On the menu today: The financial world, rocked by the collapse of FTX, is suddenly a lot warier of cryptocurrency as a whole, with ominous rumblings coming from Binance, the world’s largest cryptocurrency exchange. Cryptocurrency was what was financing the explosion of interest in and demand for NFTs (non-fungible tokens) an electronic trading market of images that makes investing in modern art look sane, rational, and cautious. And oh yes, a certain former president made a “big announcement” yesterday that he, too, is now offering “limited edition digital trading cards.” I don’t know if the bubble is bursting, about to burst, or somehow going to carry on. But it seems like a lot of real-world people have spent a lot of real-world money to purchase a lot of non-real-world investments.
Marketing the Intangible
At some point in your life, you’ve probably encountered someone who tried to sell you something you didn’t want. They were persistent, and if they were in the corporate world, they likely tried to overwhelm you with jargon. Consultants are notorious for this kind of talk. “What we’re offering is next-gen synergy, to lean in and leverage the agility of big data to provide you with actionable integration and scalable verticals to drill down on the paradigm shift of disruptive bandwidth realignment.”
Hopefully, you responded with some version of “okay, but what do you actually do?”
The more we learn about disgraced FTX founder Sam Bankman-Fried, the more we realize that his cryptocurrency empire was built on selling something intangible to people who were not dumb but who were terrified of missing out on the next big thing. The infamous and now very ironic Larry David Super Bowl commercial for FTX played on this fear — that something revolutionary and ingenious had come along, and because not everyone understood it, a select few were positioned to reap gargantuan financial rewards, and you, humble Super Bowl viewer, had a limited opportunity to get in on the ground floor. (Gah, now I’m using the consultant clichés!)
Last month I attempted to walk readers through the FTX scandal and cryptocurrency; as I joke to colleagues, when I write an explainer piece, it’s likely that I needed the topic explained to me. “If two people agree that the cryptocurrency has a particular value, they can use it to buy or sell goods or services. Or someone can buy a cryptocurrency and hold onto it like a stock or other asset, hoping it rises in value.”
After the collapse of FTX and the indictment of Sam Bankman-Fried on charges of wire fraud, conspiracy, and money-laundering, some people are wondering if any cryptocurrency has real value, and if it does, whether it will keep that value for much longer. In November, a report by the cryptocurrency website CoinDesk led lots of people in the financial and tech sectors to wonder how much of FTX and Alameda’s financial assets were based on non-crypto, tangible financial assets. In a bid to save itself, FTX entered into negotiations with Binance, the world’s largest cryptocurrency exchange, seeking to be acquired by the larger exchange. Once Binance looked at FTX’s numbers and ran away screaming, everyone knew FTX was in serious trouble.
Now people aren’t so sure about Binance, either.
Fallout from the catastrophic collapse of the cryptocurrency exchange FTX continues to spread, and fear and panic has now turned to FTX’s one-time rival, Binance. . . .
Approximately $1.14 billion was withdrawn from Binance on Tuesday, as the crypto world digested news that FTX’s founder, Sam Bankman-Fried, had been arrested in the Bahamas, along with a report about government scrutiny of Binance.
The company’s CEO, Changpeng Zhao, who is better known as “CZ,” dismissed the outrush of cash as “business as usual” for the world’s largest crypto exchange.
“We have seen this before,” he wrote on Twitter. “Some days we have net withdrawals; some days we have net deposits.”
The company offered reassurances in a statement that the withdrawals were “managed with ease.”
There were also signs, though, of uneasiness, when Binance halted withdrawals of a so-called “stable coin” called USDC, for about eight hours on Tuesday. . . .
In a memo to employees, obtained by NPR, CZ also indicated that Tuesday was not a one-off, with the industry where he also reigns as a celebrity and influencer going through an “historic moment.”
“While we expect the next several months to be bumpy, we will get past this challenging period,” he wrote. “And we’ll be stronger for having been through it.”
Apparently, the entire world of cryptocurrency is full of crazy rumors right now, so investors have major doubts about which currencies are likely to retain their worth and which ones are a house of cards ready to tumble.
If you invest in, say, Coca-Cola stock, you know what it is: shares in an Atlanta-based multinational that makes soda and other beverage products and sells them around the world. Maybe you think sales will go down because Americans are coming to prefer other, less sugary drinks. Maybe you think Coca-Cola’s new, er, “Christmas Anthology” short-film series will boost sales. But the point is you can see the product, touch it, smell it, and even taste it. You can look at the company’s annual filings. You can read transcripts of the CEO discussing the quarterly earnings. You know what it does, and you can make your investment decisions based on that.
Some of the hot new concepts in the financial-investment world are not tangible, and sometimes it’s hard to get your head around what they actually are. Chances are you’ve heard a little bit about something called “NFT,” non-fungible token. Investopedia defines NFTs as “cryptographic assets on a blockchain with unique identification codes and metadata that distinguish them from each other.” Think of it as a unique file that cannot be duplicated, only transferred from one owner to another.
In theory, this is like a unique work of art. Pablo Picasso’s Nature Morte, from 1960, is the only one of its kind, which is why it sold for $118,000 back in 2014. (Ben Wilson of the Washington Free Beacon notices that that’s less than the price of a Hunter Biden painting.) Of course, if you spend $118,000 for a Picasso painting, you get an actual painting. You can hang it in your living room and invite guests over and say, “Yes, that’s an original by Pablo Picasso,” and some people will ooh and ahh over it. For some art buyers, that satisfaction is worth paying $118,000.
When you buy an NFT, you get an electronic file and a certificate declaring you’re the owner. You can look at the electronic file, but if it is an image, you’re looking at the exact same image as everyone else. I don’t know about you, but that seems . . . much less satisfying. And yet, some of the NFTs have sold for millions of dollars.
Your mileage may vary, but this reminds me a bit of the Dutch tulip mania. As many of us learn early on with items like baseball cards, the value of something is really determined by what someone else is willing to pay for it. It doesn’t matter if you can point to some price guide that says the 1989 Topps Gregg Jeffries rookie card, announcing the New York Met as a “Future Star,” is worth a lot — the other kids at school will only trade cards of good value for it if they themselves think the card is valuable. (The grownup equivalent of this is when someone goes on Zillow or Redfin, learns that, according to the website’s formula-calculated price, their home is worth a fortune, and tries to sell the house at that price. Your home price is really determined by who’s looking to buy a house in your neighborhood at that moment.)
Sure, somebody paid more than $23 million for the NFT “Cryptopunk 5822.” If that seems like an unimaginable sum to spend on an electronic file as a form of “art,” keep in mind that a lot of NFTs are bought with . . . cryptocurrency. (Cue ominous music.) If cryptocurrency feels like Monopoly money, with a value that is highly volatile and unclear long-term prospects, it makes it somewhat less consequential to spend what seems like a fortune on a piece of digital art.
It is possible that at some time in the future, someone will be willing to pay more for “Cryptopunk 5822.” But it’s just as possible, and maybe more likely, that at some point in the future, lots of people will ask, “Wait, why are we spending gobs of real money to obtain cryptocurrency to purchase electronic files that somebody else made, just because they’re unique? I could have spent that money on something else or invested it somewhere else.”
In 2021, companies like CNN jumped into the NFT market . . . and then jumped out of the NFT market. If you have a long-enough memory, you can envision big companies trying to jump in by creating their own line of pogs or Beanie Babies.
Cryptocurrency, NFTs — there’s nothing actually tangible about any of this stuff. It’s all electronic files, zipping from one account to another. Again, you’re a grownup and can make your own decisions, and if this sounds like the investment opportunity of a lifetime to you, it’s a free country, knock yourself out. But at least in the tulip craze, when the bubble burst, you were left with an actual tulip.
All of this might seem like a long lead-in to slam former president Donald Trump’s “big announcement” that he’s offering “limited edition digital trading cards” at a cost of $99 each, but at this point, it’s like shooting fish in a barrel.
I will note that this continues a pattern of declared presidential candidate Donald Trump seeming not so interested in actually running for president.
ADDENDUM: As I noted yesterday, Treasury Secretary Janet Yellen appeared on the op-ed page of the Wall Street Journal to declare, “Biden Has the Economy Back on Track.”
I forgot to mention this bit of counterevidence: “As the Federal Reserve works to combat rising inflation by slowing down the economy, the wealth of American households has evaporated—collapsing by more than $6.8 trillion this year as Americans load up on debt and face plunging stock values, a slowdown in the housing market and a potential recession.”