The overinvestment in the automobile industry in the early 20th century—about 600 new car manufacturers launched in the United States between 1908 and 1910—gave us cars with fast combustion engines and amazing efficiency. The first was so slow that detractors used to stand by the roadside yelling “Get a horse” at the drivers; Today, we need speed limits to stop everyone from driving at 150mph.
The diving bell bubble of the 1890s left us with better diving technology (all the better at finding wrecks). The rail bubble gave us rail (and, in the UK, an accounting revolution). The dot-com bubble gave us the infrastructure for the modern internet, and the housing bubble in the US in at least 2007 left many homes in its wake. Even the insidious bubble of tulips left some very beautiful tulips (some of which still exist today) and some fine paintings (encouraged an emphasis on floral displays). Even the UK’s South Sea bubble, while based mainly on silly stories, has developed the infrastructure around joint-stock companies quite a bit.
You get the picture. In general, the history of those with money and a love of good stories who flock to unprofitable and beneficial long-term capital spending is not a bad one.
Then on to today’s great crypto bubble. Unfortunately, this seems like it might be a strange thing – it leaves nothing but pain behind when it explodes.
This is something Sam Bankman-Fried quickly discovers. Founder of cryptocurrency exchange FTX had a net worth of $26 billion; This is now nothing. For some reason, you might say, his downfall is not about cryptocurrency failures but more about the more common platform failures. This is partly true. It is, in most respects, a perfectly normal story about greed, potential fraud (the story of a company borrowing its customers’ deposits to speculate is not entirely new) and a liquidity crisis. Perhaps not unlike the type of crater that appears at the end of each bubble.
However, the miserable debacle should remind us of the fragility of the cryptocurrency state in general.
Try to imagine a world without Bitcoin, Ethereum, Ripple, Litecoin, and the like. I think you will find it easy. This is because it is by no means an integral part of 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’s probably not in your pension, and if anyone asked you what the problem in your life is, it might be a solution, you probably wouldn’t be able to think of any. Logical. I can’t either.
Fans tell us that thanks to its limited supply, Bitcoin is an excellent hedge for inflation and therefore a great store of wealth. But while scarcity combined with utility or desirability creates intrinsic value, scarcity in and of itself does not. The UK CPI is at 11.1% and Bitcoin is down 62% in Sterling this year (66% in USD). So far, too bad. Is there, then, reason to believe that there is a good use case for cryptocurrencies that will add value over time?
Believers say yes – that it is transferrable, easily divisible, liquid, independent of government and private, and that these things make it desirable. Hmm. Assuming your platform didn’t crash, the first three might 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 next organizational splurge. Even worse, if you’re not using a platform (purists think you shouldn’t), all of that stuff can quickly become irrelevant. There is no customer support. Lost your passcode? so sad. You also lost your encryption.
None of this matters, of course, if enough people are drawn into the whole thing. If everyone starts to believe in the emperor’s new clothes, these clothes will become valuable. Earlier this year, Goldman Sachs suggested that the Bitcoin price could reach $100,000 within five years, if more people adopt it as a store of wealth on the same scale as gold. This does mean, however, that if fewer people see it as a store of wealth (and I think we can assume that this is the case now), then the price could go to zero.
The point is that while some useful South Sea-style financial infrastructure could be left behind, it seems more likely that once people who believe in bitcoin stop believing in it, there will be nothing left but capital losses. No bulbs, no bikes, no diving bells, no plates. What is there to draw?
The good news is, if you want to keep something that actually does most of the things people want Bitcoin to do, you can. Gold is universally accepted as a long-term store of value. It works well as an inflation hedge: spot gold sterling is up 10.6% since the start of the year, so UK holders should be happy. It does not require a platform or password if you want to dig it out from its hiding place. It looks nice, useful, hard to fake, easily broken down, and not the subject of conversations of endless attempts on how to organize it.
Finally, it is worth noting that central banks (who have now accepted that inflation is not fleeting) seem to like it a lot. They buy a lot of gold, something they know is a good bet for the long term. What they’re not buying is Bitcoin – something they probably know they’re not.
More from Bloomberg Opinion:
• FTX Hammers More Nails In Crypto’s Coffin: Lionel Laurent
• The UK housing market is desperate again: Merryn Somerset Webb
• These banks are left holding the bag in case cryptocurrency explodes: Mark Rubinstein
This column does not necessarily reflect the opinion of the editorial board or Bloomberg LP and its owners.
Merrin Somerset Webb is a senior columnist for Bloomberg Opinion covering personal finance and investing. Previously, she was editor-in-chief of MoneyWeek and contributing editor to the Financial Times.
More stories like this are available at bloomberg.com/opinion
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