Back in the halcyon days of November 2021, cryptocurrencies—and other speculative “investments” like “meme” stocks, special purpose acquisition companies (SPACs) and Cathie Wood’s ARK Innovation ETF—soared to record highs, as 0% interest rates provided the rocket fuel. Speculators exhorted one another on social media to drive prices “to the moon,” as fundamental analysis (“boring/outdated” criteria like profitability and cash flow) was overwhelmed by YOLO (you only live once)/FOMO (fear of missing out).
In a brilliant essay in The New York Times, “The crypto collapse and the end of the magical thinking that infected capitalism,” Harvard professor Mihir Desai argued that widespread anger after the 2008 global financial crisis created a deep mistrust of traditional financial institutions. Sprinkle in a little “stick it to ‘The Man’” anti-establishment ethos, and you had “fertile soil for fantastical dreams to flourish.” Crypto’s promise as a replacement for traditional currencies (free from government oversight or control) made it a perfect “blank slate that meaning can be imposed onto” by inexperienced investors who imagined themselves on the forefront of technology and disruption.
Indeed, the very first Bitcoin was “mined” in 2009.
By late 2021, the market value of cryptocurrencies reached a staggering $3 trillion. For the newly crowned emperors of the industry, what better way to flaunt your boundless resources and ambition than to turn Super Bowl LVI (Feb. 13, 2022) into the “Crypto Bowl” by running ads on NBC costing a cool $7 million for 30 seconds?
Larry David starred in an ad for FTX as a naysayer who rejected innovations ranging from the wheel, fork, toilet, coffee, Declaration of Independence, lightbulb, dishwasher, putting a man on the moon, Sony Walkman and, finally, crypto. An FTX employee touted the company as a “safe and easy way to get into crypto,” to which David replied, “Eh, I don’t think so, and I’m never wrong about this stuff—never.” The voiceover said, “Don’t be like Larry; don’t miss out.”
FTX was a crypto trading exchange that billed itself as the “adult in the room” with bulletproof financial controls. Similarly, founder Sam Bankman-Fried (all of 30) cultivated his image as a modern-day J.P. Morgan, hobnobbing with the world’s financial and political elite. Nine months after its Super Bowl ad, FTX filed for bankruptcy protection, and Bankman-Fried was criminally charged with running a massive, years-long fraud.
LeBron James traveled back to 2003 in an ad for Crypto.com where his younger self asked, “Is the hype too much? Am I ready?” Presumably he was asking if he should go directly from high school to the NBA and not about crypto, but the present-day James replied, “If you want to make history, you’ve got to call your own shots.” The ad ended with the now-infamous four-word tagline from an earlier cringeworthy Crypto.com ad featuring Matt Damon: “Fortune favors the brave.”
Since then, the company announced major layoffs due to reduced trading volume caused by cratering crypto prices (the market value of cryptocurrencies crashed to $1 trillion by June 2022) and because the collapse of FTX had “significantly damaged trust in the industry.”
Banks make money on the spread between the interest paid to depositors and by borrowers. The mismatch between short-term deposits vs. long-term loans is a key inherent risk. As the Bailey Brothers Building & Loan can attest, if all your depositors want their money back at the same time, you have a huge problem.
For traditional banks, this risk is mitigated by a stringent regulatory regime that requires them to have a sufficient cushion of capital and limits the riskiness and concentration of loans. Most important, deposits are insured by the government (up to a limit).
Crypto lenders are unregulated and free from these shackles. They hawked “risk free” rates of up to 18% to would-be depositors and operated with little capital cushion. They made huge, risky loans to a highly concentrated group of borrowers.
Celsius Network CEO Alex Mashinsky touted his platform as a way for depositors to get rich safely while “sticking it to greedy banks.” His schtick was, “Banks are not your friend,” and he was unintentionally prescient and ironic when he said, “Somebody is lying—either the bank is lying or Celsius is lying.”
Celsius and Voyager Digital filed for bankruptcy protection in July. BlockFi followed in November and Genesis Global Capital a couple of weeks ago. The falling dominoes demonstrated how interconnected and fragile the crypto industry is. Voyager and Celsius were torpedoed by the implosion of hedge fund Three Arrows Capital (3AC) that saddled lenders with billions in losses. BlockFi was “rescued” by FTX, which subsequently failed. Genesis failed after loaning hundreds of millions to FTX.
Sadly, customers were led to believe they were making insured deposits with the bankrupt crypto lending platforms but in reality were making unsecured loans, meaning they stand in line with millions of other creditors hoping for a pennies-on-the-dollar recovery years down the road.
In a cruel and bizarre twist, the founders of 3AC are starting an exchange (GTX) that will trade crypto bankruptcy claims, including those of lenders 3AC itself stiffed.•
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Kim and Lee are chief operating/compliance officer and director of research, respectively, for Columbus-based investment adviser Kirr Marbach & Co. They can be reached at 812-376-9444 or mickey@kirrmar.com and roger@kirrmar.com.
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Only a fool would invest in something that doesn’t produce a good or service or is a tangible asset such as land and expect to make money from it.