Contrary to popular belief, Nayib Bukele is not completely off the mark.
The young, handsome and hipster president of El Salvador – who sports a short beard and walks around in backward-facing baseball caps – has come under heavy criticism from global monetary authorities and has raised eyebrows even among its neighbors.
As the first country in the world to legitimize bitcoin after adopting it as legal tender last September, El Salvador’s timing was, to put it mildly, unfortunate.
This was compounded by Mr Bukele, sometimes described as the “coolest dictator in the world”, and his decision to not only buy a large amount of digital currency last year, but to continue to throw the finances of the nation impoverished even as the price fell. .
But his plan to build a bitcoin city, shaped like a coin and with the coin’s emblem scalloped in the central plaza, was not without foresight.
Located under a volcano, the city was to be powered by geothermal energy and become a “haven of freedom from a world of tyranny”.
Instead, the plans – which were engulfed in a firestorm as digital currencies crashed and El Salvador’s $100m bet was more than halved – have become emblematic of the fast-paced fantasy that underpins the crypto world.
It is a shock of reality likely to have much wider and more serious repercussions on the global economy than many realize.
Millions of mostly unsophisticated investors have been tricked into pouring billions of dollars into what mostly appears to be a hoax, overseen in many cases by anonymous, some criminal, entities in a totally unregulated environment.
It was a breathtaking sight to behold.
This is not to say that the technology behind digital currencies is without merit. Not all digital currencies are fake either. But many are and exist with no underlying purpose other than to scam innocent bystanders out of their money.
Of the over 19,000 cryptocurrencies in existence, a handful offer any type of purpose, utility, or business plan. And meanwhile, bitcoin continues to dig a hole in the heart of Antarctica.
Brave new world or slave of the past?
The irony is breathtaking.
Bitcoin, supposedly founded by the mythical Satoshi Nakamoto, or someone who goes by that alias, was designed to make traditional currencies redundant, to create a bold new world free from government and central bank control.
After 13 years, it is a bitter failure.
Instead, it has become a captive of global central banks.
The great bitcoin boom since the global financial crisis, and particularly since the pandemic, has been almost entirely fueled by central banks spraying massive amounts of liquidity into the global economy.
With interest rates at zero, investors pushed further along the risk curve for anything that could generate a return.
First, they were unprofitable high-tech companies with promises of future wealth. And when cryptocurrencies started going crazy, even sane and wise minds thought, why not jump on board?
Now the opposite is in full swing.
As central banks clamp down on liquidity and raise interest rates, risk appetite evaporates. This created a full-scale crisis in the crypto world. Liquidity is drying up, clearing houses are under pressure and traders are suffering huge losses.
These losses are passed on to the general public.
Bitcoin and its mini-me imitators have been tentatively embraced by the financial establishment, especially in the past three years. The temptation was just too great, given the amount of money flowing through them.
Investment banks, pension funds and even established banks have all dipped their toes in the water, adding to the supposed credibility of these “investments”. Most have simply engaged in a commission-based service, cutting the ticket on transactions.
But this crossover into the mainstream has established a correlation between traditional investments, such as stocks and digital currencies, helping the meteoric rise in crypto valuations to over $3 trillion ($4.3 trillion) in November last year.
Pressure on interest rates began to rot late last year.
Since then, more than two-thirds of the market has been wiped out, exposing the fantasy at the heart of the crypto world: that in many cases there is simply nothing there.
But the losses are real. And the concern is that they could accelerate the decline in global stock markets as punters try to scoop up cash wherever they can, affecting spending and ultimately economic growth more broadly.
Collapses creating momentum
At its peak, terra was valued at around $40 billion.
A so-called stablecoin, it was intended to maintain its value against the US dollar, to easily allow transfers between crypto and traditional currencies.
But he did not hold greenbacks or gold as collateral. Instead, it relied on “smart contracts” and algorithms working between its sister crypto luna. When the tide suddenly went out last month, she was horribly exposed.
Its collapse was accompanied by accusations that dark forces deliberately undermined the operation.
Instead, it helped expose the stark similarities between the revolutionary and brave new world of cryptocurrencies and traditional banking and finance.
There is only one difference: no regulation and no protection for investors.
Almost a fortnight ago, Celsius, a digital platform that attracted its 1.7 million customers by asking, “If you don’t have access to your funds, are they really your funds?” suspended all transactions as crypto markets crashed.
It first ran into trouble in April when regulators questioned whether its business model – where it paid interest of up to 18% to holders of up to 40 cryptocurrencies, including bitcoin and ethereum. , and lent them at 20% – was a traditional model. securities lending activity.
These claims have been dismissed, even though it looked like the same pattern for all money lending companies over the past 3,000 years.
Since the official interest was barely above zero, the premiums clearly indicated that the risk was very high. But those involved were tricked into thinking they were part of a bold new world that did not meet financial standards.
To make matters worse, the platform bet currencies against others to boost returns – a strategy that worked wonders when everything was hot.
But now that is no longer the case.
Celsius chief executive Alex Mashinsky, who has made it a point to castigate banks and the financial system, has not been heard from since the platform “suspended withdrawals” a fortnight ago. The self-aggrandizing tweets have ceased.
Once again, conspiracy theories are surfacing. The allegations are that nefarious forces were at work, undermining what could have been a threat to the established global financial order.
This, however, has been nothing more than the fallout of a traditional liquidity squeeze and the financial model built around cryptocurrency trading is as old as the hills.
The only difference is that the hype and hysteria around cryptocurrencies may have developed into the most exaggerated bubble since the Dutch went tulip-crazy in the 17th century.
Just like tulips, digital currencies, tokens and the technology surrounding blockchain will not go away. But digital assets that have no other purpose than to serve as a vehicle for speculation will continue to come under pressure as interest rates rise. And it will inflict continued pain on many millions of investors.
Unlike other financial crises, however, the US Federal Reserve will not come to the rescue in this one.