In yesterday’s piece, I noted the remarkable tendency for big market events to occur when I’m out of the office. Although I asserted that FTX would be proven to be more significant than Thursday’s CPI driven rally (which continues this morning after today’s PPI report), we proceeded to discuss the ramifications of the big moves in stocks and bonds. Today we focus on FTX and the crazy ride in bitcoin and other cryptocurrencies.
It would be irresponsible to opine about the path forward for FTX. The myriad moving parts and jurisdictions make it too difficult to predict the likelihood of recovery for customers and investors. That said, there are elements of Enron (over-leverage and murky balance sheets), Theranos (a young, intelligent founder whose wild claims were believed without sufficient evidence), and Lehman Brothers (a precipitous decline and funds held in countries with different rule sets). None of those bode well as precedents for those with exposure to FTX, Alameda and related companies and tokens.
In yet another coincidence, one of the few business-related calls that I took during the week was from a reporter I like who was working on a story commemorating the one-year anniversary of bitcoin’s record high. Yes, on November 10th, 2021, bitcoin topped out at $68,991. When we chatted last Tuesday, November 8th, 2022, bitcoin was around $20,000 – a decline of over 70%. It is an unpleasant memory for those who have been long over the past year. I couldn’t resist commenting on that topic, so we made plans to speak during the afternoon in Europe. Literally, while I was on the phone with him, I saw the initial alerts that FTX might be experiencing trouble. We talked for a while, but for obvious reasons the simple commemorative story was overtaken by events.
Here are the basic points that I made during last week’s call:
1. Would cryptos have become mainstream, let alone a mania, if we had positive real interest rates? I think not. Zero nominal and negative real rates encouraged all sorts of speculative excesses. This was just the most extreme.
2. How could anyone credibly assert that Bitcoin or any other cryptos could be an inflation hedge when they literally never existed in a period when inflation was problematic? I find it a difficult, if not impossible argument.
Finally, as part of the background for the interview that never aired I sent some links to pieces that I wrote about cryptos over the past couple of years. Looking back at them, many still seem relevant. They include:
- This piece was written in November 2021, shortly after bitcoin peaked and about two weeks before the NASDAQ 100 (NDX) peaked. The premise was that Bitcoin was not a hedge, just another (more) speculative investment: Sorry Kids, Bitcoin is Acting Like Just Another Risk Asset.
- In hindsight, the launch of the ProShares Bitcoin Strategy ETF (BITO) may have been the reason for the final run-up. The advent of an ETF based on bitcoin futures was indeed a milestone, but ultimately became another over-hyped event. On the plus side, the contango in bitcoin futures flattened considerably, undermining our worst fears about systematic underperformance, but outperforming a disastrous market is still not a win: This Is How We Roll
- Although bitcoin was past its peak when I wrote this, here was a piece comparing the most recent Super Bowl ads to the 2000 edition internet ads. The comparison holds up all too well: Will We Be Nostalgic for Super Bowl Crypto Ads?
- In piece above, I linked to one from August. In this one I laid out my premise that the real innovation may be blockchain, and that cryptos became a the early investment method of choice rather than the best use of the technology: Blockchain : Internet :: Bitcoin : ?
- This piece proved to be premature because it failed to anticipate the autumn 2021 run-up, but it links to a bunch of other useful pieces I’d written earlier in 2021: My Wife’s Trainer and Joe Kennedy’s Shoeshine Boy.
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