Scams, bubbles and charlatans: cryptos in crisis

The wealth creation happening in cryptocurrencies is staggering. But so too are the warning signs that this may be the biggest investment bubble since the 2000 dotcom crash.

 

Brian Armstrong, the 38-year-old, baldheaded brainbox behind cryptocurrency exchange Coinbase, gave himself a Christmas present this year: an immense property in LA’s Bel Air. The price was a cool dollars $US133 million. He’s unlikely to miss it. Armstrong’s net worth shot to an estimated $US9.4 billion after Coinbase’s 2021 stock market float.

The one-time Airbnb software engineer is not the only person to have come into sudden, vast wealth lately. In the crypto world, such stories are de rigueur.

Consider Alex Atallah and Devin Finzer. Two years ago, the New York thirty-somethings were running a marketplace for non-fungible tokens, the unique digital assets known as NFTs. It was generating less than $US30,000 a month in sales. Then the world fell in love with high-priced Jpegs – and OpenSea, their company, exploded. Amid the NFT frenzy, it raised a fresh round of funding this month to value the four-year-old start-up at $US13 billion, raising the pair’s paper fortunes to an estimated $US2.2 billion each.

Changpeng Zhao can top that. The 44-year-old Canadian programmer started the Binance crypto exchange in 2017. Today, his net worth, based on his Binance stake, tops $US96 billion. That puts him in the same neighbourhood as Warren Buffett, who has been investing and trading since before Zhao was born.

The wealth creation happening in cryptocurrencies is staggering. But so too are the warning signs that this may be the biggest investment bubble since the 2000 dotcom crash. Jeremy Grantham at fund management giant GMO, who called both the tech bubble and the 2008 real estate crash, last year said that bitcoin “most resembles the Nasdaq in 2000”.

Richard Bernstein, founder of New York fund manager Richard Bernstein Advisors, went further. He said: “Crypto could be the biggest financial bubble in history.”

In the past two months, the prices of bitcoin and ethereum, the top two cryptocurrencies, have plunged by a third, vaporising more than $US600 billion in value – though they are still up dramatically from the levels they traded at pre-pandemic. At the same time as this vertiginous drop, or perhaps because of it, a civil war has broken out in techie circles.

On one side, messianic crypto-maximalists argue that cryptocurrencies, and the blockchain technology behind them, represent the future of virtually everything – money, art, music, the internet itself. The recent drop? A mere $US600 billion speed bump on the road to this brave new world.

On the other are a growing group of sceptics who claim that the mania has devolved into a good old-fashioned money grab that has drawn in grifters and suckers for whom this will all end in tears.

This is not to say that cryptocurrency, or blockchain, or, as it has all been rebranded, “Web3”, will not change the world. It might. Consider the 1999 tech bubble, when Silicon Valley breathlessly promised to revolutionise the way we shopped, banked, consumed entertainment, dated and generally lived life. All of that has happened; it just took far longer, and was much harder, than advertised. If you bought into the Nasdaq 100, the US index of top tech companies, in December 1999, four months before the market peak, it would have taken you 14 years to break even, Bernstein has pointed out.

In other words, the companies that went on to change the world were not the ones raising hundreds of billions of dollars back in the late 1990s, barring a few exceptions such as Amazon. Bernstein says: “I don’t think that too many people are buying cryptocurrencies today and saying, ‘I’ll break even in 14 years.’ ”

At the core of the crypto craze is a reaction to the world as it is today, where a group of mammoth institutions, from the big banks to Big Tech, extract an inordinate amount of value from what we do, see, buy and sell. Web3 promises the opposite: a decentralised world in which all economic activity is recorded on a public ledger that no one controls, and where digital money skitters around the web with the ease of sending an email.

However, right now, Web3 is full of clunky, barely useful projects marred by astronomical transaction fees. When Motherboard magazine sought to give $US75 in ethereum to a group of crypto-enthusiasts attempting to buy a copy of the US Constitution in November, it was charged an extra $US75 in “gas” fees – the cost to process the transaction. It makes cash machine withdrawal charges look downright magnanimous.

But none of crypto’s obvious shortcomings or current lack of utility can dilute the boom’s key fuel: greed. Tales of punters becoming millionaires by betting big on obscure tokens such as Dogecoin go viral, inspiring millions to start trading on platforms like Coinbase. And vast fortunes have indeed been made. Yet as Bloomberg’s Matt Levine wrote: “I have never read a profile of someone who became a billionaire by using crypto to solve any problem other than trading more crypto.” Which is why there are now more than 16,000 cryptocurrencies in circulation, worth $US2 trillion-plus.

Scams are on the rise. According to Chainalysis, crypto-punters were last year swindled out of $U7.7 billion. “Rug-pulls”, where someone spins up a crypto project, sells a currency to fund it and then absconds with the cash, have skyrocketed. Fatih Faruk Ozer, 28, created a crypto exchange, Thodex, and then vanished with $US2.6 billion in April.

Alex Mashinsky, founder of Celsius, a crypto fund manager that has just raised $US750 million, warned: “Everything that people are trying to do for you in the crypto world, almost everybody almost without exception, are doing it because they want to steal from you.”

The question is: if the boom turns to bust, will it matter? The tech bubble’s bursting led to a mild recession. If bitcoin imploded, would it tank the economy – or just create a flood of sales of Miami mansions and million-dollar Jpegs? It feels like the latter. And maybe that’s OK, as it would leave the hardcore builders to toil outside the spotlights of the crypto craze, developing the scaffolding that may indeed one day change the world.

When central banks tighten policies, bubbles pop. Jerome Powell, chairman of the Federal Reserve, pledged last week to start hiking rates. Bernstein said: “The shot is being made across the bow, and people are ignoring it.”

THE TIMES