FTX-Led Crypto Bubble Really Is the Worst of Its Kind


Investment bubbles get a bad rap. Perhaps we should mock them a little less and appreciate them a little more. Why? Because while they leave enormous misery in their wake, they also end up leaving us with good things paid for with other people’s capital.

For example, the bicycle bubble of 1896 left us with better bicycles. It also led to significant improvements in road quality in the United States. As Sandy Nairn notes in his 2002 book Engines That Move Markets (a must-read for anyone interested in how new technologies drive bubbles), at the time “surface roads remained rare.” With their revival, the bicycle boom paved the way for the arrival of the automobile.

Overinvestment in the auto industry in the early 1900s. the nearly 600 new automobile manufacturers launched in the United States between 1908 and 1910 gave us amazingly efficient and fast combustion-engined cars. The first ones were so slow that detractors would stand by the road shouting “bring a horse” to the drivers. Today we need speed limits to stop everyone driving 150 mph.

The diving bell bubble of the 1690s left us with better diving technology (better for finding wrecks). The rail bubble gave us railways (and in the UK an accounting revolution). The dotcom bubble gave us modern internet infrastructure, and the US housing bubble of 2007 left at least a lot of homes in its wake. Even the much-maligned tulip bubble left some very beautiful tulips (a few of which are still around today) and some pretty fabulous pictures (it encouraged a focus on floral displays). Even the South Sea bubble in the UK, although largely based on silly stories, developed a bit of an infrastructure around joint stock companies.

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You get the picture. Overall, the story of those who have money and love good stories pouring into unprofitable capital expenditures that are beneficial in the long run is not a bad one.

Then to today’s big crypto bubble. Unfortunately, this one looks like it might be something out of the ordinary that leaves nothing but pain when it explodes.

This is what Sam Bankman-Fried quickly finds out. The founder of crypto exchange FTX was once worth $26 billion; it’s nothing now. You could reasonably say that its downfall is not a cryptocurrency failure, but a more prosaic failure of the platform. That’s partially true. It is, in many ways, a perfectly normal story of greed, potential fraud (the story of a company borrowing its customers’ deposits to speculate is not a new one) and a liquidity crisis. Not unlike, perhaps, the kind of veil that is revealed at the end of every bubble.

However, the entire miserable decline should remind us of the fragility of the crypto business as a whole.

Try to imagine a world without Bitcoin, Ethereum, Ripple, Litecoin, etc. I doubt you will find it easy. That’s because it’s not included in your life in any way. You don’t use it, you don’t spend it, you don’t think of it as a medium of exchange or currency, it’s probably not in your retirement, and if someone asks you, what could be the problem in your life? solve, you probably won’t be able to think of any. That makes sense. I can’t either.

Fans tell us that due to its limited supply, Bitcoin is an excellent inflation hedge and therefore a fantastic store of wealth. But while scarcity creates intrinsic value coupled with utility or desirability, scarcity itself does not. UK CPI is running at 11.1% and Bitcoin is down 62% in sterling this year (66% in USD). So far so bad. So is there reason to believe there is a good use case for crypto that will add value over time?

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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 break, the first three might be correct. But doesn’t your bank account offer the same? What about private and independent from the government? We can come back to that after the upcoming regulatory extravaganza. Worse, if you don’t use a platform (which purists believe you shouldn’t), all of those things can quickly become irrelevant. No customer support. Lost your password Too bad. Have you lost your crypto too?

None of that matters, of course, if enough people are involved in the whole thing. If everyone starts believing in the emperor’s new clothes, then those clothes are worth something. Earlier this year, Goldman Sachs suggested that the price of bitcoin could reach $100,000 within five years if more people adopt it as a store of wealth on the same scale as gold. However, this implies that if fewer people see it as a store of wealth (and I think we can assume that is the case right now), the price could go to zero.

The thing is, while it’s possible that some useful financial infrastructure could go South Sea-style, it seems likely that once the people who believe in Bitcoin stop believing in it, there will be nothing left but capital losses. : No lamps, no bicycles, no diving bells and no pictures. What is there to draw?

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The good news is that 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 quite well as an inflation hedge. gold spot sterling is up 10.6% year to date, so UK holders should be pleased. It doesn’t require a platform or password if you want to unhide it. It looks nice, it’s useful, it’s hard to fake, it’s easy to take apart, and it’s not the subject of endless experimental conversations about how it should be configured.

Finally, it’s worth noting that central banks (which have now accepted that inflation is not temporary) seem to like it quite a bit. They buy a lot of gold, something they know is a good long-term bet. What they don’t buy is bitcoin, something they know probably isn’t.

More from Bloomberg Opinion.

• FTX Hammers Put More Nails in Crypto’s Coffin; Lionel Laurent

• The UK housing market is once again becoming desperate. Merryn Somerset Webb

• These banks were left holding the bag with the crypto-explosion. Mark Rubinstein

This column does not necessarily reflect the opinion of the editorial board or of Bloomberg LP and its owners.

Maryn Somerset Webb is a senior columnist for Bloomberg Opinion covering personal finance and investing. He was previously editor-in-chief of MoneyWeek and editor of the Financial Times.

More stories like this are available at bloomberg.com/opinion


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