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Analysis | FTX-Led Crypto Bubble is truly the worst of its kind


Investment bubbles are getting a bad reputation. Perhaps we should mock them a little less and express our gratitude to them a little more. Why? For while they leave enormous misery in their wake, in the end they also 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 US roads. As Sandy Nairn notes in his 2002 book Engines That Move Markets (a must-read for anyone interested in how new technology drives bubbles), “paved roads remained a rarity in those days.” By resurfacing them, the bicycle boom paved the way for the advent of the automobile.

The overinvestment in the car industry at the beginning of the 20th century – some 600 new car manufacturers launched in the US between 1908 and 1910 – gave us amazingly efficient and fast internal combustion engine cars. The former were so slow that opponents stood along the road yelling “get a horse” at the drivers; today we need speed limits to prevent everyone from driving at 150 mph.

The diving bell of the 1690s has left us with better diving technology (so much the better for finding wrecks). The railway bubble has brought us railways (and, in the UK, an accounting revolution). The dot-com bubble gave us the infrastructure for the modern Internet, and the US housing bubble of 2007 certainly left many homes behind. Even the much-maligned tulip bubble left behind some very nice tulips (some of which still exist) and some rather fabulous paintings (it encouraged a focus on floral displays). Even the UK’s South Sea Bubble, while based mainly on silly stories, moved the infrastructure around public companies a bit forward.

You get the picture. All in all, the history of people with money and a penchant for good stories culminating in unprofitable capital expenditures that are useful in the long run isn’t bad.

On to today’s great crypto bubble. Unfortunately, this one looks like it’s an outlier – one that will leave nothing but pain when it bursts.

That’s something Sam Bankman-Fried finds out quickly. The founder of crypto exchange FTX was once worth $26 billion; that has now come to nothing. You could say for some reason that his demise is not about the failure of cryptocurrencies, but the more prosaic failure of a platform. That is partially true. In most respects, it’s a perfectly normal story of greed, probable fraud (the story of a company borrowing customer deposits to speculate isn’t exactly new), and a liquidity crisis. Not unlike the kind of bezzle revealed at the end of each bubble.

However, the whole miserable debacle should remind us of the vulnerability of the case to 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’s not embedded in your life in any way. You don’t use it, you don’t spend it, you don’t consider it a medium of exchange or currency, it probably isn’t in your retirement, and if someone asked you what problem in your life it could solve, you probably would can’t think of any. That makes sense. I can not either.

Fans tell us that thanks to its limited supply, Bitcoin is an excellent inflation hedge and therefore a fantastic treasure trove of wealth. But while scarcity in combination with utility or desirability creates intrinsic value, scarcity in itself does not. UK CPI is running at 11.1% and Bitcoin is down 62% this year in British Pounds (66% in US Dollars). So far, so bad. Is there any 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 shareable, liquid, independent of government and private, and these things make it desirable. Hmm. Assuming your platform doesn’t go out of business, the first three could be true. But doesn’t your bank account offer the same? As for private and independent from the government? We can come back to that after the forthcoming regulatory splurge. Even worse, if you don’t use a platform (which purists think you shouldn’t), all of those things can quickly be rendered irrelevant. There is no customer support. Have you lost your access code? Unfortunately. You also lost your crypto.

None of this matters, of course, as long as enough people are involved. If everyone starts to believe in the emperor’s new clothes, those clothes will be worth something. Earlier this year, Goldman Sachs suggested that the price of a Bitcoin could reach $100,000 within five years if more people adopted it as a storehouse of wealth on the same scale as gold. However, this implies that if fewer people see it as a treasure trove 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 usable South Seas-style financial infrastructure will continue to be left lying around, it seems highly 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 paintings. What is there to paint?

The good news is that if you want to keep something that does most of the things people wish Bitcoin could do, you can. Gold is widely accepted as a long-term store of value. It works quite well as an inflation hedge: the spot price of sterling gold is up 10.6% so far, so UK holders should be pleased. It doesn’t need a platform or password if you want to unearth it from its hiding place. It looks nice, it’s useful, it’s hard to fake, it’s easily shareable, and it’s not the subject of endless difficult conversations about how to manage it.

Finally, it is worth noting that the central banks (who have now accepted that inflation is not transient) seem very happy with it. 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’s opinion:

• FTX hammers more nails into Crypto’s coffin: Lionel Laurent

• UK housing market is desperate again: Merryn Somerset Webb

• These banks were left with the bag in crypto implosion: Marc Rubinstein

This column does not necessarily reflect the views of the editors or Bloomberg LP and its owners.

Merryn Somerset Webb is a senior columnist for Bloomberg Opinion on personal finance and investments. Previously, she was 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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