The crypto bubble of the worst kind
INVESTMENT bubbles get a bad rap.
Perhaps we should mock them a little less and express our gratitude to them a little more. Why? Because while they leave huge misery in their wake, they also eventually leave us with good things paid for by other people’s capital.
The bicycle bubble of 1896, for example, left us with better bicycles. It also led to a significant improvement in the quality of the roads in the United States. As Sandy Nairn points out in his 2002 book Engines That Move Markets (a must read for anyone interested in how new technology drives bubbles), at the time, “surfaced roads remained a rarity.”
By getting them resurfaced, the bicycle boom paved the way for the arrival of the automobile.
The over-investment in the auto industry in the early 1900s – some 600 new car manufacturers launched in the United States between 1908 and 1910 – gave us stunningly efficient and fast combustionengine cars.
The railway bubble gave us railways (and, in the UK, an accounting revolution). The dotcom bubble gave us the infrastructure for the modern Internet, and the US housing bubble of 2007 at least left a lot of houses in its wake.
Even the much maligned tulipbubble left some very beautiful tulips (some of which are still around today) and some rather fabulous paintings (it encouraged a focus on floral displays).
You get the picture.
On then to today’s great crypto bubble.
Unfortunately, this one looks like it might be something of an outlier – one that leaves nothing but pain behind when it bursts.
That’s something Sam BankmanFried is fast finding out. The founder of crypto exchange FTX was once worth Us$26bil (Rm116.2bil); that’s now down to nothing. You may say, with some reason, that his downfall is not about the failure of cryptocurrencies but about the more prosaic failure of a platform.
However, the whole miserable debacle should remind us of the fragility of the case for crypto in general.
Try to imagine a world without bitcoin, ethereum, ripple, litecoin and the like. I suspect you will find it easy. That’s because it is in no way embedded in your life.
Fans tell us that thanks to its limited supply, bitcoin is an excellent inflation hedge and therefore a fantastic store of wealth. But while scarcity combined with usefulness or desirability creates intrinsic value, scarcity in itself does not.
UK CPI is running at 11.1% and bitcoin is down 62% in sterling terms this year (66% in US dollar terms). So far, so bad. Is there then reason to believe that there is a good use case for crypto that will add value over time?
Believers say yes – that it is transferable, easily divisible, liquid, independent of government and private, and that these things make it desirable. Hmm. Assuming your platform doesn’t go bust, the first three may be true.
But doesn’t your bank account offer the same thing? As for private and independent of government? We can come back to that after the coming regulatory splurge. None of this matters, of course, if enough people are drawn into the whole thing. If everyone starts believing in the emperor’s new clothes, those clothes then become worth something.
Earlier this year, Goldman Sachs suggested that the price of a bitcoin could hit US$100,000 (RM447,000) in five years, if more people adopted it as a store of wealth on the same scale as they do gold. This implies, though, that if fewer people see it as a store of wealth (and I think we can assume this is the case right now), the price could hit zero.
The good news is, if you want to hold something that actually does most of the things people wish bitcoin could do, you can.
Gold is universally accepted as a long-term store of value. It works pretty well as an inflation hedge: The spot sterling gold price is up 10.6% year to date, so UK holders should be pleased. It doesn’t require a platform or a password if you want to dig it up from its hiding place.
It looks nice, it’s useful, it’s hard to fake, it is easily divisible and it is not the subject of endless trying conversations about how it should be regulated.
Finally, it is worth noting that central banks (which have now accepted that inflation is not transient) appear to like it quite a lot. They are buying a lot of gold, something they know is a good long-term bet. What they aren’t buying is bitcoin – something they know probably isn’t.
The founder of crypto exchange FTX was once worth Us$26bil (Rm116.2bil); that’s now down to nothing.