Lessons we are still learning from the crypto crash
Press of Atlantic City (NJ)
We have now witnessed the collapse of the largest (so far) 21st-century "tulip bubble" as the FTX Crypto Exchange collapsed - taking down the value of the best-known cryptocurrencies, along with the equity of some very sophisticated players and the wealth dreams of small-time investors.
When it was revealed that the FTX "exchange" was backed by capital denominated in crypto tokens created by its founder Sam Bankman-Fried with no intrinsic value, the "Ponzi scheme" collapsed into a $32 billion loss of value in one day.
There was to be no last-minute rescue. FTX Exchange has filed for bankruptcy, and Bankman-Fried has resigned. Accounts are frozen. It is likely that those who held their cryptocurrencies at FTX will lose most of their value. And the major financial players who invested in FTX - including some big Wall Street venture firms - have lost billions.
It's a scenario reminiscent of Enron: balance-sheet shenanigans, no-value assets, interlocking companies - and no transparency. Yes, laws were changed after Enron - but FTX operated in an unregulated global marketplace, headquartered in the Bahamas. As in Enron, money has simply disappeared.
Meanwhile, the price of all cryptos plunged. Bitcoin has traded as low as $15,500 before rebounding a bit. That's down from a high made in December almost two years ago of over $60,000.
It's not that the blockchain concept is without merit. A digital currency will eventually come. But it will likely be regulated and related to central bank currencies, since the promises that cryptos provide safety outside the banking system have now been publicly demolished.
And now it is likely that the Securities and Exchange Commission, which had been dragging its feet about regulating this global "cash" market, will step in to see if there were any violations of existing securities laws in public statements made by Bankman-Fried. Meanwhile, the financial industry is holding its breath to see if Bankman-Fried's trading company, Alameda Research (backed by his own FTX token, FTT), had cross-trading relationships with other firms that could cause system weakness.
Don't worry if you aren't following all these details. It will be a made-for-TV movie in a few months. I nominate Ashton Kutcher to play Bankman-Fried, not only because of the obvious physical resemblance but because he famously invested in Bitcoin against his wife's advice. If he does take this starring role, you can bet he will ask to be paid in good old U.S. dollars.
But a generation of young investors who thought they had discovered a new way to instant wealth is going to get burned. Not only did they lose out on "meme" stocks like Robinhood, and now crypto prices, but their other tech heroes are proving vulnerable, too.
Elon Musk had to sell an additional $3 billion in Tesla stock to finance his Twitter acquisition. As that was revealed Friday, Tesla stock plunged to $176 (down 7% in one day) and down from its year-ago high of $360. Even Musk's ardent fans don't believe he can do a combo of Tesla, SpaceX and Twitter in a 24-hour day.
And Meta Platforms' stock (the former Facebook) had a similar dizzying plunge from a high around $350 to just over $100, as founder Mark Zuckerberg announced the need to lay off 13% of his workforce as he overindulged his passion for the "metaverse" and spent way too much corporate cash to make his dream come true. Now, it has turned into a nightmare for more than 11,000 employees - as well as shareholders.
Do you see what they all have in common? They all had plenty of cash while the game lasted. But now that the Fed is raising rates (the cost of capital) and sucking excess liquidity out of the market by selling its portfolio of government bonds and mortgage-backed securities, cash has become more valuable, and scrutiny of corporate value has become more intense.
There is no free lunch. Another generation is learning that lesson. That's surely a Savage Truth.
Terry Savage is a registered investment adviser and the author of four best-selling books, including "The Savage Truth on Money." Email her at [email protected].