Over the last month, I have been fascinated reading about the collapse of FTX, a crypto exchange company. FTX was supposed to be a safe place for crypto investors to trade and store their digital assets – Bitcoin, Dogecoin (which was started as a joke), Ether, etc. It turned out that FTX was a complete fraud, with the CEO treating his customers' accounts like his own piggy bank. As Warren Buffet famously said, when the tide goes out, you see who’s swimming naked. The crypto bubble has popped, with total losses on these various digital coins so far exceeding $2 trillion since they peaked last fall. With many investors running for the exits, the solvency of other digital exchanges has come into question. The news of the FTX collapse caused several other exchanges, who were FTX counterparties, to freeze accounts and prohibit withdrawals, sparking fears of more failures to come.
It isn't at all shocking that this happened because cryptocurrencies are a shell game. They add nothing to the economy because they aren’t actually currencies. A currency must be accepted everywhere you go to buy stuff. Go to the grocery store and try to buy a loaf of bread with Bitcoin – you can’t. A currency must also be a store of value. The Canadian dollar this year has traded at an average of roughly 77 cents US, with a high of 80 cents and a low of 73. This means that it fluctuated less than 4 percent. Now compare this to bitcoin. On January 1 of this year, it was worth over 60,000 USD; as I write this, it is worth 16,828 USD, a decline of more than 72 percent. So yeah, not a currency.
There is no underlying economic activity in crypto – it doesn’t make anything, it doesn't create a stream of income. It’s not actually needed for anything. (In fact, because it has to be “mined” using gobs of computing power, it is a net negative, because it wastes alarming amounts of electricity and creates the resultant emissions.) The only way to make money from crypto is through the Greater Fool Theory, where someone is willing to pay you more than you paid for it. To catch the fools, you need a good story. The crypto acolytes use the same fearful language the gold cranks use – that the central banks are printing money and destroying your savings. Bitcoin, they claim, is going to be valuable because only a finite number can be created. But as I showed above you have no idea what Bitcoin will be worth from one week to the next. Central banks like the Fed and the Bank of Canada exist precisely to create stable money and they do that job very well. Secondly, even if there is only a finite number of Bitcoins, there are potentially an infinite number of other crypto coins that can be created (for example, Litecoin also has a fixed number of coins). What makes one more valuable than the others? Absolutely nothing.
A second story is around security, privacy and eliminating all the bloodsucking banks and credit card companies who charge you to save and spend your own money – not to mention that pesky government demanding its taxes. Digital coins are supposed to be a way to have frictionless transactions – easy, free, and safe. But much like the early days of the internet, when everything was going to be free, crypto isn’t free. The exchanges are increasingly behaving just like the banks, with trading fees, withdrawal fees and even their own debit/credit cards. As for the security argument, it's pretty laughable, since the people who benefit from this feature are mainly criminals. As Charlie Munger said, Bitcoin is good for kidnappers.
So what is crypto actually for? Merely to create another casino in which vast sums can be made by a few people at the expense of the many. Because our terrible tax, legal and regulatory regimes have led to an immense concentration of wealth, our economy has been creating one asset bubble after another for the last 25 years – since the late 90s, we’ve had bubbles in tech stocks, housing, oil, ‘covid’ stocks, and crypto. All of these bubbles have one thing in common – they transferred money from the bottom and middle up to the top. Crypto is playing out like all the other ones, with the vast majority of retail investors having lost money. And every time this happens, a bunch of people are left worse off than they were before. The money flushed down the toilet during these last few years on crypto and overhyped growth stocks is gone, and all that can replace it is more debt. Suffice to say, this isn’t something that can go on forever.
Nothing illustrates the cost of bubbles more clearly than the 2008 financial crisis. Housing in the US was booming due to low interest rates. Mortgage lending standards were a hinderance to bigger profits, so the banks doled out NINJA loans to gullible people to keep the party going. When housing prices crashed and banks like Bear Stearns and Lehman became insolvent, the government had to step in and bail them out. Despite literally thousands of cases of fraud, misrepresentation and insider trading, not only did no one go to jail, the bankers were allowed to keep all the dough they made. While they sunned themselves in the Hamptons, millions of people all over the world lost their jobs and their homes in the Great Recession, only to have idiots like this guy put the blame on the victims instead of his pals on Wall Street. Many people (and countries – see Greece) have never recovered from 2008. That’s what’s so unjust about asset bubbles- you don’t have to participate in them in any way to end up being a victim.
Think about the myths of capitalism, dating all the way back to Max Weber’s The Protestant Ethic, which proclaimed that if you worked hard, were honest, thrifty and disciplined, that you would do well. The Protestant Ethic then translated into the so-called American Dream, whereby working-class people could work hard and earn enough to have a house, two cars and a solidly middle-class life. Moreover, because our societies were meritocracies and not hereditary aristocracies, your children could do even better by getting a then-reasonably priced education. The consensus established after the Great Depression/New Deal was a truce between capital and labor. There was a recognition that a level of cooperation was needed, that companies, customers and workers all were necessary parts of a virtuous circle.
That’s all gone, and it’s been replaced by a hyper-competitive, greed-soaked economy in which exploitation of differences in wealth and knowledge are the best way to make money. When you have concentration of wealth, an illogical tax system and impotent regulation, bubbles are inevitable. While crypto won’t end up crashing the economy, it certainly doesn’t help it, especially when you factor in what the opportunity cost is of putting resources and talent into completely unproductive things. If we don’t fix our economy - cut taxes for working people, stop corporate mergers and reintroduce competition, use taxes and regulations to incentivize the behaviours that benefit us all - we'll have more bubbles, and it will be only a matter of time before another 2008 happens, with even worse results.
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