A Metaphor for Crypto Markets and How to Explain It to the Uninitiated

I didn't want to title this post as I originally intended because I figured I'd get a quite a bit of eye rolling. However, I wanted to talk about a way to conceptualize crypto markets that might help the layman better understand. (Since I am a relatively new adopter I probably should get this post out as soon as possible so I don't forget what it feels like to be a "noob.") Also, this is more of a fun post. I'm just running with it.

In truth, I have heard bitcoin (BTC) and altcoins (e.g. Ethereum (ETH)) referenced as a number of things to make sense of the crypto space. People use comparisons or flat out super over-simplified explanations most of the time. For example, on Steemit it seems that there's a lot of sentiment in that BTC is poised to be the next currency of the world. Then you head over to the financial space and you have the Jamie Dimon's of the world calling it a fraud. As an example, I've heard another more charitable financial commentator liken it to beanie babies when those dolls were very popular. The list goes on and on.

In my opinion, any speech that is extreme in nature usually is not a useful way to conceptualize things and has never really helped me understand what something is or what it's good for, thus saying things like crypto will "end slavery to the Fed" or "it's a fraud" are not helpful when we come down to its current manifestation and application.

For instance, "religion is everything" versus "religion is a sham," well, that's a pretty hard world in which to cope and doesn't really leave a lot of room for interpretation for the regular person on the street trying to figure things out. Let's do a little interpreting about crypto, shall we?

So, without further ado... Yes, Gran Gran, Cryptocurrencies are like casino chips. (I promise this might be useful.)

While I await a potential horse whipping in the comments, bear with me.

So, you're explaining to your great Gran Gran about blockchain and cryptocurrencies. They're great! They're awesome! You can make transactions all over the globe! It's safe, secure, building value, has exciting blockchain technology, and is pretty good about obfuscating one's identity during transactions, heck it's even decentralized; however, it doesn't seem like she's getting it as her eyes glaze over. Yet, like many seniors Gran Gran absolutely loves going to casinos. The drinks are free, you can smoke inside, the slots are loose. It's a riot!

So, we've established your Gran Gran might have a gambling problem, but I digress.

Ask if it'd be worth it to her if every time she exchanged money for chips that she was also clearing a small stake in the casino in which she was playing. I don't know how good her financial acumen is, but we'll assume at this point her ears perk up. "Yeah, Gran, everytime you exchange money for chips you're also getting a little tiny ownership chunk in the casino that is proportional to the chip's value. Of course, the value will also depend on how many chips are out there getting used by people to gamble and are in the casino's vaults."

"Well, that sounds like it could be interesting," she says.

"It really is. And you don't have to turn those chips in either when you're done gambling. If you really like the casino and think it's great place and bound to keep making more money then later on when you'd like you can come back and turn those chips in for a little more money than when you bought or won them. You can hold onto them if you think the casino is going to increase in value!"

"I might hold onto some of my chips then."

Damn right you would, Gran Gran.

So, that's the easy part. Here come the questions from our Gran Gran.

HOW DO I EXCHANGE THOSE DANG CHIPS FOR MY MONEY, DARLING?

One of the problems any drunk person gambling in Vegas has encountered is that one casino's chips aren't necessarily useful in another casino. The same goes for cryptos at the moment. "But wait," you say, "we have these awesome exchanges that allow you to exchange one crypto for another! So, you hold your horses right there, buddy."

I'll hold the horses, but please listen.

That's true, but there are some pretty steep costs in terms of an online exchanges' entrances, inter-crypto exchanges (e.g. BTC to ETH), and exits. The same holds true for casino chips. You've got to take the bus and walk back. You have to go to the right casino. And still, darn it if the Sands does not accept chips from Circus Circus. Plus, that bus back is brutal. Gran Gran can never find a seat! This is a big and inherent time cost to something that wants to treat itself like a currency.

So, the onboarding time to get into crypto for anyone takes a bit. "What's a private key?" "How is this stuff secure?" "Does it only work with my computer?" So, there's that. Then after learning about a fairly complex system you board the bus...

At this point, I'm on a number of exchanges to get in on the trades I want to make; however, what I have discovered is that depositing whatever currency isn't so bad for the most part, but whew those fees eat into your trades on the exchange. Plus, to get out of fiat (e.g. dollars into BTC) requires one transaction, then moving it to another exchange is another transaction, buying or selling it is another transaction - if not two or three. Then because I want to safely store my coins and tokens off the exchange it usually costs a pretty good bit to send them elsewhere.

Basically, in our metaphor going to the exchange is effectively going to some casino chip exchanger on the street and paying them to take the bus, walk to the right casino, and make the exchange. You may not think that .25% is much at the crypto exchange, but it really adds up as you're moving around SATs trying to figure out how much of this coin or token you want. Each coin/token movement costs a percentage of the original value. In reality, it's not a fault of the construction and original vision of a lot of these cryptos, but it represents real, material costs.

(Fortunately, there's several blockchain firms working to overcome this very problem, which I'll detail moving forward in other posts. And there's always the more decentralized approach. Still, judging by volume and price action most people elect to use centralized crypto exchanges.)

Then you've got the problem of transaction time for processing the blocks to move coins and tokens. BTC is notorious for this problem, as it takes awhile to move stuff around. The relationship has to do with the demand on the mining capabilities of the blockchain, but for the moment Gran Gran doesn't need to worry about that. However, going forward this is a major issue in the space. In our analogy, this is more or less the length of the bus ride back and forth to the casino strip. At the moment, it can be a long ride.

DO YOU THINK I COULD USE MY CHIPS TO PAY FOR OTHER STUFF, BABY BOO?

Let's see, Gran Gran.

There's a problem with paying for things or exchanging the chips for goods and services. If I'm busy mowing someone's yard in Vegas and they decide to pay me in casino chips for a higher price than if they had paid in paper, I'd probably accept the chips because it'd not be such a big deal to walk over to the strip and exchange the chips. Let's say that's the Silicon Valley example. However, if I mowed lawns in Miles City, Montana I definitely wouldn't exchange my labor for casino chips. That's the "where" there aren't any nearby digital currency-friendly businesses example.

That is one great thing about crypto you, for all intents and purposes, have access to your digital wallet wherever there is Internet and can use your wallet and crypto if someone is willing to accept it. However, in most places and at the present time most businesses look at crypto as though you were trying to pay them in casino chips.

Then there's the other problem of the moving price targets. It's difficult to justify buying a coke with 25,000 Satoshis (SATs or the common name of the smallest divisible unit of BTC presently .00000001) one day and the next with 10,000 or 50,000. If Gran's casino chips are stakes in a casino with blockbuster growth she'll be in the same boat. Even more to the point, that makes conducting business in these volatile instruments very difficult unless everyone agrees that it'll only go up in price and then everyone would be happy to accept it. But as with everything else in life, it's bound to go down too - at least cyclically once in awhile.

(I'll get more into price movement and currency management in another post.)

HUNNY, I DON'T KNOW IF I'D FEEL COMFORTABLE LUGGING AROUND A BIG BAG OF CASINO CHIPS
(pun intended)

Gran, I don't blame you. But that's where crypto is great and terrible at the same time.

I haven't looked at the numbers, but I'm sure there's a significant amount of lost crypto value every day due to hacking, lost private keys, lost passwords, terrible support from the exchanges, governments randomly intervening, and for a number of other factors. You can't really hack a sack of casino chips, but then again you can't really easily wander around with a cool million in those little discs either. I'm not saying the security issues are a wash by any means, but in this regard they both have their problems.

SNOOKUMS, WHAT ABOUT THE TAXES?

Well, that's a sticky wicket right there in both regards. Ironically the tax system for gambling winnings and capital gains are pretty well codified and understood. In our example if the casino were to increase in value a great deal when you came back to cash in your chips you'd be happily making gains on your initial investment (or in this case the choice to hold onto the chips) and you'd probably pay the realized "winnings" or "gains" in income tax. However, crypto in general doesn't want to be treated as an investment, but as a currency. On the other hand, it's currently taxed as a capital investment and treated as one.

There are upsides and downsides to being treated as one or the other, but the biggest problem is that each transaction among different cryptos is currently treated as a realized capital loss or gain at the time of the transaction. It really isn't that big a deal as any stock trader will tell you that's how they keep track of their books - each trade made with realized gains or losses - but because the system doesn't have an industry-wide infrastructure in place it makes it more difficult to do your taxes (I'm speaking from the US perspective here).

Add in the fact that some transactions are made on purely anonymous block chains and it's recipe for disaster in trying to get capital gains tax treatment or trying to go as legit as possible in using anonymous cryptos. Plus, for US tax purposes every transaction has to be denominated in USD, which when moving from BTC to ETH can be slightly more complex to calculate. Fortunately, a number of exchanges offer spreadsheets of values denominated in USD at tax time.

(I'll go into the costs and benefits of capital gains taxes in another post.)

THERE ARE SO MANY CASINOS TO CHOOSE FROM, PUMPKIN. HOW WOULD I KNOW WHICH ONE IS A GOOD PLACE TO BUY CHIPS?

Well, there are A LOT of different casinos out there. They all have different themes, strengths, and weaknesses. And Gran Gran would need to invest a great deal of time spent at all of them to be an informed stake/chip-holder. Once in awhile she hears of an awesome, sure bet casino in which to gamble and leave keeping her chips. But her friend did it already and boom the casino closed up shop, the owner took what value remained, and her friend couldn't exchange her chips there anymore. Her friend, sadly, is stuck holding her bags of chips. Your Gran Gran is a little afraid now to hold onto any chips in general.

This problem, so to speak, is exponentially greater with crypto. In the first place, there really isn't anything you can touch. It's the big ledger in the sky with your coded line somewhere on the blockchain, so what do you really own? That's a hard conceptualization in and of itself, but let's say that it's a piece of intellectual, tech property. Because of the lack of coordination and regulation in the crypto market at the moment, anyone can create a coin or token and shill for it like it's going to walk on water. People buy it. Then it tanks after the shiller already exchanged all their money. There are a few examples of this and, in general, it is a real detriment to the crypto community's honest part.

People will say that you need to do your research. That seems to be a running theme these days. "Do your research before you post, talk, or invest." Fair enough, but once in awhile we all get taken in by something or somebody. And because something so new to most people and is hard to conceptualize like cryptocurrencies, there's bound to be some bad research floating around just like there are badly managed casinos and, worse, casinos that are only out to get your Gran Gran's money (which is most of them).

What this will ultimately do is push more government regulation on the crypto market as the government seeks to protect unwitting consumers from themselves. As always, there's upsides and downsides to regulation if we're speaking generally. And it's important to bear in mind that you wouldn't want Gran Gran getting taken in by a huckster and losing her life savings.

(I'll go into greater detail on potential effects of regulation in another post.)

IT SOUNDS LIKE AN EXCITING IDEA, MY DEAR, BUT I'M JUST NOT SURE I'M UP TO IT
(or "it sounds risky")

Gran, gran you're actually right here in a way. Casinos are really speculative investments relative to one another. But, Gran, the industry has had solid growth for a number of years.

At the present time there's a steep learning curve for most older generations to accept and adopt crypto. We won't see the same dynamic moving forward as those that use crypto now age and their children become indoctrinated as well, but at the moment most of the wealth of the world is held by people who are older and are probably quite comfortable in the way they've been managing their money. This is by no means a judgmental statement and there's plenty of older visionaries, but for the most part why fix something that isn't broken? That would be their thinking anyway.

The other side of this is that it seems to me that crypto in general seems to be a pretty useful idea. For example, Steemit is releasing its own ethereum-like blockchain for authors. Yet, the biggest difficulty at the moment is getting crypto writ-large adopted. And the funny thing about investments and sentiment is that if people don't like something for fear or whatever reason they're just not going to buy it if there is another investment that appears safer.

ARE YOU SURE THAT DIGITAL CURRENCIES ARE LIKE CASINO CHIPS, MI QUERIDO?

Well, obviously, Gran Gran, it's not a perfect analogy.

There are several points to make where casino chips that carry a value of a stake in the casino and digital currencies are not alike. For instance, casino chips are physical, thus are not as safe to secure. And casinos, in general, have one major objective in mind, securing their house edge in their gambling games whereas blockchain technology allows any number of coded uses on top its original, hopefully open source code. Casino chips are simple and should have a centralized administration to them. Blockchain, in general, is not and can take the form of any type of governance bound within its framework.

Well, that's the hope of any teaching analogy, to make things a little easier to get into. After all, we're talking with a Gran Gran here.

I'LL THINK ABOUT IT

So, for the time being Gran might not be in love with the idea of crypto, but I think she sounds sold on buying into a casino a little bit and going home with a few chips. If she starts holding onto her casino chips under her mattress bring up crypto again. :)

In the meantime, just take what I've written here with a grain of salt. I'd love to read your comments on this post as well.
Perhaps together we can nail down a way to help explain crypto in terms that are a little more accessible for everyone out there. I'm just hoping to create a launch pad for discussion. Thanks for reading!

We're all gonna make it!

Minderbinder

[Disclaimer: All the opinions expressed in this article are my own and are in no way meant to be construed as investment advice. And the photos are from www.stockvault.net, which is a great source for free photos.]