The crypto bubble has burst, destroying billions of dollars of notional wealth. It’s not just the “crypto bros” who have lost out. Many ordinary people who got caught up in the hype have lost savings.
The collapse of crypto exchange FTX has ripped off 30,000 people in Australia. “I am financially crippled now,” one wrote. “I want my money back,” another said.
The collapse of the crypto market will affect workers. In Canada, the Ontario Teachers Pension Plan has written off $143 million in members’ funds.
In the US, firefighters in Houston, Texas, will be worse off in retirement—their fund “invested” $38 million in cryptocurrencies.
Earlier this year, Rest became the first Australian super fund to buy into crypto, although in modest amounts.
The crisis began to unfold in mid-November when FTX, run by Sam Bankman-Fried or SBF for short, went bust.
FTX, the second largest such exchange in the world, posed as an oasis of reliability in the unregulated world of cryptocurrencies, the most famous of which is Bitcoin.
Bitcoin launched in early 2009, less than four months after Wall Street financial giant Lehman Brothers went broke as markets melted down in what became known as the Global Financial Crisis.
Banks had lent money to people who couldn’t pay their debts—and when the realization hit in 2008-09, the financial system teetered on the brink of collapse until governments bailed out the bankers.
Cryptocurrencies, based on a new digital technology known as blockchain, seem to offer a different way of running finance. Anyone with a computer could “mine” Bitcoin. No banks were involved.
The decentralized nature of the system made it very attractive to right-wing libertarians like the pro-Liberal Party think tank, the Institute of Public Affairs. It hailed the “blockchain revolution”, saying “some of the most fundamental principles governing our society are up for grabs”.
A major problem with the likes of Bitcoin was the way it worsened global warming. “Mining” the coins meant running computers around the clock. As the stockpile of potential Bitcoins was reduced, computers had to become much more powerful to find them in a race against other miners.
According to one estimate, Bitcoin consumes 0.55 per cent of global electricity production each year, or about the annual energy usage of Malaysia.
The other problem was that attempts to use Bitcoin as a practical currency failed and it quickly became something speculators bought into in the hope of turning a profit.
Massive FOMO drove the price of Bitcoin and its many competitor cryptocurrencies to eye-watering levels. In 2010, a Bitcoin was worth 11 cents. A year ago, the price peaked at $93,000. Today, Bitcoin’s price is sinking fast.
Despite the hype, cryptocurrencies were not a rival to the old world of finance but increasingly interconnected. A forest of brokers, investment funds and advisers sprang up. And everyone was looking to skim cyber wealth and turn it into real dollars.
FTX was no exception. The money SBF took from investors was “stored” in an in-house cryptocurrency token while he siphoned off $12.5 billion to his hedge fund, Alameda, to speculate on the markets.
The problem was that Alameda backed its activities with FTX’s in-house tokens, which were essentially worthless. The whole thing was a sham and, once the whistle was blown, FTX, Alameda went bankrupt. It was a digital echo of the Lehman Brothers fiasco.
All of this is what Karl Marx called “fictitious capital”—the web of lending, borrowing and gambling that’s wrapped around the production of goods and services.
It can seem that profits are being generated by clever trading, whether in shares or crypto. But the financial speculators are merely squabbling over the actual profits generated by workers in the production of goods and services.
The problem is that as investment in machinery and technology increases, it reduces the proportion of living labor in production. And as value is generated by workers, the rate of profit in the system tends to decline.
Marxist economist Michael Roberts has calculated that, globally, the rate of profit has declined from 15 per cent in the mid-1960s to a little over 10 per cent today.
That makes capitalists reluctant to invest in production. Instead they speculate on assets like real estate, art, shares or cryptocurrencies in a bid to make money at the expense of others.
This can send the price soaring temporarily, but eventually these speculative bubbles burst because they are not based on increases in the value of goods and services in the real world.
When things go bad, it’s workers who pay the heaviest price. It’s a system that needs to go.
By David Glanz