Alan Kohler: Crypto and the end of the beginning

Photo: Getty/TND

On Friday, a day after Elon Musk warned that bankruptcy was not out of the question for Twitter, Sam (‘SBF’) Bankman-Fried’s FTX actually did go into Chapter 11 bankruptcy.

Never heard of FTX or SBF? That’s understandable.

FTX is, or was, a crypto exchange, buying and selling cryptocurrencies, and 14 years and one month after the invention of Bitcoin, crypto remains in the shadows of finance.

When FTX ran out of money a couple of weeks ago, SBF had to turn to his competitor, Changpeng Zhao, founder of Binance (and known as CZ of course), because there was no appetite among mainstream financiers to bail out a crypto exchange.

Last week, CZ walked away. SBF tried to raise $US8 billion but failed because no one outside crypto-land wanted to touch it. So he put the company into Chapter 11, quit as CEO, called in the guy who handled the Enron collapse, and said goodbye to his own $US24 billion personal (paper) fortune. It’s probably the largest money bonfire in history.

Meanwhile, the world of big tech has also had a rocky couple of weeks.

Rocky road: The share price of Meta dropped 25 per cent in one day.

In late October, the share prices of Meta (owner of Facebook and Instagram), Alphabet (owner of Google) and Amazon all fell 20 to 25 per cent in a few days (Meta did it one day), as disappointing quarterly earnings were announced.

Then last Thursday, after US inflation fell and lowered expectations about interest rates, they all zoomed higher and propelled the US stockmarket to its best day in two years.

Actually, these stocks have been falling for exactly 12 months, in tandem with Bitcoin and the other cryptos.

The so-called FAANG index, which includes Alphabet, Meta, Amazon, Netflix and Apple, peaked on November 12, 2021, and has since declined 41 per cent. Meta has fallen 75 per cent because of CEO Mark Zuckerberg’s so-far ill-fated adventure in the metaverse.

World’s third/fourth industrial revolution

The decline has been partly due to rising interest rates, but it’s also due to the fact that we’re at the end of the beginning of the fourth industrial revolution.

The question of which is third and which is the fourth is a bit messy.

The third industrial revolution (digital) tends to merge into the fourth (automation), so it might be better to talk about them as one thing.
Whatever – we’re now moving from its second price bubble into something more boring and normal.

The first bubble was the late 1990s, ending in the March 2000 bust.
But over the following decade, the arrival of smartphones, social media, online shopping, video streaming and above all, Google’s internet search tools, kindled a new bubble, this time of real earnings, not just valuations (although valuations did take off as well because central banks slashed interest rates after the GFC and then took them to zero in the pandemic).

But the companies did make colossal fortunes because they had great products.

Apple’s iPhone, introduced by Steve Jobs at the Macworld conference of 2007, is the greatest consumer product of all time – even greater, I submit, than the car. Everybody now has a smartphone and uses it for everything. We simply can’t do without it.

Google is a daily miracle. You type anything into the search field and either it, or Wikipedia with its 6.5 million articles, gives you the answer or where to find it. I am constantly amazed by Google, never get tired of it.

Online shopping (Amazon) and video streaming (Netflix) are incredibly disruptive and have really only just begun to transform the way we live, and work, with Zoom and Microsoft Teams.

Microsoft’s programs have been with us for so long we take them for granted, but Word and Excel are also a little bit miraculous.

Social media is more troubling, which is a whole other subject, but it’s still a great product, just as disruptive and just as much a part of the third/fourth industrial revolution.

The number of social media users (Facebook, Instagram, Twitter, WhatsApp, TikTok) add up to the population of the planet (7.5 billion), although there is plenty of double counting since most people are using more than one.

All of these businesses are now settling into becoming regulated utilities, making regulated utility profits.

In other words, it’s the end of the beginning of this industrial revolution, and investors are seeing that.

In his wonderful book The Great Transformation, published in 1944, Karl Polanyi wrote: “At the heart of the Industrial Revolution of the eighteenth century there was an almost miraculous improvement in the tools of production, which was accompanied by a catastrophic dislocation of the lives of the common people.”

Something similar is happening this time – definitely miraculous improvement in tools, but perhaps not “catastrophic dislocation”, although the impact of social media, and the Chinese government-owned TikTok in particular, is close to being catastrophic, in my view.

The dislocation in the 18th century that Polanyi wrote about led to Marxism and what we now call industrial relations, or labour regulation – that is, controlling how companies pay and treat their employees.

And the colossal profits of early steam, electricity, railway and steel businesses were eventually competed and regulated away.

That is now starting to happen with the businesses behind the third/fourth industrial revolution.

The big money is no longer available, because the “common people” have the vote (they didn’t in the first industrial revolution), and they won’t stand for it.

The future of crypto

Back to crypto: Is it a scam? Well, some of it is.

Here’s what SBF said in an interview with Bloomberg in April: “And now all of a sudden everyone’s like, wow, people just decide to put $200 million in the box. This is a pretty cool box, right? Like this is a valuable box as demonstrated by all the money that people have apparently decided should be in the box.”

A box that has value because people put money in it is the definition of a Ponzi scheme.

Will FTX’s collapse mean the end of crypto? Well, some of the 3000 or so cryptocurrencies, or at least it should.

Bitcoin has had another 75 per cent bust over 12 months like it did in 2017; it recovered then and might again, but it’s becoming clear now that Bitcoin will probably never become a form of money – that is, a widely accepted medium of exchange – at least not for anyone except criminals and hackers.

Its only legitimate use, and the reason it still costs more than $US16,000 to buy one, is as a store of value, brought about by the strict limit on the number that can ever be created.

But that’s undermined by the way it can be divided into an apparently limitless number of bits, and anyway to succeed it needs another use, not just store of value. The world might discover at some point that Bitcoin has no use, or value, at all.

It’s possible that the second-biggest crypto, Ethereum, will last because it is the platform for decentralised finance, or defi, which have a permanent place in finance generally, but it will be a smaller place than its promoters claimed and its enthusiasts think, a bit like buy now, pay later. It’s a real business, but not much of one, and not enough of one for all those crowding into it.

For a while it looked like crypto and Bitcoin would kick the whole tech party along and, along with the metaverse, extend the third/fourth industrial revolution into a fifth including blockchain and virtual reality.

Maybe that will still happen eventually, but that future is looking less likely today after the misfortunes of SBF, and the 75 per cent crashes in the prices of Meta and Bitcoin.

Alan Kohler writes twice a week for The New Daily. He is also founder of Eureka Report and finance presenter on ABC news

Topics: Alan Kohler, Bitcoin, Cryptocurrency, FTX
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