Heavy investment in the auto industry in the early 1900s — nearly 600 new car manufacturers opened in the US between 1908 and 1910 — gave us incredibly efficient and fast combustion-engine cars. The first ones were so slow that opponents stood on the side of the road and shouted to the drivers to “get a horse”; Today, we need speed limits to stop everyone driving 150 mph.
The diving bell bubble of the 1690s gave us better diving technology (better to find wrecks). The railway bubble gave us the 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 left at least that many homes. Even the much-maligned tulip bubble left behind many beautiful tulips (some of which still exist) and some wonderful paintings (which encouraged a focus on flower shows). Even the South Sea Bubble in the UK, based mainly on silly stories, developed little infrastructure around joint stock companies.
You get the picture. All in all, not a bad track record for those with a love of money and a good story in a profitable capital expenditure that can be useful in the long run.
From then on to today’s great crypto bubble. Unfortunately, it seems to be an extreme thing – it causes nothing but pain when it explodes.
That’s what Sam Bankman-Fried quickly discovered. The founder of crypto exchange FTX was once worth $26 billion; It is nothing now. For some reason, you could say that his downfall was not about the failure of cryptocurrencies, but about the more extreme failure of the platform itself. That is partially true. It’s, in many ways, a perfectly normal story of greed, potential fraud (the story of a company borrowing money to anticipate its client’s deposits isn’t exactly new) and a liquidity crunch. The exposed bezel at the end of each bubble may not differ in type.
However, the overall pathetic debacle should be a reminder of the fragility of the crypto case in general.
Try to imagine a world without Bitcoin, Ethereum, Ripple, Litecoin and the like. I suspect you will 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 might not be in your pension, and if someone asks you what problem in your life to solve, you probably can’t think of anything. It makes sense. I can’t either.
Thanks to its limited supply, Bitcoin is an excellent inflation hedge and therefore an excellent store of wealth, fans tell us. But scarcity combined with use or desire creates intrinsic value, not scarcity by itself. 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 crypto has a good use case that adds 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 isn’t busted, the first three might be true. But doesn’t your bank account serve the same purpose? Regardless of private and government? We may come back to that after the upcoming regulatory splurge. Worse, if you don’t use the platform (purists think you shouldn’t), all that stuff can quickly become irrelevant. No customer support. Lost your passcode? Too bad. You also lost your crypto.
When it comes to the aggregate of enough people, 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 hit $100,000 within five years if more people adopt it as a wealth equivalent to gold. However, if fewer people see it as a store of wealth (and I think this is the case right now), this suggests that the price could approach zero.
The thing is, while there may be some useful financial infrastructure left over like the South Sea, once the people who believe in Bitcoin stop believing in it, there may be nothing left but capital losses. No light bulbs, no bikes, no diving bells and no paintings. What is there to paint?
The good news is that if you really want to do most of the things that 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 happy. It doesn’t need a platform or password if you want to unhide it. It’s cool, it’s useful, it’s hard to duplicate, it’s easily divisible, and it’s not the subject of endless conversations about how it should be regulated.
Finally, it is worth noting that central banks (now admitting that inflation is not volatile) are very willing. They are buying a lot of gold, which they know is a good long-term bet. What they won’t buy is Bitcoin – they know maybe not.
More from Bloomberg Opinion:
• FTX Hammers More Nails in Crypto’s Coffin: Lionel Laurent
• The UK housing market is once again depressed: Merrin Somerset Webb
• These banks were left holding the bag in the crypto implosion: 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 personal finance and investing columnist for Bloomberg Opinion. Previously, she was editor-in-chief of Moneyweek and a contributing editor at the Financial Times.
More similar articles are available at bloomberg.com/opinion