Signs of carnage are everywhere. The price of bitcoin, the pioneering, 13-year-old cryptocurrency, is down 50 percent in six months. The values of other exotically named digital tokens such as solana, ethereum, XRP and dogecoin (begun as a joke and increasingly behaving like one) have fallen by similar percentages.
A “stablecoin” called terraUSD, which was supposed to be pegged to the U.S. dollar to facilitate predictable exchanges, collapsed. Non-fungible tokens, which are tradable renderings of digital objects, have lost their luster. The collector who paid $2.9 million for Twitter co-founder Jack Dorsey’s first tweet reportedly chose not to sell it when the best he could fetch was $14,000.
This all is as painful to enthusiasts as it is confusing for the uninitiated. So, let me explain why the bloodbath, while inevitable, could lead to something better.
Various forms of cryptocurrencies were dreamed up by a medley of venture capitalists, software coders and entrepreneurs in the past decade to constitute an alternative system for finance and other digital transactions. The thinking was that the global financial system is creaky and controlled by sclerotic governments. A new system based on a decentralized accounting technology called blockchain would democratize the worldwide exchange of goods and services.
That’s the vision, anyway.
In practice, crypto adherents have struggled to say exactly what their creation is or, more importantly, what it’s good for. Cryptocurrencies aren’t actual currencies because nearly no one uses them to pay for anything. (Pornography and criminal activity are notable exceptions.) Even Coinbase, a large crypto exchange, charges customers in dollars to trade on its platform. Cryptocurrencies also aren’t securities, like stocks and bonds, though regulators are considering declaring them so in the name of protecting investors.
Crypto enthusiasts predicted (okay, maybe hoped) their creations would behave like commodities, particularly gold, as a store of value. But the recent swoon in crypto prices in the face of rising inflation has punctured these dreams. Instead, speculative bets on unproven cryptocurrencies have gone bad alongside other failing wagers.
Warren Buffett got it right recently when he called bitcoin and its ilk unproductive assets. They go up when people pay more for them and down when people pay less. But they have no value unto themselves.
All this search for meaning would be good and fine if not for all those who have lost real money investing in the imaginary kind. You can draw a straight line from the dot-com bubble of the late 1990s to the subprime mortgage debacle a decade later to today’s crypto fad. Each involved the kernel of a good idea that was then puffed up by hucksters, charlatans and other confidence men and women, convincing average consumers they were investing rather than speculating. The high-water mark of this era might prove to be the announcement last month by the staid Fidelity Investments that it would give employers the option to allow employees to allocate a portion of their retirement plans to bitcoin.
Given the carnage, I would not be surprised to see Fidelity slow-walk its plans as few companies take the bait.
Crypto cheerleaders predictably call this a blip — and one they have seen before. The Silicon Valley investment firm Andreessen Horowitz, for instance, issued a report last week that unironically referred to the downturn as one in a series of “price-innovation” cycles.
But there are real losers here, egged on by celebrities and public figures, such as New York Mayor Eric Adams (D), who, in the name of promoting his city as a “fintech” capital, vowed to convert his first three paychecks into bitcoin and ethereum. Matt Damon, Gwyneth Paltrow and LeBron James are just a few of the A-listers who have shilled for various crypto offerings. A friend of mine decided last year to invest $1,000 in a basket of crypto so he could see what all the fuss was about. It’s worth $280 today.
As with the aftermaths of other financial bust-ups, something good likely will emerge from the great crypto meltdown. Legitimately beneficial products, firmly regulated by governments, undoubtedly will emerge that will make someone a fortune and improve people’s everyday lives.
Until then, crypto remains a solution in search of a problem.