Editor’s note: This article originally appeared on Dana Blankenhorn’s blog Facing the Future. Subscribe here.
I wrote about cryptocurrency a lot, late in the last decade.
I finally decided it was trash.
There are no blockchain applications superior to what you can do in other ways. Bitcoin (BTC-USD) and Ethereum (ETH-USD) claim they’re better than other coins, but the market remains crooked and opaque.
All this came crowding in this week when FTX collapsed. FTX was the creation of a 20-something (now 30) named Sam Bankman-Fried, whom my son now calls Bank Man Fried, as in French fries.
FTX was among the largest crypto exchanges. It supposedly “bailed” smaller ones out earlier this year when they collapsed. But the whole thing was a house of cards.
Bankman-Fried created his own money, FTX Token (FTT-USD). He sold some of it. Then he printed a ton more and gave it the price he’d sold the first stuff at. Oh, he also leveraged it, making bets he couldn’t pay out on, and used it as collateral for loans. No one knew any of this until people started trying to get real money for their FTX Tokens.
This is not how money works. Real banks publish their numbers. They’re limited in what they can do by regulators. The supply of money is controlled by a central bank, and the operations of that bank are transparent. This was no “Lehman moment” because there was no one to backstop the system.
Can We Fix the Crypto System?
Unlike with Bitcoin, a real economic system can be fixed. It’s true that in the first decade of this century our system nearly collapsed because of fake “insurance” that turned crap mortgages into AAA paper. The result was Ben Bernanke’s “helicopter money,” free cash that rained down on the system to keep it afloat. This prevented a Great Depression, an economic collapse caused by too little money chasing too many goods.
Bernanke’s solution, however, led directly to crypto’s Ponzi bubble, which dominated this year’s Super Bowl ads as dot-com stocks did that of 2000. (Also won by the Rams.)
All the dumb waste of the last decade – the crypto garbage, SPACs, overpriced tech stocks, the housing bubble – resulted from too much free government money. It couldn’t find a safe return. It slopped over into the hands of conmen.
Conmen like Sam Bankman-Fried. Who claimed his money was real money, and that real money was fake money, because the Bush-era Fed screwed the pooch and the economy had to be bailed out.
But when Lehman Brothers collapsed, at least the government was there. At least its assets were real. There was nothing behind FTX but this kid’s word.
What the Bitcoin Bros who started this mess want to claim is that what happened to them will soon happen to “fiat currencies,” like the U.S. dollar.
Government actions in the end are controlled by currency markets. Money prices are constantly compared and when a government screws up, it’s reflected in worthless currency. They’re not all going to screw up at once, leaving everyone with nothing to trade with. There’s value in every economy. A currency is a call on that value. That value is real.
Crypto isn’t real. It never was.
On the date of publication, Dana Blankenhorn did not hold (either directly or indirectly) any positions in the securities mentioned in this article. The opinions expressed in this article are those of the writer, subject to the InvestorPlace.com Publishing Guidelines.