The manic speculation behind FTX’s fall is as old as the markets themselves

Sam Bankman-Fried, co-founder and managing director of FTX, in Hong Kong, China on Tuesday, May 11, 2021.

Lam Yık | Bloomberg | Getty Images

With a nod to Gertrude Stein, “there’s none out there”, in the world of cryptocurrencies.

The spectacular crash of FTX – the crypto exchange founded by former prodigy, Sam Bankman-Fried – coupled with its staggering loss of wealth is yet another lesson in how rank speculation negatively affects markets and even the most seasoned investors.

From fads in Sumerian grain markets, Dutch tulip bulbs, rail bonds and everything from internet service providers to digital currencies, leveraged speculation is as old as the markets themselves. themselves.

Crypto’s unsurprising crash is another example of everyone from the most sophisticated investors to the least knowledgeable day traders getting sold a bill of goods and happily buying it in hopes of “winning “a generational richness.

It is both an old story and an ongoing story.

A familiar tale

During the dot-com bubble, investors poured dollars into so-called “vaporware”, computer hardware or software that had yet to be produced and never been released.

Most have never been.

Crypto strikes me as a form of vaporware.

Digital assets that do not exist in reality have been used as collateral to buy and sell other non-existent assets with a heavy dose of borrowed money. This creates a garland of nested digital tokens that have no intrinsic value except what people are willing to assign.

Much like the tulip mania in Holland in the 1600s, the intrinsic value of tulips was minimal: they were just flowers. They were very popular until a sailor – and this is an apocryphal story – ate a tulip bulb thinking it was an onion.

This small dose of reality shocked investors who suddenly realized what had been clear all along: it was just a light bulb.

The market for precious tulip bulbs collapsed in 1637.

This can also be the case with cryptography. We learn that the balance sheets of some crypto exchanges were using proprietary tokens as collateral, using them, and buying other tokens, other digital assets, or so-called stablecoins, which may ultimately turn out to be anything but.

There is also the risk that client funds will be diverted to enrich those at the top of the table.

Crypto, in my humble – but seasoned – opinion has always been a Ponzi scheme. There is none there.

A solution in search of a problem

This latest craze is about things that don’t exist and have no intrinsic value, but offered a Panglossian view of what the future of money might be – even if the money we have today is more than enough to function as a medium of exchange, a unit of account and a store of value.

Cryptocurrencies, unlike the underlying blockchain technology, were solutions in search of a problem.

Activity over the past decade in digital assets – whether in crypto, stablecoins or non-fungible tokens – has been another episode of popular delusion, rank speculation, unsupervised free play in shady markets that will soon wipe out the value of investors’ real money.

Markets for these assets can be highly regulated or fully regulated. This chapter remains to be written.

Investors’ willingness to turn to “The New New Thing” – as author Michael Lewis once described Silicon Valley stocks during the internet revolution – never ceases to amaze.

Every five or 10 years we get a “new new thing” that will supposedly alter the course of human history.

Some really will, such as electricity, automobiles, the computer, the Internet, and biotechnology have all succeeded in doing so.

However, some things are ideas that capture the imagination but ultimately remain in the realm of fantasy.

Many still believe that the fantasy will come true.

Sam Bankman-Fried may still be among them, but his bet on the future has made him a prince and a pauper in the space of about 48 hours.

Hopefully that won’t be the case for anyone who’s been looking to make money just by creating it.

Ron Insana is a CNBC contributor and senior adviser at Schroders.

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