Why Crypto Tends to Attract Free Market Advocates

By Chris Coney

At its core, free market capitalism is a meritocracy.

Essentially, a meritocracy is a system where those in power are selected based on their skills, achievements and/or knowledge. After all, merit is determined by quality actions, not words, because talk is cheap.

A true free market system, one without any government intervention, would be just like the natural world — generally ordered but specifically chaotic.

This is how crypto started out and how it largely continues to function to this day. And a prime example of this played out recently with the business woes of the FTX exchange.

Now, I think what scares most people about the idea of a true free market system is the degree of difference between extremes. Instead of full centralized control or zero government interference, many would prefer a happy medium.

So, since crypto is mostly unregulated, in response to FTX’s downfall, there have been numerous calls for increased crypto regulation. Basically, we’re moving from one extreme to the other.

But the problem with regulation is those rules are man-made. And it’s widely believed that without these man-made rules, the whole system would devolve into chaos.

But without rules, is chaos guaranteed?

Not necessarily.

For example, if you’ve ever taken a walk in a dense forest, you’ll see how chaotic that is. There’s stuff all over the place. Sometimes it’s difficult to distinguish which plants are new, old, dead or alive. It all blends into one seemingly chaotic mess.

Yet from an aerial view, the forest seems balanced with everything in the right place. Like I said, generally ordered but specifically chaotic.

The same concept can be applied to most natural phenomena. After all, nature wasn’t created by humans, but rather discovered and observed by them.

For instance, if you view cells under a microscope, they may seem disorganized and chaotic. But when we look at the same organism with the naked eye, it looks perfectly put together.

I suppose the belief is that without purposeful control, all structure would be lost. Yet in all the examples I’ve given, this isn’t the case.

Free market advocates say the same is also true of economic systems. If left to their own devices, irresponsible companies should be allowed to fail, resulting in an optimal balance.

Crypto has so far been one of the most spectacular experiments in free market economics in my opinion.

By starting out totally unregulated and becoming more regulated over time, the natural process was allowed to play out and be observed.

Theoretically, a free market would operate on a business version of survival of the fittest. In economic terms, fittest would translate to the healthiest balance sheet, the healthiest cash flows, the most efficient teamwork and so on.

I’m highlighting this now because during the first two weeks of November when the FTX drama first appeared, this was at the forefront of my mind.

The Contestants

Let’s imagine a boxing match between the two key exchanges in the headlines — FTX and Binance (BNB, Tech/Adoption Grade “C-”).

These two entities have the most spectacular contrast and an even greater advert for a free market system.

In the blue corner you have FTX, a company that seemed to have forgotten what business it was in. Supposedly it was in the crypto exchange business, fulfilling the role of facilitating trades between market participants for a fee.

But FTX is just a centralized company disguised as crypto.

Its alleged misuse of customer funds and borrowing of billions of dollars against collateral of its fragile, illiquid FTT token are extremely high-risk activities that do not belong in the crypto world.

In the red corner you have Binance, a crypto exchange company that raised its funding directly from the market via a good-old fashioned initial token offering. What’s more, it has consistently reinvested in the one thing its founder seems obsessed with: building out the platform.

The founder of Binance, Changpeng Zhao, is somewhat of an odd character in the world of finance. He’s built one of the world’s most successful crypto exchanges … yet he’s not a trader, nor is he particularly materialistic.

He seems to get the most joy out of providing value to his customers by continuing to reinvest profits in building better products and continuing to innovate.

While FTX was busy conducting one private funding round after another, Binance was focused on growing its user base and its volumes.

This boosted Binance’s revenue, which gave it the cash to reinvest in its growth through a self-funding flywheel.

Through this demonstrable action, Binance has proven its commitment to its users and the service they provide.

Going Above and Beyond

By way of example, Binance has an initiative called the Safe Asset Fund for Users which ensures that customer funds are protected.

In addition to all the money it spends on cybersecurity and other safety protocols, this is an additional pot of money — currently valued at $1 billion — Binance voluntarily sets aside to safeguard users from certain losses incurred, such as if a security flaw is exploited.

But their commitment goes further than that. Back in December 2020, the Cover Protocol (COVER, Unrated) smart contract was hacked and nearly $4 million was stolen.

When the COVER project team said they would be unable to recoup the losses incurred by users, Binance stepped in and paid $10 million out of their SAFU fund to make those users whole.

To be clear, this hack wasn’t a failure on behalf of Binance. But its users were affected by the hack, so as a gesture of goodwill, the Binance executive team decided to plug the $10 million hole out of their company’s pocket.

How often does this happen in traditional finance?

In short, it doesn’t. TradFi is often seen as a ruthless, everyone-for-themselves type of gig.

Crypto started out differently. Many people like myself and Changpeng Zhao got into crypto not for the money, but for the mission.

In a free market system, such inspiring action not only wins over the hearts and minds of the community, but it also leads to smarter business decisions. Running businesses in a conservative matter can help ensure they function in a robust state for the long term.

While it may appear so, this isn’t intended to be a puff piece for Binance. I’m just citing them as a role model for others to follow.

Prioritizing customer safety isn’t only the right thing to do, but it actually works.

However, even though Binance has historically gone the extra mile to protect users, this should not in any way cause you to override universal investing principles.

It’s best practice in crypto to custody your own funds whenever possible.

By all means, use a centralized exchange if you want to. But deposit funds, make the trade and then withdraw your assets back into your own wallet.

It’s inconvenient, but it’s safe. Remember, no one should have control over your funds but you.

If FTX users had done that, most of them could have avoided having their assets stuck when FTX filed for bankruptcy and stopped honoring withdrawals.

But that’s all I’ve got for you today. Let me know your thoughts on crypto as a free-market system by tweeting @WeissCrypto.

I’ll catch you here next week with another update.

Until then,

Chris Coney