“In the following months, we engaged in a series of philosophical conversations about cryptocurrencies with our friend to learn more. Concurrent with this quest for knowledge, the paper value of our modest investment began to soar, which had the understandable effect of increasing the urgency of our research. We distinctly recall drawing two circles on a piece of paper. In the circle on the left, we wrote ‘real economy,’ while in the circle on the right we wrote ‘crypto universe.’ We drew two pipes between the circles – one flowing into the crypto universe and the other flowing back to the real economy – and labeled both pipes with ‘fiat currencies.’ While we understood how fiat currencies from investors could flow in, we failed to grasp what could be occurring within the crypto universe that would create more fiat currency for investors to take out at a later date. There seemed to be many brilliant people excited to be working in the space and using a technical language foreign to us, so we concluded that our inability to understand this rather pertinent issue was a fault of our own making.”
While many crypto enthusiasts ridiculed our analysis and filled our comments section with vitriol, missing from their trolling was a compelling reason why our model was wrong. If fiat is your framework, how could it be? To be sure, many said a similar analogy could be drawn with gold, but gold is directly traded in fiat and the size of the gold market is a fraction of the global circulating supply of fiat.
