Small investors have already fled and their bounties and savings are gone. Wealthy venture capitalists get badly burned after each back-to-back bust-up, wash their hands, and move on to the next shiny object. Please) goes backstage. And regulators, as usual, finally issue expiring rules long after the damage has occurred.
However, there is a crucial difference in crypto when compared to past bubbles.
Before and after the bubble burst in the mid-1600s, tulips were still pretty flowers. America’s railroads brought about major (and positive) changes well before the Depression of 1873, and they still play a vital role almost 150 years later. The promise of email (and its dotcom derivatives) in the 1990s was real and groundbreaking. Even the abused subprime mortgage was an unfortunate innovation in hard-to-find loans for homebuyers who survived the 2008 financial crisis.
“Crypto” is a catch-all phrase for digital currencies and other securities not controlled by governments, which is not yet fully understood, but cannot make the same claim. Cryptocurrencies, like hard metal commodities such as gold, were often thought of as havens in inflationary times. But confections like Bitcoin and Ethereum plummeted as inflation soared. They promised a way to store value. Obviously not.
Even worse, cryptocurrencies were supposed to have all sorts of uses, from easy cross-border transfers to pegging the value of newly created forms of digital art. This has not been achieved on a scale that we can brag about.
Our system allows entrepreneurs and their backing investors to take risks on unproven ideas to provide valuable service. Without them, there would be no Apple, no Google, no Post-its. But now we know that the boastful investors who casually came up with a new category of investments known as web3 are joking.
The general justification for these investments is that they have captured the lure of software coders and entrepreneurs, leading to the dreamy conclusion that a true market for digital assets of all kinds is emerging.
In its place was confirmation bias, one of the worst ailments plaguing Sand Hill Road, the epicenter of Silicon Valley’s venture capital industry. The enthusiasm VCs have mistaken for investment themes has often been the result of chasing really good ideas with too much cash and too little.
Geeks are not stupid. When someone offers them big bucks to follow trends, they start coding. Hence the crypto.
Venture capital investment in the last 15 years or so can in many ways be explained by the low interest rate environment in which it has exploded. Funds and pension funds (and many ordinary billionaires) he has not been able to get a safe return on bonds for over a decade and instead spends their money his manager making riskier bets selected.
Consider the Ontario Teachers’ Pension Plan, the third largest in Canada. Three years ago, the company set up a special fund to make venture capital stage investments. He invested $95 million in FTX, a leading cryptocurrency trading platform. “Not all investments in this early-stage asset class will perform as expected,” he noted on Thursday. He added that the company’s investment in FTX—one that will likely never be seen again—makes up a small percentage of its overall investment.
Over the years, the stupidity of such investment strategies has essentially turned into free money for entrepreneurs. There was not.
Now those days are over. Rising interest rates will allow pension funds like those in Ontario to seek safer investments. As a result, the flow of funds to VCs and startups slows down. Only the best companies and VCs emerge on the other side.
