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

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Investment bubbles get a bad rap. Maybe we should mock them a little less and express our gratitude to them a little more. Why? Because while they leave great misery in their wake, they also leave us with good things eventually paid for by other people’s capital.

The bicycle bubble of 1896, for example, left us with great bicycles. This led to a significant improvement in the quality of roads in the US. As Sandy Nairn pointed out in her 2002 book Engines That Move Markets (a must-read for anyone interested in how new technology drives bubbles), at the time, “surface roads rarely remained.” By reviving them, the bicycle boom gave way to the advent of the automobile.

Overinvestment in the auto industry in the early 1900s—some 600 new car manufacturers started in the US between 1908 and 1910—gave us incredibly efficient and fast combustion-engine cars. The first ones were so slow that opponents would stand by the side of the road shouting to the drivers to “get a horse”; Today, we need speed limits to keep everyone driving at 150 mph.

The diving bell bubble of the 1690s left us with great diving technology (all the better for finding wrecks). The railway bubble gave us railways (and, in the UK, the 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 homes in its wake. The much-maligned tulip bubble left behind some beautiful tulips (some of which are still around today) and some rather extraordinary paintings (which encouraged a focus on flower displays). The South Sea Bubble in the UK was also mainly based on silly stories, with little advance infrastructure around joint stock companies.

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You get the picture. Overall, the track record for those with money and a love of good stories is not a bad one in capital expenditure that is not profitable in the long run.

Then to today’s great crypto bubble. Unfortunately, it looks like something is out there – leaving nothing but pain when it bursts.

That’s what Sam Bankman-Fried is quickly discovering. The founder of crypto exchange FTX was once worth $26 billion; It is nothing now. With some reason, you could say that his downfall was not about the failure of cryptocurrencies but about the more prevalent failure of the platform. That is partly true. It is, in most ways, a perfectly normal story of greed, possible fraud (the story of a company borrowing to assume its client deposits is not exactly new) and a liquidity crisis. The exposed bezel at the end of each bubble is probably not different for the type.

However, the sheer abject failure should remind us of the fragility of the crypto case in general.

Try to imagine a world without Bitcoin, Ethereum, Ripple, Litecoin and so on. I hope you find it easy. Because it is not embedded 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 not in your pension, and if someone asks you to solve what it might be in your life, you probably won’t be able to think of anything. That makes sense. I can’t either.

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Fans tell us that thanks to its limited supply, Bitcoin is an excellent inflation hedge and therefore a wonderful store of wealth. But scarcity combined with utility or desirability creates intrinsic value, scarcity by 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 reason to believe that there is a good use case for crypto that will add value over time?

Believers say yes – it is transferable, easily divisible, liquid, independent of government and private, and these things make it desirable. hmm Assuming your platform doesn’t go bust, the first three can be true. But doesn’t your bank account offer the same thing? Independent of private and government? We may come back to it after the upcoming regulatory fiasco. Worse, if you don’t use the platform (purists think you shouldn’t), all those things can quickly become irrelevant. No customer support. Lost your passcode? Too bad. You lost your crypto too.

If enough people are drawn to the whole thing, none of this matters. If everyone starts believing in the Emperor’s new clothes, those clothes will become valuable. Earlier this year, Goldman Sachs suggested that Bitcoin’s price could reach $100,000 within five years, if more people adopt it as a store of wealth on the same scale as gold. However, if fewer people see it as an accumulation of wealth (and I think we may feel this way right now), this suggests that the price could hit zero.

Once the people who believe in Bitcoin stop believing in it, though some useful financial infrastructure is likely to crash South Sea style, it seems that nothing but capital losses will be left behind. No light bulbs, no bikes, no diving bells and no paintings. What is there to paint?

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The good news is that if you want to get hold of 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 well as an inflation hedge: the spot sterling gold price is up 10.6% year to date, so UK holders should be happy. It doesn’t need a platform or a password if you want to dig it out of its hiding place. It looks good, it’s useful, it’s hard to fake, it’s easily shareable, and it’s not the subject of endlessly trying conversations about how to control it.

Finally, it’s worth noting that central banks (which now admit that inflation is not volatile) seem to like it quite a bit. They are buying a lot of gold, which they know is a good long-term bet. They know they aren’t buying bitcoin – probably not.

More from Bloomberg Opinion:

• More nails in FTX Hammer’s cryptos coffin: Lionel Laurent

• UK Housing Market Getting Desperate Again: Merrin Somerset Webb

• These banks are holding the bag on the crypto implosion: Mark Rubinstein

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

Maryn Somerset Webb is a senior columnist covering personal finance and investing for Bloomberg Opinion. Previously, he was editor-in-chief of Moneyweek and contributing editor at the Financial Times.

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


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