made me question the rationality of crypto investors. In each case, the value of a product has risen even as its flaws have come to light.
How can we account for these events?
I’m by no means the first expert to take out the proverbial telescope. In light of recent happenings in crypto, this John Maynard Keynes quote seems apt:
“Markets can remain irrational longer than you can remain solvent.”
Tether Defies Basic Economics
Court papers filed by company lawyers on April 30 confirmed that Tether only has 74 percent of cash reserves of its current token supply.
It’s news that probably should have been a bigger deal. Tether, a self-professed stablecoin, admitted its reserves lie on the financial equivalent of a split fault line.
Logically, you would think that the price of this not-so-stable coin would have dropped accordingly. But Tether is still trading at $1 as if it were fully backed.
How is that possible?
The same lawyers who filed those papers likened Tether to commercial banks, entities which also hold significantly less than depositors’ money in liquid cash.
We can deduce from Tether’s case that in spite of the market’s curious behavior, not all stablecoins are what they first seem.
Komodo Price Skies Despite Cloudy Forecast
Earlier this month, news broke that Komodo — a privacy coin that promises its users shielded transactions, keeping transfers private — resorted to stealing from its own users to protect them from other potential thieves.
This move, unprecedented even in the Wild West of crypto, calls forth a unique set of questions, the most prominent of these being: how do you prove who owns a wallet?
You would think that a scandal on this level, and the Pandora’s Box of questions it has opened for debate, would sink Komodo.
But no! In spite of this decidedly bad news, Komodo — a privacy coin leaking privacy — is trading up as of this writing.
Flawed ZCoin Sells Its Roadmap
Then we have ZCoin.
In order to differentiate itself from ZCash and Horizen, ZCoin went to market offering what they sold to users as a unique privacy protocol — one that didn’t use zero-knowledge, one that ran based on its own zero-privacy protocol.
As it turns out — and maybe you can guess where this is headed — there emerged a flaw in that protocol that made the privacy in ZCoin transactions nonexistant.
And still the price of ZCoin has risen.
ZCoin claims to have acknowledged the complete lack of privacy in its transactions — on the condition that Sigma, a recent update, would patch things up on the privacy front.
What does this mean for Crypto Law insiders?
The three cases discussed above can be seen as a market trend in the context of stablecoins. In each of the three cases, the governance behind stablecoins failed on some level to uphold users’ trust.
As we’ve said elsewhere, the reliance on trust is an inherent flaw in stablecoins.
Tether, Komodo, and ZCoin each failed their users to some degree. In the cases of Tether and Komodo, the abuse of their users’ privacy has yet to cause a drop in price.
Meanwhile, in the case of ZCoin, a long-promised system update seems to have restored faith in the coin.
One possible deduction is that crypto investors simply have become callous to the increasingly common news of privacy breaches. In the case of ZCoin, users who held strong were rewarded by the Sigma update.
On the contrary, it’s equally possible (I would argue probable) that most investors simply don’t understand the risk of trading entities like a Tether or a Komodo.
To paraphrase Keynes: you can be right that a market is overvalued, but wrong on the timing.
A stablecoin that’s not stable, a privacy coin that’s not private — these are anomalies, and it’s only a matter of time before the market subsumes them.
Even as flawed options such as Tether, Komodo, and (formerly) ZCoin hold steady, the most observant sector in crypto — the builders — are making products that account for breaches in trust, products less vulnerable to overnight fluctuations than Tether or Komodo.
With each subsequent privacy breach, it becomes more and more clear that crypto needs third-party organizations to prove that new technology works and can be trusted.