Investment bubbles eventually leave us with good things paid for by other people’s capital. Not FTX.
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 US. 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 US between 1908 and 1910 — gave us stunningly efficient and fast combustion-engine cars. The first ones were so slow that detractors used to stand by the road yelling “get a horse” at the drivers; today, we need speed limits to stop everyone driving at 150 mph.
The diving bell bubble of the 1690s left us with better diving technology (all the better for finding wrecks with). 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 tulip bubble left some very beautiful tulips (some of which are still around today) and some rather fabulous paintings (it encouraged a focus on floral displays ). Even the South Sea Bubble in the UK, while mainly based on silly stories, advanced the infrastructure around joint stock companies a little.
You get the picture. All in all, the history of those with money and a love of good stories pouring into unprofitable capital expenditure that’s useful over the long term is not a bad one.
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 Bankman-Fried is fast finding out. The founder of crypto exchange FTX was once worth $26 billion; 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. That’s partly true. It is, in most ways, a perfectly normal story of greed, probable fraud (the story of a company borrowing its client deposits to speculate is not exactly new) and a liquidity crunch. No different perhaps to the kind of bezzle that gets revealed at the end of every bubble.
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. You don’t use it, you don’t spend it, you don’t think of it as a medium of exchange or currency, it likely isn’t in your pension, and if anyone asked you what problem in your life it might solve, you probably wouldn’t be able to think of any. That makes sense. I can’t either.
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. Worse, if you don’t use a platform (which purists think you should not), all those things could be fast made irrelevant. There is no customer support. Lost your passcode? Too bad. You lost your crypto too.
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 $100,000 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 point is, while it is possible that some useful financial infrastructure may be left knocking around South Sea-style, it seems most likely that once the people who believe in Bitcoin stop believing in it, there will be nothing left but capital losses. No bulbs, no bikes, no diving bells and no paintings. What is there to paint?
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. - Bloomberg Opinion: