Will the failure of Ftx be the end of cryptocurrencies?
The world of cryptocurrencies will survive the bankruptcy of Ftx: the deep reasons that gave birth to it are still there. The analysis by Alessandro Fugnoli, Kairos strategist
Secularized Europe has experienced cryptocurrencies as a game and a glittering fad. It participated in the two big increases of 2017 and 2021 (more in the first than in the second) and made and lost money as you do on any speculative stock. Nothing more.
America, whose foundation remains an incompressible religious substratum, has experienced them as a utopia. However, utopias have a vocation for dystopia because dreams often turn into nightmares. The bankruptcy of the FTX ecosystem, which has rapidly become the brightest protagonist of the fintech world and is now in free fall into a black hole whose dimensions we still do not know, is the bitter awakening from the dream. The utopia of cryptocurrencies and the universe that has been created around them originates from two distinct and parallel strands of thought. The first is left and right libertarianism, the second, which has especially animated FTX, is the philosophy of effective altruism.
Libertarianism is as old as America and goes from Jefferson and Jackson to Ayn Rand. It is hostility towards a greedy, intrusive and overbearing state which, with the 2008 crisis, also becomes almost incapable of guaranteeing the only reason that could justify its existence, that of guaranteeing the security of exchanges and the observance of contracts. With the blockchain, we finally find (or believe we will find) a decentralized and self-managed remedy to that counterparty risk that from 2008 to 2010 froze the pipes of the financial system regulated by national states. Bitcoin, for its part, becomes the credible alternative to fiat money which has replaced gold since 1971 and made currency uncertain and precarious as a store of value. If in Western countries, it is thought, Bitcoin defends against the erosion of inflation, in authoritarian countries it becomes protection from the whims of the sovereign, from confiscations and from hyperinflation.
The fintech world sees the birth of companies that explicitly refer to agorism, the social philosophy proposed by Samuel Konkin in the 1970s which takes up von Mises and Rothbard and declines them to the left in the counter-economy, the black market and the building of ties from below strictly and exclusively voluntary economic and social activities.
On these foundations begins the construction of a new financial ecosystem, impressive and increasingly complex, animated by prophets but also populated by venture capitalists, rocket scientists, adventurers, bandits and hackers. It is not the European hit and run, it is the construction of a new frontier.
In 2017, a small group of young MIT graduates, led by Sam Bankman-Fried, came onto the scene from families of respected MIT and Harvard academics. They are inspired by a young philosopher who teaches ethics at Oxford, William MacAskill, who in turn started from the utilitarianism of Peter Singer's preference.
MacAskill, who until last week sat on the board of directors of FTX, theorizes efficient altruism, a radical form of consequentialism. Traditional altruism, he says, is a waste of resources. Why leave for Africa as an aid worker and help a few dozen people at most when you can instead look for an activity that allows you to accumulate a mountain of money which, once donated to charitable foundations, will benefit thousands of people?
As often happens when it is believed that a great end justifies any means, the Bankman-Fried group, endowed with considerable intellectual capital and excellent relations with the world of venture capital, sets out on its noble mission by choosing the quickest route to wealth, the one that passes through the unregulated world of cryptocurrencies. Here, like others but more than all others, he builds a web of deeply incestuous businesses that combines the functions of coin collector, brokerage house, bank and asset manager (all invested in the money created by the house) into a single ecosystem. All this with high levels of leverage and with continuous transfers of (unsuspecting) client and third party funds from one box to another.
The growth is dizzying. Bankman-Fried becomes a folk hero, but is also revered by the media and politicians. Eventually the house of cards collapses and the tsunami now threatens to overwhelm other major players in the sector. The damage is enormous.
Will the world of cryptocurrencies remain standing? Most likely yes. The profound reasons that gave birth to it and that we have briefly mentioned are still there. The visionary designs of Bankman-Fried, who wanted to build a parallel and complete financial system to the one we all know, will be picked up by others, who will proceed much more slowly but will continue. The political power, for now kept quiet by the generous donations of FTX, will put many spanners in the works and nothing will be as before, but the project will not stop.
Buffett and Munger are both right when they say that the entire cryptocurrency industry is built on absolute nothingness. One of the best known and most traded currencies, the Dogecoin, was born as a joke and has always expressly stated that it is pure nothing. But on the other hand, at the end of 2021 there were 36.5 million Americans invested in cryptocurrencies, while innovation in the sector is infinitely faster than in the traditional world.
Those from Europe who want to continue (or start) following the sector will probably do well to adopt a very cautious profile in the next tumultuous months. Instruments that offer returns such as checking accounts should be avoided, because this interest will likely come from leveraged or otherwise risky assets. Better to focus on simple tools like the old Bitcoin and pay close attention to the intermediaries you use.
While massive, the cryptocurrency crisis hasn't affected stock markets much so far. If the seemingly unstoppable rise following the good inflation data has lost momentum, it is not because of the FTX affair, but because of the energetic containment action of the Fed. If the market was already convinced that the terminal rate would have been below 5 percent, Bullard, who likes to speak very clearly, said it will be above 5. New York Fed President Williams, for his part, explained that the Fed cannot, right now, do too many things at once . Now the priority is inflation, not financial stability (ie banks and markets). What can be done on financial stability will therefore not be on rates, but on prevention.
Translated, we think we can say, it means careful supervision of bank risks and, as far as the markets are concerned, a commitment to avoid excess volatility.
Today the stock exchanges are at balanced levels. The SP 500 is at 18-20 times next year's earnings (depending on estimates). It cannot be said to be a low level considering that rates will remain close to 5 percent. However, it is not even an unsustainable level if the economy, while slowing down from the still brisk pace of the moment, avoids, as is probable, a deep recession.
This is a machine translation from Italian language of a post published on Start Magazine at the URL https://www.startmag.it/economia/fallimento-ftx-fine-criptovalute/ on Sun, 27 Nov 2022 07:10:23 +0000.