Memo: The State of Crypto in 2026
A full breakdown of the bearish and bullish viewpoints, the rotation into AI infrastructure and gold and away from crypto, and why fraud remains a barrier to core asset status.
Key Findings
· The AI Displacement: Crypto is losing “innovation capital” to AI infrastructure, which investors currently perceive as having higher social utility and productivity potential.
· The Energy Bottleneck: AI data centers are outbidding miners for electricity. As energy becomes a strategic resource, policymakers are likely to prioritize AI over crypto mining.
· Neutral Money vs. Digital Gold: While the “Neutral Money” bull case remains intact, crypto has failed to act as a safe haven during recent risk-off periods, trailing gold significantly.
· Structural Fraud Levels: Crypto’s “fraud-to-asset” ratio is significantly higher than traditional finance. While not a systemic threat to banks, it remains a primary barrier to institutional “core asset” status.
· The “Lost” Supply: Analysis suggests 15–20% of the Bitcoin supply is permanently inaccessible due to custody errors, creating a unique “digital burn” that impacts real-world liquidity.
Memo Summary
Is crypto a revolutionary financial layer, or a high-beta tech experiment currently losing its lunch to AI infrastructure (as a high-tech alternative) and Gold (as a low-tech safe haven)? This memo evaluates the “Neutral Money” thesis against a 50% market drawdown, rising energy competition, and the structural impact of industry fraud.
Authors Note: I believe in keeping the core analysis of Economic Memos open to everyone to help build a more informed financial community. However, the granular data and technical reference guides are reserved for my paid supporters.
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· Appendix A: A credibility breakdown of the 5 different types of crypto (Bitcoin vs. Smart Contracts vs. Stablecoins).
· Appendix B & C: A complete “Registry of Risk” detailing major fraud events and the $85B+ in lost assets.
· Appendix D: The technical data on “Lost Supply”—why millions of BTC will never return to the market.
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Introduction:
Cryptocurrencies are digital assets that use cryptography and decentralized computer networks to record and verify transactions without relying on central authorities such as banks or governments. They operate on blockchains, distributed ledgers maintained by network participants, rather than by a single institution. This structure allows peer-to-peer transfers across borders and continuous settlement outside the traditional banking system.
The original aim of cryptocurrencies was to create a new form of digital money: a medium of exchange independent of central banking infrastructure. Over time, a second narrative emerged—that certain cryptocurrencies could serve as stores of value, which woud protect investors from potential inflation caused by inflation or currency debasement.
Crypto networks and blockchain technology are emerging as a digital alternative to the traditional financial system. Many of these applications are already live: they allow for peer-to-peer payments and near-instant international transfers that bypass traditional middlemen. Beyond just moving money, this tech uses ‘smart contracts’ to automate lending and borrowing, creates digital versions of real-world assets, and builds identity systems that don’t rely on a central bank or a private corporation to verify your data.
The objectives of this memo are to describe the bull and bear cases for crypto technology and evaluate reasons behind the current decline in crypto prices.
The Bull Case for Crypto
The bullish thesis holds that cryptocurrencies represent early-stage monetary and financial infrastructure innovation.
The bull case for crypto as a new financial layer is based on the following pillars:
· Neutral Money: A global currency that operates by math, not politics—no central bank can print more of it or devalue your savings.
· Unstoppable Access: A financial “exit ramp” for anyone facing high inflation, frozen accounts, or strict government oversight.
· Digital Scarcity: Unlike “easy money” issued by governments, these assets have a hard-coded limit that acts as a long-term shield against inflation.
· Modern Plumbing: A 24/7 financial system that replaces slow, human-managed banks with fast, automated code that never sleeps.
· Protocol Growth: The opportunity to own a piece of the world’s next financial infrastructure, similar to owning a “share” of the early internet.
Crypto is economically measurable but not systemically dominant.
The strongest real-world use case is stablecoin-based transfers, which process trillions of dollars in annual volume and account for roughly 1–3% of global cross-border payment flows, depending on measurement. In certain emerging-market corridors and capital-control environments, stablecoins are meaningfully used for remittances and business settlement.
Within the crypto ecosystem itself, daily trading often reaches hundreds of billions of dollars, and total market capitalization has ranged around $1–3 trillion in recent cycles.
Relative to the global financial system, however, crypto remains small. Global equity markets exceed $100 trillion, global bonds about $130 trillion, global banking assets over $300 trillion, and foreign exchange markets trade more than $7 trillion per day.
The most accurate characterization is that crypto operates at meaningful scale inside its own ecosystem and has achieved low-single-digit penetration in selected global payment corridors. It has not displaced traditional finance at systemic scale, but neither is it economically negligible.
Prominent advocates include -- Michael Saylor, Cathie Wood, Balaji Srinivasan, and Brian Armstrong. Saylor has described bitcoin as digital gold superior to physical gold. Wood perceives Bitcoin to be a new asset class and that an increase in uses by institutions would substantially increase its value. Srinivasan has described Bitcoin as an apolitical borderless alternative to central banks. Armstrong has argued that crypto is about economic freedom and that it can expand access to financial services globally.
The Bear Case for Crypto
The bearish thesis argues that cryptocurrencies lack the core features that anchor long-term asset valuation.
They do not generate cash flows, pay dividends, or produce goods and services. In short, crypto lacks intrinsic value.
If considered currencies, they should behave like relative prices rather than compounding investments.
If treated as stores of value, extreme volatility challenges their stabilizing function. Sustained price appreciation relies primarily on speculative inflows.
If crypto markets grow increasingly interconnected with banks, asset managers, payment systems, or leveraged financial intermediaries, instability within crypto could transmit shocks into the broader financial system.
The lesson many skeptics draw from past crises is that financial innovation can outpace supervision, allowing risk to accumulate in corners of the system that appear peripheral—until confidence breaks. A sufficiently integrated crypto ecosystem could create institutions that are not necessarily “too big” in isolation but become too interconnected to fail without broader consequences. Critics believe the expansion of crypto could lead to the next 2008.
Prominent skeptics include two famous investors, Warren Buffett and Charlie Munger, and two prominent economists, Paul Krugman and Nouriel Roubini. Buffet and Munger compared Bitcoin to rat poison. Krugman compares the Bitcoin craze to the tulip bubble and considers the concept to be motivated by libertarian philosophy, a new subprime market tied to leverage and lax regulation. Nouriel Roubini argues that Bitcoin resembles a Ponzi-like speculative structure sustained by continuous inflows rather than intrinsic value, and that crypto markets are structurally prone to manipulation, insider advantages, and weak regulatory oversight.
Recent Sustained Price Decline
Over the past several months, major cryptocurrencies have pulled back sharply from their late-2025 peaks:
Bitcoin peaked at around $126,000 in October 2025. As of early 2026, it has declined roughly 40–50% from that peak, trading near $65,000–$70,000, its lowest level in about a year.
Ethereum peaked near approximately $4,000–$4,200 in late 2025. By early 2026, it had fallen to roughly $1,900–$2,200, representing a drawdown of about 45–55% from peak levels and placing it back near price ranges seen roughly a year earlier.
Crypto markets have historically experienced large cyclical drawdowns. In prior bear markets, Bitcoin has fallen 60–80% from peak to trough (notably in 2017–18 and 2021–22), and Ethereum has repeatedly endured declines of 60% or more across multiple cycles. These swings are extreme compared to traditional asset swings, but no extreme compared to past swings in crypto prices. Additional decreases in crypto values extending the recent downturn are plausible and would be consistent with previous crypto winters.
Factors Impacting the Current Crypto Market
Portfolio reallocations from booming AI and Gold
From a portfolio construction perspective, crypto does not exist in isolation. It sits inside a broader “innovation / long-duration / speculative technology” allocation bucket.
Under classical portfolio theory, investors allocate capital based on expected return, variance, and correlation. C
Crypto is perceived as a high-beta, long-duration innovation asset—similar to early-stage technology equities. It competes for portfolio share directly with other frontier themes such as AI infrastructure, AI-driven software, robotics, quantum computing, and prediction markets.
Portfolio managers currently appear to prefer these other high-tech speculative opportunities to crypto. The growth in value of AI linked opportunities occurred simultaneously with a decline in both the value of software and Crypto.
When AI enthusiasm lifts technology broadly, aggregate portfolio exposure to tech risk may rise beyond target levels. Risk management constraints can then trigger deleveraging or diversification across the entire technology complex, creating pressure on all high-beta assets, including crypto.
At the same time, crypto has also competed with gold for “alternative monetary asset” status. Prominent advocates such as Michael Saylor have argued that Bitcoin is superior to gold, describing it as “digital gold” and even “the hardest money ever created.” The proposition was that a scarce, portable, programmable asset would outperform physical gold as a store of value.
However, during periods of risk aversion and portfolio repositioning, gold has often behaved more like a traditional safe haven, while crypto has traded more like a high-beta technology asset. To the extent that investors treat gold as defensive and crypto as speculative, the claim that digital gold would displace or outperform real gold in stressed environments has not consistently held up across recent cycles.
Saylor’s statement that digital gold is superior to actual gold has not aged well.
Energy Constraints, AI Competition, and Crypto
There is growing concern that rapid AI expansion could strain electricity supply.
Large AI data centers require enormous and continuous power, and utility companies in several regions have warned about rising demand. Crypto mining—especially Bitcoin—also consumes substantial electricity. When two fast-growing industries compete for energy, it raises questions about prices, grid stability, and long-term supply.
Energy is not just an industrial issue but a political one. Governments face pressure to manage electricity costs, meet climate targets, and maintain grid reliability. In that environment, policymakers may prioritize data centers tied to AI and industrial policy over crypto mining, which is often viewed as more discretionary. Rising power costs or political scrutiny of energy use could weigh more heavily on energy-intensive crypto models than on other digital industries.
Investors may discount businesses that appear vulnerable to higher long-term energy costs. In a world where energy is strategically constrained, competition between AI infrastructure and crypto mining could become an additional pressure point for crypto markets. I expect that the political and economic pressure to reduce energy use will be more intense on crypto than AI because AI is the more profitable industry and has demonstrated greater benefits to society in the form of increased productivity.
Fraud, Regulation, and Institutional Confidence
Fraud and governance failures have been recurring features of the cryptocurrency ecosystem.
High-profile cases frequently cited by critics include the collapse of FTX, multi-billion-dollar enforcement actions against Binance, the conviction and pardon of Binance’s founder, and repeated token pump-and-dump schemes and stablecoin failures such as Terra/Luna.
These events have reinforced concerns about insider concentration, weak disclosure, and exchange conflicts of interest. For many institutional investors, the issue is not simply isolated misconduct but whether governance standards across the ecosystem are durable enough to justify long-term capital allocation.
Regulatory responses have diverged across major jurisdictions.
China has taken the strictest approach, effectively banned domestic trading and mining while promoting a state-controlled digital currency.
Europe has implemented a comprehensive rulebook through the Markets in Crypto-Assets (MiCA) framework, imposing licensing, disclosure, and reserve requirements while permitting regulated activity.
The United States has taken a more fragmented path. Congress passed the GENIUS Act, establishing a federal framework for stablecoins with reserve backing, disclosure standards, and supervisory oversight. A broader market-structure bill, the CLARITY Act, aimed at defining when digital assets are securities versus commodities and clarifying SEC/CFTC roles, passed the House but stalled in the Senate amid disputes over stablecoin interest payments, surveillance concerns, and industry opposition.
Supporters of Crypto want less regulation to stimulate innovation. Critics warn that if crypto becomes deeply intertwined with banks, asset managers, or leveraged intermediaries before governance and valuation questions are settled, instability could propagate into core financial institutions—raising echoes of 2008-style contagion dynamics.
Concerns about fraud, disputes over regulation, and concerns about the impact of crypto on the future safety and soundness of the financial industry may slow crypto’s growth.
Conclusion
The bull case views crypto as early-stage infrastructure: a digitally scarce monetary asset and programmable financial network with low but growing penetration. The bear case views it as lacking intrinsic value or worse a scam and a Ponzi scheme with the potential to destabilize the financial system.
The recent price decline does not appear historically unusual by crypto standards. Prior cycles have featured 60–80% drawdowns, and current declines of roughly 40–50% from late-2025 peaks fall within crypto’s historical volatility range.
The downturn likely reflects a combination of capital reallocation toward AI-linked assets, competition with gold in risk-off environments, concerns about energy constraints, and persistent regulatory and fraud-related uncertainty. None of these factors alone explains price movements, but together they shape capital flows and required risk premia.
There is a substantial amount of fraud in this new sector. Fraud is not the source of the downturn but is likely to impede cryptos future growth and expanded adoption.
At present, crypto represents roughly 1–2% of global financial assets and has low but non-zero systemic penetration. Some diversified investors hold small allocations as an optionality play, inflation hedge, or high-beta innovation exposure. However, it is not yet universally treated as a required core asset class alongside equities, bonds, and real estate. Its role remains discretionary rather than foundational.
