It confounds value investors. Heck, it confounds most momentum investors. And some of the very best investors have never been onboard.
“Sometimes I call it crypto ‘crappo,’ sometimes I call it ‘crypto s—.’ It’s just ridiculous that anybody would buy this stuff,” legendary value investor Charlie Munger told CNBC early in 2023. “It’s totally absolutely crazy, stupid gambling.”
Crypto Winter
In the early 2020’s if you weren’t investing in crypto you risked looking out of touch. From virtually nothing Bitcoin reached nearly $70,000. Ethereum was close to $5000. Even Dogecoin, a literal joke that formed on Reddit, hit $0.69.
But after a series of boom and bust cycles, the bottom seemed to fall out of crypto in 2022 in what became know as the “Crypto Winter”. A torrent of lawsuits, many involving celebrities who were accused of using their influence to peddle worthless offerings, followed. The Washington Post declared: “the sense that the crypto bubble has definitively popped, taking with it billions of dollars of investments made by regular people, pension funds, venture capitalists, and traditional companies”.
So what does an investor into crypto really need to know? For those who have leveraged themselves into it the truth is a cold one indeed: crypto has no net worth and investments in crypto have been dependent on the “Greater Fool Theory”.
“While Bitcoin has failed in its stated objectives, it has become a speculative investment,” argues Eswar Prasad of The Brookings institute. “This is puzzling. It has no intrinsic value and is not backed by anything. Bitcoin devotees will tell you that, like gold, its value comes from its scarcity—Bitcoin’s computer algorithm mandates a fixed cap of 21 million digital coins (nearly 19 million have been created so far). But scarcity by itself can hardly be a source of value.”
Will crypto go to zero?
So what’s to prevent Bitcoin, to use the most high-profile example, from going to zero? Nothing, says investor Peter Schiff, who says that’s exactly what is going to happen.
“The ride to $0 is not going to be in a straight line,” he said in a recent interview.
But why, exactly? The Economist laid it plain in a piece called, plainly, “How Crypto Goes to Zero”
If everyone stopped using it. That, in five words, is how crypto would go to zero. Still, the journey is more interesting than the destination. The death of ftx, an exchange declared bankrupt on November 11th after a spectacular blow-up, will encourage some people to turn their attention elsewhere.”
But the same article conceded that going to zero would probably be a bridge too far.
“The total market cap of cryptocurrencies is currently $820bn. That is 70% below the peak a year ago, but still high compared with most of crypto’s history. It is higher than at the start of last year, for instance, and any point before then, including the peak of the bull market in 2017. Many more layers—such as a major stablecoin, big businesses or perhaps other on-chain protocols—would have to unravel to take crypto’s value back to the levels at which it traded just three or four years ago. Crypto’s reputation has been undermined before. It has collapsed in value repeatedly throughout its lifetime. Although fewer people will use crypto as a result of the ftx collapse, it is very hard to imagine the number will be small enough to take its value to zero.”
People aren’t using crypto
The real Achilles Heel of crypto is that people simply aren’t using it as a currency.
“Over a decade after its launch, the promise that shoppers would be happily using their Bitcoin addresses for payments in stores rings hollow,” says Decrypt’s Robert Stevens.
Stevens argues that people IT do use bitcoin to by things, it’s just that this scenario is dwarfed by its usage as a speculative investment.
But this, says Nathaniel Popper, writing for the New York Times, is not necessarily a condemnation of Bitcoin as a currency, but rather a cagy move by those who are aware of its other aspects.
“The increasing value of Bitcoin made it even less attractive as a way to pay for things. Most people don’t want to pay now with a dollar that could be worth twice as much next week,” the writer said.
Crypto Paradise Lost
In a speech entitled “Paradise lost? How crypto failed to deliver on its promises and what to do about it” Fabio Panetta, Member of the Executive Board of the European Central Bank argued that far from being minor blips, the major and minor crypto crashes that have defined the last couple years in the space have done permanent damage to the idea that crypto cold become a viable currency and therefore be ascribed a value.
“Today I will contend that due to their limitations, cryptos have not developed into a form of finance that is innovative and robust, but have instead morphed into one that is deleterious,” he said. “The crypto ecosystem is riddled with market failures and negative externalities, and it is bound to experience further market disruptions unless proper regulatory safeguards are put in place.”
Panetta argues that the dream of a lack of limitations that crypto promised has been replaced by one that has very clearly defined limitations.
“A key reason why cryptos have failed to make good on their claim to perform the role of money is technical,” he said. “Indeed, the use of blockchain – particularly in the form of public, permissionless blockchain – for transacting crypto-assets has exhibited significant limitations. Transacting cryptos on blockchains can be inefficient, slow and expensive; they face the blockchain trilemma, whereby aiming for optimal levels of security, scalability and decentralisation at the same time is not achievable.”
Warren Buffett on Crypto
The last word goes to the man highest on the totem pole, who clearly must understand all the nuances and permutations of a generation-busting investment, right?
“If you owned all of the bitcoin in the world and you offered it to me for $25, I wouldn’t take it,” said Buffett recently.
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