The Forgotten Bubble

Bitcoin had one job. It's failing.

AI is here in all its hype and glory, triggering nationalism and trade wars. It. Is generating a hell of a lot of revenue and epic stock prices , but not a lot of ROI on AI investment. Build-out costs are soaring and the sector’s circular financing is nothing if not interesting. There is naturally a wall of talk about an AI bubble… but not yet. Buried in the chatter, though, is the long, quiet slide of crypto the precise moment it should have hockey-sticked upward.

The intended purpose of cryptocurrencies like Bitcoin was to “democratize” money the way that the dot.com revolution “democratized” media and commerce. The internet may have freed a million mom & pops from Walmart, but they all use Amazon. So it’s worth looking at the unintended consequences here. Unlike AI, Cryptos don’t do anything: there is no revenue and they are too volatile to be a real store of value. You can’t use it to pay your mortgage or your bar bill. Its entire value rests on the speculative “greater fool” theory that you, in your brilliance, will off-load a heap of the stuff at its peak price to some fool who doesn’t see that the ride is over.

Since 2020, Strategy, Inc., a dot.com-era darling founded as MicroStrategy to produce analytical software, has been plowing cash from operations, as well as a raft of new equity and debt, to purchase about $70bn in Bitcoin, making it the largest corporate holder.

When incoming Trump administration (and family) came into office championing crypto, it triggered a fury of speculation and Strategy shares were trading at 2x its Bitcoin holdings. Since August, after the passage of the big, beautiful bill, the price is down 25% and Strategy’s shares have dropped by 20%. The ankle breaker for Strategy is that if can’t sell more shares as the market price drops, then it will be forced to sell Bitcoin holdings to pay its massive debt load, causing shares to drop further. One company going toe-up may not seem like a disaster, but there are a hundred plus companies all borrowing heavily to give retail investors leveraged exposure to Bitcoin. It really only takes one to start a panic.One of the loudest assets in history may be the forgotten bubble.

With all due respect to you Econ professor, market price is not always the consensus of a universe of rational investors. In his book Anti-Fragile, Nassem Taleb drums on the outsized multiplier that a single, determined seller can have on the entire market, provided that the seller is motivated enough. He cites the example of Société Générale in 2008, when the French bank discovered a hidden acquisition by a rogue trader and decided it had to reverse a $50bn position. That only accounted for about two-tenths of a percent of the 30 trillion overall stock market at the time, yet it triggered a 10% decline, erasing three trillion dollars in value.

Less Than Zero

What might happen if crypto continues to slide? With all the hype and talk of a strategic crypto reserve, the White House has created the impression – but not the reality -– of a US crypto backstop. Speculation exploded the way it always does when people think that Uncle Sam is picking up the tab. For a financial innovation that was supposed to free people from the tyranny of government central banks, Bitcoin and the rest of the cryptos have become decidedly political which, these days, will inject volatility into anything. Excited investors don’t ask questions. Confused investors, however, do. You don’t have to ask too many questions about cryptos fundamentals (there aren’t any) to start feeling perplexed.

So a crypto-panic rush to the door is likely and it looms closer than an AI crash. For those who have borrowed to buy exposure to crypto – from corporations to retail investors – their losses will be less than zero. Not only do they lose their investment, but are still on the hook for the debt used to finance it, potentially squeezing lenders downstream.

You Had One Job…

Like the internet, crypto-currencies were an innovation with a noble, if ill-advised purpose. So ill-advised you’d be forgiven for thinking the those clever techies on the ground floor had never met a human. They never intended their creation as a money laundering and drug trafficking hack anymore than the architects of the internet thought deep-fakes and universal porn were good ideas. Crypto was supposed to be an alternative to fiat currency in a time when out-of-control government borrowing was creating debt-debasement.

If crypto had one job beyond churning the greater fool, it was to be a safe haven when governments – intentionally or not – debased their currencies with excessive debt. If it were performing as intended, the price would have been climbing since August, not sliding. Bitcoin isn’t over, but it had one job to do. And it failed.