Some ideas are meant to die in infancy, but they can still make a powerful statement.
Cryptocurrencies were one of these novel, ground-breaking ideas bound to garner initial support. A new type of finite currency, in an age of money printing, that would bypass the banking system, on the back of a new and credible technology, the Blockchain. The idea seemed appealing. Yet, a little more than a decade later, it lies in tatters. The value of Bitcoin has dropped from $60,000 to $16,000 in two years. The collapse of FTX, a popular exchange, Three Arrows Capital, a crypto hedge fund, as well as crypto brokers Genesis Global Trading and Gemini, all tell a story of failing ‘asset’.
For the time being, there seems to be no significant financial contagion. After all, the whole point of the enterprise was avoiding banks altogether. This means that the crypto world operated in a rather closed loop. But there are important lessons to be learned.
We never believed in Bitcoin, let alone the lesser cryptocurrencies. We have been very vocal about it for a long time when investors were clamouring for advice, when major banks were seeding money in Bitcoin funds and when new exchanges were being set up. It wasn’t a store of value or a recognised medium of exchange. More importantly, it was anti-systemic, and our belief in the power of the system to control the flow of ‘money’ is entrenched. The cold calls from brokers promising riches only deepened our suspicions about the cryptocurrency market.
But ‘we told you so’ doesn’t make for much of a post-mortem (if in fact the cryptocurrency can’t be considered quite ‘dead’ yet). Our role as money managers is to inform, discuss and keep learning. It is to set realistic goals and then achieve them, rather than promise our clients that we can realise their wildest dreams. Nor should we assume we can speak ‘ex-cathedra’ on the subject, deriding those who believed in it.
Why?
Because investors were asking from Fear of Missing Out (FOMO). This sort of feeling, as well as the occasional irrational exuberance, has long affected much more respectable and traditional risk assets. We hardly find ourselves impervious to sentiment. If we had ignored it, then we would have missed the greatest equity and bond rally in history, by staying in cash since 2008.
Instead of teaching, we find ourselves in need to be taught. What is the true lesson here?
In fact there are several.
The first one is the potential dynamic of fringe narratives in the age of social media. We saw the same dynamics in politics. Ideas previously doomed to lurk in the shadows saw the light and spread like wildfire in an era where traditional information outlets were disintermediated and the power to inform (or disinform) has passed from news anchors to the people. ‘Authority’ on the truth is at the same time both easily bestowed and difficult to determine.
Second, quite tangent is people’s evident disillusionment with the financial and economic system, especially among the younger cohorts. Young entrepreneurs weren’t going to banks to fund their ‘unicorns’. They knew they didn’t stand a chance, and if they did the terms would be onerous. Instead, they turned to private investors. Bitcoin was often seen as a way to get back at the global banking system, that so spectacularly collapsed in the Global Financial Crisis. A system that was rescued with taxpayer money and subsequently became less useful, as it stopped transferring wealth from savers to investors, focusing on healing and benefiting from asset price inflation. For Wall Street, it was the greatest Bull Market in history. For Main Street, it was fourteen years of what Larry Summers called ‘Secular Stagnation’. Bitcoin was seen as a way to make banks and other financial intermediaries irrelevant, in a world that was finding increasingly less use for them.
Third, the global financial and political system could have easily quashed cryptocurrencies in their infancy. But it chose not to. Its goal is rather transparent. To use cryptocurrencies as a way to get people talking about digital currencies, produced by central banks. The era of the physical ‘wallet’ is fast coming to an end, and paper money, that have existed since at least the 10th century, may soon be consigned to history.
While Bitcoin itself may become extinct, the conditions that created it are very much alive.
Some popular social media (such as Twitter, or even Facebook) may well go out of business but the genie is out of the bottle. People will find it hard to trust traditional media outlets[1], a lot of which have opted to ‘opinionise’ and ‘sensationalise’ rather than report, and will seek novel ways to be entertained, informed and even assuaged.
Meanwhile, global inequalities are also set to persist. For fourteen years, central banks printed over $20tn to keep the global financial system afloat, inflating risk assets and private portfolios while the real economy remained in the doldrums and people were disincentivised from saving. These same central banks are now purposefully driving the global economy into recession, warning starkly against waged workers asking for raises to keep up with inflation.
While there is some logic to it, in an age where being popular matters more than being systemic, the ‘system’ has done very little to become more enticing to the electorate, and this may well translate into more disillusionment. Historian Eric Hobsbawm famously predicted in 1994 that “social distribution and not growth will dominate the politics of the new millennium”. Meanwhile, in the background, the globalised supply chain is being quietly dismantled, in favour of ‘friend-shoring’, exacerbating global divides.
As for ‘money’ itself? We use our phones to pay. Money is, practically already digital. A four-year-old will probably learn the meaning of ‘cash’ from the history books.
In the days from Harry Truman to Ronald Reagan, supporting Capitalism was a cause unto itself. ‘Capitalism should thrive, and Communism beaten’ was the ‘raison d’etre of western governments. The demise of communism and the unipolar world means that now people will not support the capitalist system as a matter of survival in ‘the battle of good versus evil’, but rather see it more critically.
Paraphrasing Leonard Cohen, ‘The war is over, the good guys won’. But in the 30 years following the fall of the Soviet Union, Capitalism has been reeling from one crisis to the next. After becoming disenchanted with commercial banks, voters could soon turn on central banks, the large unelected bodies that determine the rate of growth and supposedly protect the value of money.
In short, the demand for a more sustainable and equitable version of the current system is alive, and popular pressures towards that end may well persist. Meanwhile, after fifty years of modern monetarism and sixteen after the Global Financial Crisis, the concept of ‘money’ seems once again ripe for change.
Many, including former Prime Minister Gordon Brown and former Fed Chairwoman Janet Yellen, have been calling for a new ‘Bretton Woods’[2], the re-designing of our financial and monetary system. Capitalism has an uncanny ability “to surmount problems it itself creates”[3], which accounts for its longevity since the 17th century. But the debate about how to overhaul it is long overdue. The more the discussion delays, the more the global economy will oscillate.
Bitcoin isn’t just a (possibly) dead asset class. It is a stark warning. “Make Capitalism Great Again, This Time For Everyone”.