Bitcoin, the original cryptocurrency, the gold standard for all things crypto, the holy coin crashed last week. Bitcoin prices fell a whopping 75% in the last year, or down to a fourth of its value. This, for something touted be a better store of value than Gold, US Dollars or any other fiat currency or precious metal.
Other cryptocurrencies have done worse. Many are down 80-90% in a year, some completely wiped out. Most people investors in crypto are now sitting on losses.
FTX, one of the big crypto exchanges, where people come to trade and store their cryptocurrencies, also collapsed last week. This was due to massive alleged irregularities, including customer deposits being inappropriately used to buy and prop up the company’s own issued cryptocurrency, the FTT token.
Sam Bankman-Fried, the 30-year-old CEO of FTX, who works out of an island in the Bahamas apologized on Twitter. FTX filed for bankruptcy, wiping out $32bn of value which FTX had in the last funding round. Sam himself lost most of his $17bn fortune in days. Customers, lenders and employees of FTX all have money stuck in the company, all probably gone. (Incidentally, FTX is also one of the sponsors of the recently concluded ICC World Cup!). Other Crypto entities like Celcius, Three Arrows and Voyager also went belly up last year, making investors lose billions.
Crypto is done. This toxic nonsense now stands exposed. However, it is interesting to go through what happened that made crypto into the world’s greatest con. In this are lessons for all of humanity, on how easily we can be fooled as people.
The warnings were there. One of the world’s greatest investors, Warren Buffet had said he wouldn’t buy all the Bitcoin in the world for $25. He noted that ultimately, he would have to sell it to someone else to get rid of it, as it had no other use. As the famous quote by Gertude Stein goes, “There is no there there,” implying something with no substance. This applies to cryptocurrencies too, which have no end use, no exit, no purpose, really.
And yet, how they boomed. Bitcoin grew over 5,500% from March 2017 to March 2021 alone! Instagram was filled with crypto millionaires buying yachts and Lamborghinis. Articles happily talked about this new ‘asset’ class – a digital gold of sorts. Crypto was the ethical, purer, more transparent and ‘good’ alternative to normal fiat currencies. Every Bitcoin transaction is in the blockchain ledger, so it is all in the open! There’s a limited number of Bitcoin, they can’t be printed indiscriminately like governments print money! Oh gosh, Bitcoin sounded so wonderful, it could almost be called God’s own currency.
With so many virtues and mega-returns, Bitcoin and other cryptos caught attention of millions. Mainstream media followed. Financial TV channels and newspapers gave out regular Bitcoin prices, along with that of Oil, Gold, British Pound and the Euro.. Hedge funds, banks, brokers, reporters – anyone in the finance business had a ‘crypto view’ and ‘crypto strategy.’ Bitcoin was mainstream.
In the middle of all this, it was hard to be a crypto skeptic. Warren Buffet, one of the world’s richest investors, was called ‘too old and dated.’. Yours truly, who wrote earlier write about the dangers of crypto, was trolled mercilessly.
The money flow to crypto was so good that many intermediary firms were created. They called themselves exchanges. Many of them were simply casinos of speculation. People blindly trusted them with their money. None of it was regulated. Nothing was transparent. Some of the most unethical, hustling conmen arrived on the scene and took advantage of people’s fascination with crypto. Thousands of other crypto currencies were launched.
Ordinary people took loans, sold homes, put their life savings in this once in a lifetime opportunity. Most are sitting on heavy losses. Some are wiped out.
Crypto became like communism, which promises power to the people through decentralization, but ultimately leads to power in the hands of a select few. Similarly, a few cult-like stars of crypto became the power-centres. Their opaque intermediate entities ran the show and took their cult-like followers for a ride. Big celebrity brand ambassadors were hired. Crypto followers, like religious followers, simply ‘believed’ in it all. Terms like HODL or ‘Hold on to dear life’, which means to never sell, even if the market crashes became popular. Of course, the biggest believer was usually the one to be left standing behind with the biggest losses. And since all this was unregulated, there was no recourse. The government was the problem you see? So the entire crypto eco-system was portrayed as a regulation-and-government free arena, where noble souls ethically exchanged crypto assets like early men exchanged fish for coconuts. However, whenever something is regulation and government free, it also attracts the shadiest characters and most unethical behaviors. And that is exactly what happened.
Then followed the imminent collapse. Bubbles eventually burst, we just don’t know when and which needle will prick it. This time, it was the collapse of FTX, in an environment of high inflation, high interest rates and generally decreased risk appetite. Now, there will be few new takers for crypto. You really want to put your hard-earned money in the hands of a 30-year old unregulated nerd in Bahamas?
Crypto is never coming back. It’s done. Please do not waste your money on it. It is not an investment. It’s a bogus, passing the parcel, pump and dump game. Stay away from it. If you already lost money, sorry. Hope the lesson was learnt. Lessons that apply to all who want to invest money. Investing is boring. Real returns take a lot of time. Remember these truths: There’s no quick money. There’s no ‘it’s different this time.’ There’s no ‘old-fashioned thinking’ when it comes to money. Young and cool doesn’t make it a good investment. Value matters. Real assets matter. Cash generation matters. End use matters. Regulation and government backing matters. Even if current system is not perfect, making an unregulated eventually overrun by charlatans is plain dumb and stupid.
Make money the long hard way – by working hard, being innovative, solving customer needs, earning, saving and invest in real assets and companies. That’s the only way that has worked, and that is the only way that will work in the long-term. Stay away from Bitcoins, and get yourself some CommonSenseCoins!