More and More Crypto Crashing and Burning as DeFi (Decentralized Finance) Misbehaves

Dear patient readers, yes, your humble blogger should be writing more about crypto. But I regard the project as being as appetizing as having to dissect a turd. Let’s underscore some key issues: there’s no reason for regulators to have sat pat when crypto was starting out and at not much more than hobbyist stage. Banks and monetary authorities would not benefit from having currencies outside their purview, charitably assuming that crypto ever grew up. From the beginning, its mains uses have been and remain tax avoidance, money laundering/facilitation of crime, and speculation. Oh, and one can add exploitation of users. None of these are societally valuable. It may not have been possible to completely tamp out crypto, but it could have been subjected to enough prohibitions and/or regulations to render it a fringe activity.

Instead, the continuing rout is pulling down even more players. I have to confess that I have not heard of these firms despite their alleged significance. Today, the Financial Times has a new article on how three “decentralized finance” or DeFi platforms, Maker DAO, Bancor and Solend, have all had to break their own rules to save their businesses, customers and previous commitments be damned. Crypto maven David Gerard, in It’s Time for Regulators to Put Crypto Down in Foreign Policy, focuses on how the withdrawal halt imposed by “crypto investment” firm Celsius on June 12 triggered a further downdraft in the crypto market. The Guardian also has a fine, if a bit daunting for the newbie article on Celsius, What the crypto big freeze means for your money. TL;DR: Assume it’s gone poof.

The Wall Street Journal has also published a new trying-to-make-sense-of-it-all article, The Fire Burning Beneath Crypto’s Meltdown.

Before going into the particulars, let’s again look at why the crypto project was destined to go awry. First, it was always a technology in search of a market, which is generally not a sound idea, since customer needs are too often butchered to fit the Procrustean bed of the technology, or alternatively, as happened here, all too conventional and risky work-arounds were implemented. For instance, one of the big original selling points of Bitcoin was that it would be a “hard” currency, not at all like fiat currencies, because it had a limit on how many coins could be issued. Instead, Bitcoin was lent (rehypothecated1) and loaned against, creating leverage that appears to considerably exceed the original value of the Bitcoins. And the crazy proliferation of new coins was another way to massively expand “currency” supply.2

The result was the reverse of a prized inelastic and comparatively stable (in some sort of mythical real economy sense) marker. From the Journal:

The appeal of gold today is that it acts as a haven in bad times, and typically acts as a partial hedge against inflation. Bitcoin holders have discovered that not only is it not a hedge against inflation, it isn’t a haven either. Its price tends to move in line with risky assets, not safe ones. The gold price is up 4% in the past 12 months as inflation has soared, against a fall of 12% in the S&P 500 and a 43% loss for bitcoin. Digital, sure. Gold, not so much.

Another fundamentally misconceived notion was that crypto and blockchain would serve as foundations for a decentralized, as in fairer, as well as cheaper financial system. Instead, the promoters, whether out of ignorance or malign intent, have wound up looking like the itinerant cook of the Stone Soup story, where he tells the locals he’s making a terrific soup by boiling a stone….but if he only had an onion, then it would be even better. His list of soup enhancements keeps growing.

Similarly, crypto DeFi touts have found out that to have a proper financial system, you need custodial services, legal disclosures, record-keeping, payment services, tax reporting, investment products…the list goes on. And yes, current payments processors can overcharge due to their monopoly/oligopoly status, but that’s the sort of thing that can be addressed by regulation. Offering up alternatives that don’t deliver on their promise diverts energy from getting transaction and other charges down.3

And crypto isn’t very good for its supposed core use, payments. Bitcoin has huge and rising energy costs and has much slower processing speeds than the Visa/Mastercard network. Those problems are inherent to crypto. As the Journal explained:

[Bitcoin] failed to take off as a medium of exchange, as it is clunky and costly to use. Other cryptocurrencies are somewhat more practical for transactions, but all suffer from a core problem: The more they are used, the more expensive transactions become as a way to regulate capacity on the network. Like Uber, Bitcoin has surge pricing built in.

“In a way congestion is a feature, not a bug,” says Hyun Song Shin, economic adviser and head of research at the Bank for International Settlements in Basel. For normal currencies “network effects mean the more the merrier, but crypto achieves exactly the opposite, the more the sorrier.”

As I suspect most of you realize, it takes a special talent to be below what passes for standards in the likes of Alabama and New Jersey, both ranked among the most corrupt states in the US

Oh, and while we are talking financial services like custody (as opposed to keeping your crypto on your hard disk and being at risk of disk death, loss, theft, and forgetting your password, all of which have happened), and the perceived safety of gold, how about security? Fuggedaboudit. From Foreign Policy:

Bitcoin advocates have largely switched away from claiming that the cryptocurrency can function as an actual currency, mainly due to it still being largely unfeasible to pay for anything in it. Now the claim is that bitcoin is a “store of value”—that is, an asset that won’t lose its worth over time. This has been dramatically shown untrue. More than that, the storekeepers were shoveling the valuables into their own—U.S. dollar-denominated—vaults….

Celsius said it could replace bank accounts and claimed a million customers. The company offered eye-popping interest rates—on the order of 18 percent annually. But Celsius’s interest rates were frankly implausible. You can’t get more than a few percent return anywhere in the current economy. If anyone offers 18 percent, your first thought should be: “What’s wrong here?”

Celsius had already been thrown out of Alabama, Texas, Kentucky, and New Jersey because its interest-bearing accounts were, functionally, unregistered offerings of securities. The U.S. Securities and Exchange Commission had been looking into Celsius since January 2022—but was yet to act against it.

The other problem was that Celsius was intertwined with many other crypto firms, including lending firms offering similarly implausible interest rates. This wasn’t a rogue operator; it was one part of a systemic risk—comparable to Lehman Brothers during the 2008 financial crisis.

Now let’s turn to the Celsius freeze and then to the Maker DAO, Bancor and Solend implosions. First to Celsius. From Foreign Policy:

On June 12, the crypto investment firm Celsius stopped all withdrawals, claiming “extreme market conditions.” The market went into panic. The price of bitcoin plummeted from $28,000 to $20,000. By June 14, reports emerged that Celsius was “restructuring.” Within a week, bitcoin crashed again…

Behind all this was a toxic waste dump of unregulated, dubiously sourced investments. Bitcoin’s price started rising in 2020 and launched into a new asset bubble in early 2021, peaking at $64,000 in April 2021 and again at $69,000 in November 2021. Both price pumps coincided with the injection of several billion tethers, a dubious dollar-equivalent stablecoin, via unregulated offshore exchanges. The real interest, and real dollars, came from ordinary investors when Elon Musk started talking up crypto in January 2021 and bought bitcoins for Tesla in February. When Tesla was reported to have sold the bitcoins in May, many of those investors exited the market. (Musk later claimed that he had sold only 10 percent of the holdings.) Without their actual dollars, the price of bitcoin crashed back to $31,000 by June 2021…

There were nowhere near enough outside dollars to pay out crypto holders’ paper wealth. The industry had to come up with more elaborate schemes to lure in fresh outside money. Venture capitalists frantically promoted NFTs and Web3—though it was never clear what “Web3” meant. Crypto companies even ran ads during the Super Bowl in February, marking the point at which an industry has reached nearly every American consumer, and there are no fresh customers left.

The Guardian gives more of a Matt Levine of Bloomberg level explanation, absent the trademarke Levine “You didn’t understand this was a casino and you were the mark?” chipperness:

It’s easy to treat money you can’t access right now as the same as money you can while the times are good, but when things get tricky, the difference becomes stark, and you have entered a liquidity crisis.

This problem isn’t affecting only depositors, it is also the main problem for Celsius itself. The crypto bank has a lot of money locked up in a convoluted crypto derivative called stETH, and can’t get it out.

It seemed like a great idea. Ethereum (ETH), is one of the most popular cryptocurrencies, but investment opportunities for the currency are slim. At the same time, there is a parallel project, ETH2, which is run as a test network for a new type of blockchain called “proof of stake”. In proof of stake, people “stake” their cryptocurrency – locking it up for a period of time – in order to generate raffle tickets from verifying transactions. The result is similar to earning interest at a bank, if doing so also gave you a vote on how the bank is operated.

So Celsius used an intermediary, called Lido, to take ETH invested by customers, and stake it on the ETH2 network, earning interest in turn. But there’s a problem: you can’t turn ETH2 back into ETH until the two networks merge at some point in the future. (Like self-driving cars, augmented reality and Linux on the desktop, the date of this merge is months away, and has been months away for about three years.) So Lido gives users a new token, called stETH or staked ETH, to represent their ETH2 claims.

Owning stETH should be great: it reflects not only the ETH you have locked up, but also the gains that ETH will have made by the time the merge happens. And, unlike deposits in a bank, if you need to get some ETH back, you can just sell the stETH to someone else. Until you can’t find buyers for your stETH, at which point bad things happen.

That seems to be the situation Celsius found itself in in early June. The not-bank had already taken a hit on the collapse of the Terra/Luna stablecoin, and as the crypto market fell, depositors began withdrawing their ETH. Each withdrawal required Celsius to sell a little more stETH to a rapidly declining pool of people who were willing to buy it, until, in early June, it ran out of buyers on the main exchange: you could not sell stETH at any price. The stETH still has value; the money is still there; but Celsius cannot access it.

The Guardian author continues to explain that this looks like a liquidity crisis, but it might just be a solvency crisis. Given that Celsius was offering an 18% interest rate, my bet is on solvency crisis.

The Financial Times explains how Celsius knocked over more dominoes, specifically Maker DAO, Bancor and Solend:

In the past week, three decentralised finance groups have stepped in with emergency plans to protect their projects and users from economic pain in the face of tumbling cryptocurrency prices.

The three platforms — Maker DAO, Bancor and Solend — are not household names. But they are prominent in the world of decentralised finance…

DeFi has also garnered a reputation for being the wildest of the “Wild West” in the largely unregulated crypto world, with regular thefts of tokens worth hundreds of millions of dollars as hackers exploited poorly designed systems…

Last weekend, users of Solend, a lending platform built on the Solana blockchain, proposed taking control of the wallet of its largest user. The operators feared the repercussions if the Solana coin, which dipped below $27, dropped to $22.30, a price that threatened the platform’s economics…

Bancor meanwhile cited “hostile market conditions” as justification for temporarily pausing a service that meant users were no longer protected if their deposited tokens were subject to big market swings….

And Maker DAO, a collective that runs the Dai stablecoin — a crypto token that is designed to be pegged to the dollar — voted to freeze a link to lending platform AAVE, because of the latter’s exposure to another struggling lending platform, Celsius.

Running a trading network through a consensus vote in theory means users have more say in the future of the project, according to Ingo Fiedler, co-founder of the Blockchain Research Lab and professor at Concordia University in Montreal, Canada. But this is not always the case, he noted.

“Governance is highly concentrated among a few players that can potentially co-ordinate to change the rules to their benefit and at the expense of other users,” Fiedler said.

This sounds an awful lot like, “All animals are equal but some animals are more equal than others.”

Mind you, these articles, because MSM, are pretty tame. For some real fun, have a gander through Bitcoin Is A Hideous Monstrosity Made Out Of Computers And Greed That Must Be Destroyed Before It Devours The World, Part I. Some choice bits:

The cryptocurrencies themselves (sometimes called “coins”) are just the mechanism the cryptocurrency cartel uses to extract capital from people who are gambling. The coins have no other purpose and are basically totally unimportant to this or any other story about cryptocurrencies. Coins come with names like Bitcoin, Ethereum, Avalanche, MagicalInternetMoney, Ripple, and Dogecoin. There are some 1,723 of these in circulation. Most of them are commonly known as “shitcoins.” There is sometimes truth in advertising.

I don’t think calling cryptocurrencies “demonic” is much of an overstatement. Cryptocurrencies are not currencies. There is some cryptography involved but there is also cryptography involved in sending your mother a text message on your iPhone. The places these cryptocurrencies are sold are not “markets”. They are gambling platforms that are preying on and destroying (mostly) young people’s lives financially and psychologically. Underhanded tactics are constantly deployed to get these young people to bet more in riskier ways. The businesses profit by financially and psychologically breaking the players. They cheat their customers with the numbers (as of last December, 90% (!) or more of listed trades are fake according to Nasdaq) and even more so they cheat them with psychological pressure tactics. And then there’s the billions of dollars lost to just outright theft…

Let me interject that I only really consume media about how humanity is a train wreck. Documentaries about wars, manias, the mentally ill, financial fraud, serial killers, non-serial killers, prisons — that’s my jam. Which is to say I have a pretty high tolerance for Darkness. And yet when I took a dive into the world of cryptocurrencies, I felt like I was looking at a kind of darkness humanity hasn’t encountered before… a kind of amoral cyborg monstrosity, made out of computers and greed, rising from the internet, that was already well on its way to taking over the world by the time I really noticed it.

Other experts on this beat have been regularly sounding alarms:

For instance:

Enough for today’s installment. I suspect we’ll be returning to this topic as the unwind progresses.


1 Those of you who remember the finer points of the global financial crisis will recall that how many times a security can be rehypothecated in the US is limited by the SEC, but the UK then had no limits. Lehman’s London office rehypothecated a lot of dodgy stuff more than would have been allowed in the US, and that rehypothecation played a factor in its unwind. I’m being bad by not scouring the archives for more detail, but the geekier commentators were all over this part of the unwind.

2 Remember crypto is not currency. Aside from the fact that the IRS does not regard crypto as a currency but as property, like trading baseball cards, it’s barely used in the real world (aside for criminal activities!), so users are forced to transact in and out of real world currencies and incur FX risk and transaction costs.

3 Don’t pretend this never happens. The SEC is about to end payment for order flow. And before you say no one was harmed, so how did Citadel get rich from it? Even if Citadel was only scraping micro-amounts across huge volumes, it was still a cost to retail. And that’s before getting to possible front-running, since the big brokers/fund complexes would at least send all their overnight orders before the trading day started…

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  1. John Emerson

    Presumably there will eventually be a secondhand market fairly soon for the hardware used by bitcoin operations. I don’t know anything about that hardware but as I understand there are tons of it.

        1. JAC

          Can’t wait to buy these up and make a new Linux PC with a blazing fast display! But what a waste of resources in our burning world…

          1. TheMog

            You probably don’t want an ex-mining GPU. Most GPUs aren’t really designed to run under maximum load for weeks and months at a time, so they tend to prematurely age and end up having a much shorter total lifetime as a result.

            1. Timh

              An engineer at Nvidia told me exactly that years ago. Power tracks on die aren’t as wide as they should be for long life, so narrow at one end due to metal migration and eventual go open.

              Fine for normal use, not for for bore 100% of the time.

              Ditto aircraft piston engines are designed for continuous operation at a high power output, and car engines are not.

          2. Alex Cox

            Don’t tell the Guardian writer you have a desktop GNU/Linux system! He assures his readers that they’re still years away…

          3. digi_owl

            Speaking of that, you can run a whole laptop on half of what high end GPU of the latest vintage pulls on its own these days.

            Desktop power supplies have to come with their own special connectors just to feed these digital cuckoo chicks.

            And all this simply so that people can draw more lines on the screen pr frame, as the quality of the 3D graphics have largely stayed the same since the industry introduced the programmable shader.

      1. Dagnarus

        GPU’s are used to mine Ethereum. Not bitcoin. Bitcoin requires specialised hardware which can only mine bitcoin. The ethereum miners can potential recoup some of there losses by selling GPUs to gamers/machine learning. The only use for the old bitcoin mining equipment, is 1) mine bitcoin. 2) raid the bitcoin network in 51% attacks.

    1. Wukchumni

      The whole mining angle was kind of brilliant, it made Bitcoin enthusiasts in a way, feel like they were mining for all that glitters-the same approach, kind of.

      1. johnherbiehancock

        it’s amazing to me how long this has gone on, and yeah, mining had a “make money by being clever and participating in this new tech thing” aspect. That did seem to reel in a lot of people who should’ve known better.

        I had an otherwise erudite colleague – this would have been no later than 2010 – ask me if I thought we should use the 30 or so desktop workstations we had handy for temp doc review attorneys to mine bitcoin whenever they were free.

        I told him that was against company policy (misuse of company assets), and there’s no way IT wouldn’t catch that anyway.

        Though … Given the things IT later screwed up, I’m not so sure about the second part

      2. digi_owl

        Bingo. It was all about plucking the heartstrings of the gold bugs. Get in early on a digital recreation of the California goldrush.

        Except that if you read up on history, most people that made it rich there were the merchants and land owners that could extract “rent” from the hapless prospectors gambling away what little savings they had.

        Last i heard, Nvidia was reluctant to specify how much of their sales had gone to “miners” during their conference call.

  2. Joe Well

    Crypto is a good litmus test, like Covid minimization.

    I have lost so much respect for so many luminaries who supported it, and gained respect for others.

    And then there are the ones who are both crypto skeptics and Covid minimizers.

  3. PlutoniumKun

    I noticed a comment by someone on social media recently that they know a lot of early wealthy retirees returning to the workforce because they were bored with long lunches and hobbies. I couldn’t help wonder if the real reason was crypto losses. I’m very glad this market is crashing, but I can’t help thinking that its going to take a lot of peoples savings and dreams with it.

    1. super extra

      Yes, the human collateral damage on this is probably going to be huge. I had a boyfriend some years back who had gotten into bitcoin when it was nothing and by ~2013 it was his primary income. But without asking too directly I could tell that he was not being legit with the tax or other implications and the thought of mixing finances long term with the guy was enough to spook me off a serious relationship. I’ve heard horror stories from other women, mostly of the ‘guy secretly utilized the couple’s savings for crypto speculation, lost everything plus more, then killed himself’ variety.

      1. Joe Well

        Anecdotally, did you ever hear of someone’s *girl*friend getting heavily into crypto?

        The male-heaviness of the crypto world was one of the many red flags that this was not a more intelligent, fairer and egalitarian model of finance, but a kind of subculture like sports betting.

        And no, the tech world in general is not nearly this lopsided.

        1. albrt

          I have a female friend who got into crypto relatively recently, but it was on the advice of her boyfriend.

        2. Zsx

          “And no, the tech world in general is not nearly this lopsided.”

          LOL. Yes, it is. And “male-heaviness” is pretty much invariably observed when it comes to speculative/risky activities of every kind (which are also often associated with rare but substantial rewards), and this division between between the sexes is glaringly obvious, across cultures and across history, to anyone who isn’t mind-killed.

          1. Thistlebreath

            See, also: Gamergate.

            Tech Bro’s are toxic and numerous.

            Ask any woman who worked @ Blizzard.

          2. digi_owl

            Welcome to biology 101.

            Take a look at most species of bird, and you find that the male is the eye catching one while the female blends in with the local fauna.

            This makes it a bit funny to look at things like the Oscars where it is the ladies that are all in these eye catching outfits, while the men invariably turn into a black and white blob.

            Humanity likes to think of itself as enlightened, after all we know how to ward off diseases and tame lighting and fire. Yet time and time again a trip to the local “watering hole” allow one to observe behavior that is not far removed from a nature documentary.

        3. CryptoBro

          This is a lot of speculation from people who haven’t been “in” crypto. I worked at a blockchain “company” for about a year. It was a woman who brought me into the company. The company leadership to this day includes female executives although I wont mention the nepotism there. Not many but the very young and gullible (there were a couple) had any illusions about the scammy nature of the work. They paid us in fiat handsomely, especially when compared to FAANG. The CEO is male, and many in his inner circle favored young men (not so much young ladies).

          1. Yves Smith Post author

            The plural of anecdote is not data. And we have much better anecdata from the 2021 Bitcoin conference:

            For every woman at this conference, there are five men. Women who are interested in money are suspect in general, but even more so here. Later, I will hear a group of men discussing how to discern between women who are genuinely interested in them and the ones who are hired by the venue to sell more overpriced bottles of liquor. A man pats me on the shoulder encouragingly when I clap for a comment about the CPI Inflation Calculator to tell me how clever I am. He later strikes up a conversation with another woman behind me about how detrimental feminism is to human civilization. Later that day I overhear conversation about a woman’s place in the Bitcoin community. “I don’t really trust women who are into crypto,” says another attendee to his friend. “She’s either lying or looking to take your money.”


            Women are acceptable in sales. Attractive Asian women are a staple in private equity and hedge fund investor relations.

            1. CryptoBro

              Sure, intentionally vague and anecdotal as to not be exposed to legal ramifications. However, take from my comment what you will. The woman I mentioned who brought me in was not sales (although she is Asian, as are many employees, and as am I) she is technical, and this is more a feature of having to deal with an active user base primarily in China (for obvious reasons like the ease in while large sums of money can be transferred while avoiding the banking system there). Truly the USA is not the primary market for crypto as much and people erroneously believe. KYC is a hassle & SEC is a liability. Anyways, this was not a sh**coin company, and while male dominated as is much of tech, there are women present in technical and powerful roles, and they are sharks too.

    2. Joe Well

      >>I can’t help thinking that its going to take a lot of peoples savings and dreams with it.

      Yes, but they disproportionately included some of the most obnoxious men (and they are almost all men) in our society.

      I met some bright guys (again, all guys) who got in in the very early days, but not since 2012 at least.

    3. polar donkey

      I remember reading in 2020 that 20% of home purchases used cryptocurrency gains towards down payments.

  4. FreeMarketApologist

    The Bank for International Settlements (BIS, the think tank for central banks) just released a paper (bulletin 58, 16 June) which should be a significant nail in the crypto coffin: the risk of crypto coin miner misbehavior:

    Cryptocurrencies such as Ethereum and decentralised finance (DeFi) protocols built on them rely on validators or “miners” as intermediaries to verify transactions and update the ledger. Since these intermediaries can choose which transactions they add to the ledger and in which order, they can engage in activities that would be illegal in traditional markets such as front-running and sandwich trades. The resulting profit is termed “miner extractable value” (MEV). MEV is an intrinsic shortcoming of pseudo-anonymous blockchains. Addressing this form of market manipulation may call for new regulatory approaches to this new class of intermediaries.

    They’ve also said “Structural flaws make the crypto universe unsuitable as the basis for a monetary system: it lacks a stable nominal anchor, while limits to its scalability result in fragmentation. Contrary to the decentralisation narrative, crypto often relies on unregulated intermediaries that pose financial risks.”

    At the same time, they’re floating the feasibility of central bank digital currencies in their recent annual economic report.

    Both docs are highly readable (as is most everything they publish).

    1. Susan the other

      I’m under the impression that CB digital currencies are fully regulated, or will be. Many of the questions at the hearing yesterday with Powell were about digital regulation. It’s a work in progress. And it has nothing to do with crypto at all.

      1. digi_owl

        Best i can tell, the major interest from CBs in “crypto” is the underlying blockchain ledger tech.

        A major pain with banking right now is that of clearing, or settling the books between the trading days.

        When your bank transfers money to my bank, both note the transfer and then have to send off their notes to an independent clearing house for verification.

        The idea is that the blockchain, being a ledger that can only be amended and is verified cryptographically by participants, can replace the clearing house.

  5. Thuto

    Meanwhile, Michael Saylor stacks up the soapboxes to double down on his thesis that bitcoin is going to save the world. It’s understandable mind you, the guy bet his entire company on it (literally taking out billions in loans to go all in on the crypto currency) and like Sisyphus trying to roll a boulder up a hill, he’s trying to roll the rosy bitcoin story back up to its cheap money induced crescendo, but the music has stopped and the crypto maximalists are fielding margin calls.

  6. Cristobal

    It is very simple. As described by a famous investor: Bitcoin es rat poison squared..

  7. Tom Stone

    When salesmen use words like “Fantastic” or “Incredible” they are being honest.
    An 18% return?
    “And two to take him” seems appropriate.

  8. Ignacio

    Some friends of my son (Informatics Engineer) have been involved in cryptocurrencies an he was impressed by the enormous benefits one could make. Fortunately, my son was not shy to comment this at home and both, his mother and me, insisted once and again that the crypto-cassino is risky business and prosecution futures (Hat tip Yves Smith and NC community) and that he should concentrate in more constructive tasks. Yes, the younger have been the preferred targets of the cassino and I am glad we helped our son staying away from it. I still wonder how many have been trapped on this and how much of it could be considered the fault of regulators.
    Did I tell you about my superb stone soup?

    1. Wukchumni

      I know nobody around my advanced age that has invested in crypto-not one person.

      Spent time with my 29 year old nephew last month who’s a doctor that graduated from USC and he related that he knew of around 50 friends that had lost from hundreds of $’s on crypto to as much as $10k.

      In some ways I get it, the crypto of my youth would have been rock ‘n roll music, no way no how were we gonna listen to Perry Como or classical, not a chance.

      But there was no risk (aside from your eardrums being assaulted at a concert) involved nor implied return aside from enjoyment.

      What effect will the eventual crashing and burning of cryptos have on young adults as they age?

      Methinks they’ll be incredibly wary of anything in an investment scheme for the rest of their lives.

      1. Michael Hudson

        Yes, I think it’s largely an age thing. I don’t know anyone who invested in crypto — except Max Kaiser. He kept bringing it up on his show, and I said I didn’t understand any way that it was positive, so he got off that topic because his audience consisted largely of gold bugs and pro-crypto fans.

        1. Jokerstein

          I’m wondering if this will create another Depression-mentality generation in 20-40 years, where ANY discretionary spending is a psychological struggle.

          Although it may be the case that the people who might be part of it will be mentally and physically too badly damaged.

      2. polar donkey

        I knew when gas stations first started getting cryptocurrency kiosks that the end is nigh. Most dimwit drug dealers would go to the gas station and buy crypto as some sort of clever way to launder their money.

        1. Wukchumni

          My clue was the Coinstar* machine pushing Bitcoin, I couldn’t believe it~

          * say, is there some potential for CoinstarCoin?

    2. Samuel Conner

      > more constructive tasks.

      > superb stone soup

      The thought occurs that one can multiply value with relatively little effort by planting seeds in soil. It’s IMO a tragedy that this is not part of the elementary school curriculum. That might also be a way of noticing the personality types that are likely to want later in life to go into unproductive forms of finance, rather than making real things. It would be really useful in future to identify these early and try to implement corrective measures.

      1. caucus99percenter

        > planting seeds in soil

        > making real things

        So important. Just as the folks who run “Waldorf schools” (primary schools in Germany guided by Rudolf Steiner’s writings / the Anthroposophist movement) have always said.

      2. drumlin woodchuckles

        Planting a seed in soil shows the difference between wealth and money.

        People unclear on the difference should be asked if they think that if they plant a dollar bill in the soil, that they will get a dollar bill vine which will grow dollar bills?

    3. Joe Well

      Stone soup is a poor metaphor for crypto since the soup in the end benefited all who invested.

      1. Skip Intro

        What if the stone was some soluble form of polonium or something equally nasty and insidious?

    4. digi_owl

      Observe nature. The teen to 20-somethings are invariably the most adventures lot. And also the age group most convinced that they can pull off what their parents and grand parents could not, no matter how much evidence to the contrary is provided.

      It is why i have long been convinced that a blanked ban on say youth drinking is hopeless, and instead they need a place and time to experience the ups and down of it first hand. This while being observed by people with their best interest in mind and the training to deal with an emergency as effectively as possible.

  9. Bobby Gladd

    My BS meter immediately went on Tilt upon first seeing the Photohop mirage images of the shiny gold “coins.” Then we have the wonderful supporting metaphors such as “mining,“ “wallets,” “Blockchain“ “ledgers,” etc. So many Tells, so little time. What could POSSIBLY go wrong?

    BTW, the “CoffeeZilla” kid on YouTube is all over this crap. Delightful.

    1. Wukchumni

      Every article on Bitcoin has an old fashioned metallic coin as a prop, and if you’d like to buy one, it’ll set you back a few bucks on eBay.

  10. lyman alpha blob

    They called one of these things “Bancor”, did they? That ought to have old John Maynard doing some flips in the crypt.

    1. digi_owl

      The added irony there is that the IMF has effectively implemented Keynes’ old idea, under the label of Special Drawing Rights.

  11. super extra

    Another fascinating thing about the crypto crash is that it was supposed to be the next big wave of tech VC unicorn technology dominance, aka “web 3.0”. The blockchain was supposed to be integrated in so many things going forward and from that out spun all these pathetic imitators of the earlier technologies, like they were going to unseat Paypal (web 1.0 titan) or something. I guess Paypal didn’t get a country to use them as the central bank or whatever like El Salvador and Bitcoin, so at least it will go down in history as a first for something.

    The second funny thing about the stillborn web 3.0 is the near-daily ‘coin hacked’ stories with record heist values and secondary/tertiary hacker and fraudster characters emerging. As a hardware person I mostly deal with systems-level programming, a lot of web 3.0 technology is stuff I don’t know or care about at the web application level. This is a nice way of saying that I don’t think any serious technology of the level they were proposing can emerge out of the browser in general and javascript in particular (the majority of these platforms are node and consist of browser/mobile tools to integrate the clients with the platforms, the coin mining is different and a systems-level thing but that is not what I’m talking about here), so on a purely technical basis I’ve never expected anything ground breaking from the entire web 3.0 space. I did expect moderately better security out of the people who claimed they were going for Zuckerburg et al thrones. A lot of the hacks happened because of really arrogant and bad security practices, like checking seed values into a public version control system (so many levels of ha ha wtf there)

    1. digi_owl

      Silicon Valley has pretty much since the introduction of the personal computer, if not before, been on the hunt for technical fixes to societal problems.

      What is going on right now is the double whammy of fixing the problem of “proving” identity and property ownership.

      And their go to “fix” is cryptographic signatures. But anyone that has been around the web for enough time, has seen all the problems related to HTTPS, that use cryptographically signed certificates to “prove” that a site is what it claims to be.

      One common problem is that some IT peon forgot to refresh the certificate, resulting in every browser throwing a hissy fit.

      Another is that the root certificates need these elaborate security arrangements to access (almost nuclear silo like with multiple keys etc), as any one getting out means the whole house of cards come tumbling down.

      I will still use these systems, though because frankly i have no alternative.

  12. Bart Hansen

    Maybe five years ago I saw a puff piece in one of the newspapers on the Winklevoss twins. It came with a photo of them in their office with one of them swinging around his desk as though he was about to fly off to great wealth.

    Did they invent blockchains or the first coin?

    1. drumlin woodchuckles

      I believe they bought a bunch at pennies apiece and then sold part of that bunch for many benjamins apiece, and turned that part-of-a-bunch into actual money.

      So if the crypto they still hold goes to zero, they can still laugh all the way to the bank. They made a fortune off the greater fools’s misfortune.

  13. The Rev Kev

    I’m trying to think of a good word to say about Crypto but after reading this article, the only one that comes to mind is ‘hideous’. This is a deformed puppy that really needs to be put to sleep for good before it destroys more people and pumps more pollutants into our overheating environment. And when this happens, I will play the following song- (4:17 mins)

    1. Susan the other

      I’m curious is Larry Summers is the least bit contrite these days. Wasn’t it Larry who was pushing Facebook to create Libra? A genre of crypto in that it was non-sovereign.

  14. Random Thoughts From A Crazed Mind

    It is funny that a currency that is sold as valuable because no more of it will be created is offering 18% yields. Where does the interest come from? They do not understand their own concept.

  15. Objective Ace

    I’m reminded about a prior article on NC asking how the Fed could describe destroying jobs as a good thing? I think this is the perfect example–these jobs and circular economic activity absolutely needed to be destroyed. While the fed taking away the punch bowl will hurt the real economy it will at least benefit us in eliminating this aspect (although as Yves notes, regulation would have been better in the first place)

    1. Susan the other

      Makes me wonder if our explosive financialized system needed something like crypto to be a pressure valve.

    2. orlbucfan

      I am no expert on banking/finance but the whole crypto/bitcoin trip said S-C-A-M from the get-go. No one gets something for nothing, and that’s what raised my hackles on it. Yahoo Elon Musk cheerleading finished the job.

  16. Susan the other

    Well just Mother Mary. Thank you Yves for giving us this lovely summary. I’m having a vodka on ice because it is hot and I want to contemplate this dissected turd several times. It could even be Yorick’s ghost. Fraud is intent. So if not fraud, Decentralized Finance is at a minimum an oxymoron, embraced by shortsighted goofballs. And yes, our economy runs on shortsightedness. But decentralized? How? Which came first, finance or relationships? For now it is so nice to read the obituary of crypto coin. I do hope it is not “Crypto is dead, long live crypto.” Because we really do have a reality we must deal with.

  17. Tim

    I understand all the negativity around crypto, much of it deserved.

    But the reality is it isn’t going to go away. It’s easy to throw stones at something at the bottom of the bear market when the tide is out and you can see who has been skinny dipping.

    Reality is Bitcoin is still the best performing asset of the last decade and it isn’t even close.

    Reality is the brightest minds are starting companies in crypto, getting venture capital funding in crypto. It’s where creative economic development is currently focused.

    Crypto is a legitimate technology that provides incremental improvement in the managing of money and data, and that is its long term benefit.

    Crypto isn’t going away. It will eventually be regulated effectively to become additive to the real economy and real world assets.

    So yeah, plenty of grifters and stupid to go around, but don’t throw the baby out with the bathwater. It is part of the future, and younger generations are more than fine with that.

    1. drumlin woodchuckles

      Those younger generation people who are dis-guided and dis-informed enough to flush their wealth, life and energy down the crypto toilet will live to learn the reality of the saying . . .

      Food will get you through times of no crypto better than crypto will get you through times of no food.

      And . . . .

      When the last can of catfood is gone from the last shelf of the last Walmarts, then the Young White Man will learn he cannot eat crypto.

      Let us hope that The Purifiers deal justly with those people who conned the youth into thinking crypto was wealth. Or even money.

    2. lyman alpha blob

      What you call “brightest minds”, a lot of others call “grifters” and receiving venture capital doesn’t grant legitimacy to an enterprise. VC invested in Juicero too and there’s a lot of dumb money sloshing around in the economy these days.

      And yet you are probably right – crypto will still be around going forward because PT Barnum was right about the suckers. People still by lottery tickets too.

    3. eg

      Cryptos are real in the same way that casinos are real — they are electronic gambling tokens and if you don’t know who the sucker is at the table, well …

    4. Sibiryak

      Crypto isn’t going away. It will eventually be regulated effectively to become additive to the real economy and real world assets.

      I can’t wait!

  18. drumlin woodchuckles

    I have always prayed for every person to lose every cent they invested in every or any cryptocurrency.
    I hope that is what I see happening.

    I will here re-offer the No Crypto Pledge of Honor.

    ” I will not use or invest in Cryptocurrency, and I will not tolerate those who do.”

    1. Zsx

      Yay crypto BDS. Now do the same for the US dollar. And for oil. I’m sure there’s an Aesop’s fable about this sort of clever idiocy, but I can’t be bothered to look it up at the moment.

      1. howseth

        Crypto BDS? There are very good reasons to consider it not a syndrome – but realism. As pointed out: Highly polluting in an energy intensive manner in a time of global warming – something born of greed and theory (naive idealism?) – choice of cyber criminals… Hyped to the heavens by untrustworthy players.
        BDS? I think not… even if it gets a bounce now for a while.

        1. Zsx

          Try to think it through, howseth. First, maybe you’ve never heard of BDS (Boycott, Divest, Sanction). That’s okay. I was making a joke about drumlin’s No Crypto Pledge, i.e. “I will not use, invest, tolerate…” I don’t in any case know what syndrome you’re referring to or imagining. The irony may be lost on you, but “Now do the same for the dollar and oil” correlates fairly precisely with your “highly polluting in an energy intensive manner, etc.” and no less with “hyped to the heavens by untrustworthy players.” It’s a tangled web we weave, and my point, which I assumed was fairly straightforward, is that drawing the line at this late yard in the artificial sand is a fool’s play, securing not even a Pyrrhic victory but at best the do-gooder’s pouty self-satisfaction. What does it mean, “I will not tolerate those who do,” other than “I boast of my own virtue”? And yet woodchuckles and, I suppose, you, use and invest and tolerate all the rest of it, even “in a time of global warming,” because… Feel free, if the spirit moves you, to fill in the blank.

          1. drumlin woodchuckles

            I am too smart to waste my time explaining the difference between crypto and money to someone who is too dumm to know the difference between crypto and money.

            ” I show you the moon and all you can see is my finger”.

            ” I show you a mirror and you mistake it for a window.”

            1. Yves Smith Post author

              Don’t worry, he’s been blacklisted based on his content free attack on you further below. Being an asshole, which he did again above, is a violation of house rules.

      2. drumlin woodchuckles

        I see the pro-crypto hasbarists are out in force, patrolling the threads.

        I hope that you personally are very very heavily invested in crypto.

  19. Aumua

    All I know is that right now, everyone is down on crypto and is talking mad crap. On every channel, every direction I look. There’s blood in the streets, the fear is palpable, and I don’t know. I would never suggest it of course, but I might say that hypothetically, if you were into that sort of thing, that a time like now might be traditionally considered, by traders, as the right time to buy… an asset.

    I mean Tesla’s down 50% from it’s October highs, but you’re not hearing how awful that is, or how much of a bubble the stock market has been in, are you? No it’s just crypto that’s the big bad boogie man, even though it pretty much follows the traditional markets.

    1. Yves Smith Post author

      Um, you do remember that investors also came to loathe subprime CDOs? How have they fared over time?

      And remember all the dot-coms like and Boo that never came back?

      There will be some cryptos that survive due to the use cases of speculation, crime, and tax avoidance. Bitcoin almost assuredly will if nothing else due to name recognition. But it is also the most destructive due to its high energy costs.

      1. Aumua

        You’re not wrong. It is environmentally destructive, and as far as I’ve seen there aren’t many compelling real world use cases for any of it, at least not yet. It’s a speculative asset and it’s a bubble and previous bubbles have popped permanently, and it’s also wrecked many people financially, including myself at times.

    2. drumlin woodchuckles

      Yes . . . . fill the sky with yet more carbon so you can enrich yourself with that asset.

    3. eg

      An asset, by definition, is a claim on value (material or income) — cryptos have no material value, nor do they generate income.

  20. Phichibe

    This will be brief because I’m on my phone in my mom’s hospital room but I wanted to write to 1 thank yves for writing on a topic that she finds emetic and 2 because I have worked in distributed processing computing since the 1980s and in theory know this stuff (wrote book on net protocols, have patents on next gen net control).

    The blockchain innovation was a solution to a long known challenge in distributed computing called the Byzantine Generals problem. See Wikipedia for details. This is about how to ensure reliable updates of replicated data in a decentralized database network. As I understand satoshi nakamoto’s original paper, the idea of coins was a “reward “ for people contributing the computers’ computing cycles to keeping the distributed ledger consistent and synchronized. This meshed with the facile libertarianism (is there any other kind?) that pervades Silicon Valley and led to the nonsense that is DeFi, Web3, etc. btw, how can you trust something from an inventor who only uses a pseudonym ? Btw2, something that seems to have eluded the general press was the filing in the UK of a number of patent applications in the UK about four years ago that cover the blockchain/distributed ledger architecture. They were not filed under the nonsense name satoshi nakamoto either. The real inventor appears to be a white Australian computer scientist whose name I can’t be bothered to look up at the moment as I have more pressing matters on my mind. The point is that this guy seeded interest in his invention by highly dubious if not dishonest means, generated huge interest and investment and then at the very last minute filed patent applications that claim all of it is proprietary.

    Personally I’ve never seen anything like it since an obscure Swedish bank teller named Olaf Soderblum “invented” a networking technology called Token Ring (a once rival to Ethernet) that somehow he got US and European patents for and made a small fortune before it crashed and burned when Ethernet popularity surged in the mid 90s with the development of 10BaseT. What will happen with the blockchain patents , assuming “nakamoto” receives them, I have no clue.


  21. Skippy

    Um let me see here … you take government issued fiat to speculate on something[?????] promoted from a hard ideological premise aka vacuum [pretend world] slapped together ad hoc from Plato up to Gates Frictionless digital capitalism [licks ice cream cone] where reality is homo economicus/markets/atomistic individualism distribution metrics all whilst engaging in epic levels of miss-allocated capital and best of all marketing psychology driven mania the even Bernays would blush at …. sold as a A political solution to a Political problem that would end poverty “Because[tm] Markets …

    Seriously if anyone wanted to make money off crypto it would be like the old RR barons did via the suppliers.

    Marx would never have perceived M-M taken to such absurd levels … especially as so many societies/nations are falling apart …

    1. Kfish

      Ethereum may be longer-lived since it is the currency of choice to buy NFTs with. It’s a bubble riding off another bubble. As if we had a speculative bubble in pickaxes during a gold rush.

  22. ChrisRUEcon

    Knowledge and understanding of how money works is remarkably absent in crypto circles – top to bottom. One thing that drives the fandom is this idea that crypto is some sort of rebel movement that’s going to stick it establishment finance and central banks. The bottom dwellers who merely throw tens of thousands of dollars or maybe up to a mortgage’s worth of money into it are the easy marks for the big fish who simply wait for enough of those suckers to ante up before rug pull time. There’s plenty creaming off the top that can be done between the peaks and troughs, but the casino owners came up with HODLing as a means to keep large numbers of faithful pinned. Don’t be weak! HODL! Now they got the whole pegging-to-the-dollar farce going. I guess none of them knows the history of balance of payments crises, huh? Seek out an Argentine, perhaps … no bueno. Notice I said earlier that knowledge/understanding was remarkably, not completely absent. If you analyze that last rug pull carefully, it’s quite clear the perpetrators understood that the pegged crypto and its supporting un-pegged ones could be attacked in much the same way a drain in FX reserves could precipitate a fall in (supporting) currency value. So some people absolutely know the deal … and they’re not nice people.

    And now, please sit down, remove all food and drink from your mouth and have laugh … :) (yours truly completely lost it at the 1:22 mark)

    “Let’s go live to our man on the ground, who has an update on what’s happening in the crypto markets” (via Twitter)

  23. ArvidMartensen

    Just blue-skying here so feel free to not post this but ..
    There are two things about Bitcoin that have interested me for a few years:
    1. The origin of Bitcoin. And if anyone thinks that some anonymous dude in their garage invented Bitcoin then I have an iconic bridge to sell them. In this world, if the government dudes with mega mega computers want to find somebody, then they will eventually find them, no matter if its the dark web or the light?web. But the fiction, that the person/corporation/government entity that invented something that has roiled the world can’t be found, still persists. Why?
    2. The timing of Bitcoin. It sprang, fully formed, just as QE was taking off. Now QE was the satanic road to inflation for some. What better way to soak up the QE money that wasn’t going to approved destinations (banks, to-big-to-fails, US oligarchs) than to invent electronic tulips. And hey, here we are at the end of QE and the electronic tulips are vaporising the wealth of those who profited indirectly from a QE that wasn’t meant for them.
    It reminds me a little of the South Sea Island Bubble which was, at its heart, a Ponzi scheme of the government of the time to manage war debt.

  24. Tom Stone

    There’s nothing odd about a”Risk Free Investment” that yields 18% when one year Treasuries are yielding 2%…

  25. Sibiryak

    Ponzis and bitcoin as a response to a bad economy: the case of Nigeria

    [..] What the Nigerian ponzi scheme literature suggests is that ponzi schemes were self-consciously used by Nigerians as a coping mechanism for economic malaise.

    For instance, in their survey of ponzi investors Jack & Ibekwe found that 60.3% cited harsh economic conditions as their reason for joining ponzi schemes. In a survey of 384 ponzi investors, Obamuyi et al (2018) found that one of the most popular reasons for participating in ponzis was the “current economic situation.” And in Bupo & Abam-Smith’s analysis of 287 Port Harcourt business students, 231 agreed that the scheme helped reduce the impact of the present recession.

    So let me paint a picture. Nigeria has always been a highly unequal country. The poor are very poor, the rich are very rich. There is plenty of poverty (although this is improving) and not much of a government-run social security net. Nigeria also suffers from endemic corruption, and this impedes the ability of regular folks to improve their lot.

    The yearning and frustration that this creates gives rise to a constant demand for quick financial escapes, or zero-sum games. But what sorts of zero sum games? Nigerian authorities take a relatively paternalistic approach to gambling. Depending on the game, Nigerian law either prohibits it outright or limits it. For instance, Nigeria has only three land-based casino for 200 million people. Non-skill based card games are illegal. Apart from sports betting, online casinos are prohibited, and many foreign websites don’t accept Nigerians.

    So a big part of the demand to play life-changing betting games gets channeled into whatever the underground market can provide, like ponzi schemes.

    If you start with a large population of unhappy young people who want to play life-changing zero-sum games, combine that with limitations on legal gambling, and add in a massive economic collapse which only makes their lives worse, you’re going to get a big wave of illegal ponzi schemes cropping up.

    * * * *

    In addition to embracing ponzi schemes, Nigerians have also become the world’s most prolific owners of cryptocurrencies, as the chart below illustrates. This data comes from Global Web Index via this article.

    I’ve been tracking bitcoin usage in Nigeria for a while now. We know that bitcoin is being used in combination with gift cards by Nigerian-based business email compromise and romance scammers as a convenient way to repatriate extorted funds…

    * * * *

    So cryptocurrency is certainly being used as an alternative form of doing payments. But this can’t explain why 20% of Nigerians (around 40 million people) hold some of the stuff. After all, unofficial imports, scams, and remittances are a small part of economic activity.

    I’d suggest that Nigeria’s cryptocurrency adoption is a natural extension of its earlier ponzi scheme addiction.

    Like a poker game or roulette or the lottery, cryptocurrencies such as Bitcoin or Litecoin are zero-sum betting games. They redistribute a fixed pot among participating players. Of all types of zero-sum games, cryptocurrencies are most similar to ponzi schemes. Both use an “early bird” redistribution algorithm: late entrants’ funds are paid out to early birds. But cryptocurrencies are not quite ponzi schemes. Whereas ponzis such as MMM or Ultimate Cycler are centrally managed by a coordinator, a cryptocurrency is spontaneous and decentralized.

    In the same way that young Nigerians turned to ponzi schemes as an economic drug for coping with the 2015 collapse and ensuing lack of opportunity, they may be doing the same with cryptocurrencies. COVID-19 has pushed Nigerian unemployment to its highest level in a decade, the young being hurt the most. And so once again desperate Nigerian students are on the hunt for life-changing zero-sum bets. This time they’ve settled on cryptocurrency, the decentralized nature of which renders them almost impossible for authorities to stop.

    My “ponzi” interpretation of Nigerian cryptocurrency adoption runs counter to the crypto-optimist view.

    Cryptocurrency advocates see adoption of cryptocurrencies in developing nations like Nigeria as a vindication of cryptocurrency-as-monetary technology. Their thesis is that legacy payments systems and central banks in developing countries are failing at their task, and so cryptocurrencies like bitcoin are being adopted because the offer a better monetary alternative.

    The crypto-optimist view overestimates the usefulness of cryptocurrency-as-currency. There are certainly some cases where Nigerians are using cryptocurrencies for payments, and I presented them above. But the main reason that cryptocurrencies are popular is why any zero-sum game is popular: they intoxicate players with the promise of huge price gains.

    Viewed in this light, Nigerian adoption of cryptocurrencies isn’t a bitcoin fixes this moment. Rather, it’s a repeat of Nigeria’s earlier adoption of MMM and Ultimate Cycler. That these games keep sweeping through Nigeria is a symptom of underlying economic misery. Desperate to escape their plight, young Nigerians are once again making last-ditch bets on zero-sum betting games.

    * * * *

    A nation of desperate gamblers, ponzi players, and cryptocurrency punters is a sad development. It is a symptom of a sick economy, one in which unemployed young people are flocking to make zero-sum bets because that is the only way they see their lot in life improving.

  26. juno mas

    What I want to know, Yves. . . when do you sleep?!

    Covering crypto, in any capacity, must be exhausting.

  27. BondsOfSteel

    I admit, I’m fascinated by watching this crypto meltdown. Lehman is a good analogy… there is so much contagion that no one has bothered to understand:

    1) Risks to the wider market and economy. The market is huge! Take Teather for example. Supposably this stablecoin trades 1::1 with the US dollar. It’s backed by billions of short term notes, paper, and treasuries in multiple countries. They’ve had ‘audits’, but refuse to release a detail balance sheet. Since in the past 2 months, they went from 83B -> 66B in marketcap. This means they sold real financial instrument around the same size as the Fed’s Quantivate Tighting:

    2) Risks to individual investors. The Tron network created an algorithmic stablecoin (USDD) that neither algorithmic nor stable. It’s a proof of stake network and the creater and largest stakeholder seems to be personally propping up the network. Since its proof of stake, whales like him can dictate the rules. He’s making direct decisions for the whole network, like hundreds of million dollar trades with Binance to buy TRX the underlying coin to stop short selling.

    He said the stablecoin has 3x the reserves to cover it… but a quick look at the reserve page is nothing but red flags. Promises of 33% risk free yields on deposits:

    “The TRON DAO Reserve provides risk-free yield subsidies for mainstream stablecoins on the TRON network. Supported by smart contracts on multiple platforms, it offers users higher APYs while safeguarding their assets.”

    3) Risks to the whole system. Reread that line… “Supported by smart contracts on multiple platforms”. People have been borrowing and lending using these smart contacts. They’ll borrow USDC using BTC. Then they’ll take that USDC and ‘deposit’ into the reserve to make 33%. Then the reserve uses it to but TRX.

    The whole thing is predicated on the idea that prices will always go up and no one will default.

    It’s all a beautiful trainwreck.

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