Younger generations are tech-savvy, happier to challenge institutions, and financially vulnerable. This might be great news for crypto scammers.
Earlier this year, American magazine The Baffler published an article by English professor Patrick McGinty, titled ‘Everywhere in Blockchains’.
The piece details McGinty’s journey in crypto, which begins with his musings on the 2008 financial crisis and the need for political and economic change, and steadily charts his course from crypto enthusiast to crypto sceptic (he still holds ethereum and bitcoin).
I could relate to his origin story. In December I wrote about the appeal of cryptocurrency for people who feel excluded and marginalised by the financial system. There is no shortage of these people and, as a millennial, I am keenly aware that the Bank of England has warned of 7% inflation this year (currently 5.5%), average pay not keeping pace with inflation, and house prices rising at a significantly faster rate than average pay. Like McGinty in 2008, I wonder if a solution is on its way.
Crypto and decentralised finance (DeFi) are sometimes presented as this solution, and not without a convincing argument. To make the point crudely, DeFi hints at the opportunity of borderless finance, individual control over wealth, lower barriers to entry for investors, an opportunity to elevate marginalised groups and, accordingly, a more democratic basis for finance. It also takes power from governments and banks, which some will regard as a good thing.
Let’s square this up with millennial attitudes. Deloitte’s Global 2021 Millennial and Gen Z Survey reports that 69% of millennials and 66% of Gen Zs believe that wealth and income are distributed unequally throughout society.
There is also a growing sense of economic and social/political pessimism. More than four in 10 respondents expected the social/political climate to worsen in the year ahead, and over 40% believed their local economies will be worse off within a year.
This is just a sprinkling of data, and the pandemic inevitably influenced it, but it indicates why DeFi and a new system might appeal.
And DeFi clearly does appeal to younger generations. Cryptocurrency exchange Gemini reported last year that crypto investors are most likely to be aged 18-44 and, conversely, that most people with ‘no interest’ in crypto are aged over 55. Similarly, and to look at an even younger cohort, GoHenry’s 2022 Youth Economy Report suggests that 1.33 million children in the UK aged between 6-18 hold cryptocurrencies.
My premise is essentially this: many younger people want a secure financial future and are open to the idea that we can create a better system. But is DeFi the right system?
There are many people who say ‘no’. One such person is David Golumbia, an author and associate professor at Virginia Commonwealth University, who in 2020 published a paper that was diplomatically titled, ‘Cryptocurrency is Garbage. So is Blockchain’. The paper, an acerbic challenge to crypto culture and logic, makes for a fascinating read regardless of your take.
Golumbia does not hold back when I speak to him either.
‘I think cryptocurrency is a giant Ponzi scheme and people are getting ripped off like crazy,’ he says.
‘I try not to deny that some people may benefit along the way.’
He counters, however, that it works in a similar manner to gambling.
Another of Golumbia’s criticisms is that crypto wealth is concentrated among a handful of big players. The National Bureau of Economic Research recently reported that just 2,258 crypto addresses control 7.9 million bitcoins, which is close to half of the bitcoins in circulation.
While authors Igor Makarov and Antoinette Schoar say it is impossible to analyse crypto wealth distribution with 100% accuracy, it seems plausible if not certain that crypto has a wealth distribution problem.
I am reminded of the millennial and Gen Z views on wealth inequality and McGinty’s reflections of political discourse on wealth inequality in the wake of 2008. Who remembers ‘We are the 99%’? We should think twice before conflating the politics of DeFi with the politics of inclusion.
A playground for grifters
Golumbia believes that DeFi is a playground for grifters, and he is not alone. I also got in touch with the Twitter account Bitfinex’ed, which has more than 75,000 followers. They told me that DeFi is not actually decentralised. They add that it is not scalable, and to stay away from anything involving crypto.
‘Blockchains do not scale to handle the amount of transactions needed,’ Bitfinex’ed said.
‘In fact, they are anti-scaling. When you add more capacity to the internet, the amount of business you can conduct on the internet increases. When you add more capacity to blockchain networks, the network adjusts to slow it back down so that it conducts transactions at the same rate.’
I should add that transaction times are contested. Most agree that bitcoin and ethereum cannot handle many transactions per second, but other cryptocurrencies such as solana are claiming to have comparable transaction speeds to Visa.
On a completely unrelated point, a lot of the coins, non-fungible tokens and DeFi projects I have seen appear to be, bluntly, rubbish. For an illustration, longstanding Wikipedia editor Molly White has created a website called Web3 is Going Just Great.
Alongside stories of the disastrous, criminal and farcical in DeFi, White has created a ‘grift counter’ in a bottom corner of the site that tracks the amount of money lost to grifts and scams. The total, by her reckoning, is just shy of $8.4bn (£6bn). Separately, there is an extensive list of dead crypto coins available at Coinopsy.
There have been some laughs along the way though. A highlight would be the disastrous promo video for private crypto island Cryptoland. Featuring an animated crypto fan named Christopher and a talking coin called Connie, it is genuinely one of the most challenging things I have watched. Many attempts have been made to remove the video from YouTube, but it can still be found if you look hard enough.
A brave new world?
Back to the point of this article. Some people think there is no value at all in DeFi. Others think it is the future of finance. Whichever side of the fence you are on, make sure you exercise caution. Gemini’s research suggests that 91.8% of current and previous cryptocurrency owners in the UK have a household income below £100,000. I hope they are only investing sums they can afford to lose.
Previously I wrote about why traditional finance’s failings have made DeFi appealing. This time let me outline why traditional finance has its merits. Firstly, it is regulated and, in the UK at least, you can often fall back on the Financial Services Compensation Scheme if a company you have relied upon fails. This covers you for up to £85,000 on bank accounts, mortgages, pensions, insurance and more.
Also, as Golumbia points out to me, the regulated world is home to hundreds of fintech innovations and attempts to make finance more democratised and inclusive. Golumbia emphasises that he is not on the Vanguard payroll but offers up the asset manager as an example of why conventional finance offers hope.
‘[Vanguard founder] Jack Bogle was quite clearly in favour of democratising access to investing and cutting out the middleman. That’s why Vanguard is direct-to-consumer, low fees and clear about what it’s selling. And you’re not going to lose your money with them.’
One of the problems, I would add, is that conventional finance is not exactly sexy. Friends have asked me for investment advice in the past (I am not qualified but know people who are), and when I say ‘diversified portfolio of holdings’ I can see the life draining from them.
I will acknowledge that this contrasts with my suggestion that millennials are primarily motivated by a desire to create a better world. No generation is immune to a get-rich-quick scheme.
On that point, this is also an opportune moment to champion financial advice and set realistic expectations. With proper financial advice, we can help people understand what they are getting into and the risks associated with crypto. I do think, nonetheless, that this message dulls in contrast to talk of a new financial world in which you might become very wealthy.
Am I saying to avoid all things DeFi and blockchain? No, as it happens. I have heard some very convincing arguments in favour of them too. However, if you are a millennial or younger, you may want to consider that crypto does not offer a pleasant stroll through a luscious meadow.
There are people acting in bad faith, people acting with opacity, and you can reasonably argue that DeFi offers a worse economy than a centralised one. And this is before I have mentioned energy usage, the drawbacks of anarcho-capitalism and countless other things.
When I spoke to McGinty for The WealthTech Show, he said: ‘In many ways I’m a total mark for what crypto should be.’
I think I am too. I like the idea of a fairer financial system, and I am clearly not alone. Even so, let’s apply serious scrutiny to the new systems we are engaging with.
Read full story on City Wire