Meaning | Why the crypto bubble has finally imploded

Small-time investors have already fled, their grubstakes or life savings decimated. Well-heeled venture capitalists, badly burned by each successive bust-up, will wash their hands and move on to the next shiny object. The side-pushing crypto ambassadors (insert any big name from professional sports here, please) will slip backstage. And the regulatory authorities will, as they are used to, finally issue their overdue rules, long after the damage is done.

However, there is one critical difference with crypto compared to previous bubbles: It had virtually no intrinsic value.

Before and after their bubble burst in the mid-17th century, tulips were still beautiful flowers. American railroads fueled massive (and positive) change well before the Panic of 1873 and remain vital nearly 150 years later. The promise of email in the 1990s—and its dot-com derivatives—was real and epochal. Even badly abused subprime mortgages were a regrettable innovation in hard-to-get homebuyer loans—a market that survived the 2008 financial crisis.

“Crypto,” a still poorly understood catch-all phrase for digital currencies and other securities not controlled by a government, will not be able to make the same claim. Crypto was supposed to be a safe haven in times of inflation, as hard metal commodities like gold often are. Still, confections like bitcoin and ethereum have fallen as inflation has skyrocketed. They promised a way to store value. They clearly don’t.

More extreme, crypto was meant to have all sorts of other uses, from simple cross-border transfer to attaching a value to newly created forms of digital art. None of this has come true on any scale worth bragging about.

In our system, entrepreneurs, and the investors who support them, provide a valuable service by taking risks on unproven ideas. Without them, we wouldn’t have Apple or Google – or Post-it notes. But we now know that the crop of giddy financiers who dreamed up the new category of investment, casually known as web3, have been fooling themselves.

A common justification for these investments has been that they captured the fascination of software coders and entrepreneurs, leading to the dreamy conclusion that a real market for digital assets of all kinds was emerging.

What emerged instead is yet another example of one of the worst diseases afflicting Sand Hill Road, the heart of Silicon Valley’s venture capital industry: confirmation bias. The enthusiasm the VCs took for being an investment task was often just a result of too much money chasing too few really good ideas.

Geeks aren’t stupid: If someone offers them lots of money to chase a fad, they start coding. Hence, crypto.

The last 15 years or so of venture capital investing can in many ways be explained by the low interest rate environment in which it exploded. With endowments and pension funds (and many ordinary multi-millionaires) unable to earn safe returns in bonds for more than a decade, their money managers chose instead to place riskier bets.

Consider the Ontario Teachers’ Pension Plan, Canada’s third largest. Three years ago, it created a special fund to make venture capital investments. It invested $95 million in FTX, a leading crypto trading platform. On Thursday, it noted that “not all investments in this early-stage asset class are meeting expectations.” It added that the FTX investment – presumably none of which it will ever see again – represents a small percentage of its total investments.

For years, the craze of such investment strategies has essentially translated into free money for entrepreneurs. It didn’t take a genius to spin up a company when the cost of capital was almost zero.

Now that era is over. Higher interest rates will allow pension funds like the one in Ontario to seek safer investments. As a result, the flow of funds to VCs and startups will slow. Only the best companies and VCs will appear on the other side.