This is true for every asset. For example, the value of something as boring as a government bond is partly a product of the stories economists and investors tell each other about a country’s creditworthiness and the path of future interest rates. .
When it comes to stocks, the numbers become a little less important and the stories more. Indeed, if the management team is unable to spin a credible thread, the value of a company can tread water despite reasonable figures.
Such investments often get branded “value traps”. Multiples may suggest they’re cheap, but without a new story to prompt a revaluation, it’s unclear how long they can stay that way.
The more speculative the asset, the more important the story. For example, Made.com, the online furniture retailer was able to go public 17 months ago with a valuation of £775m despite never turning a profit as it convinced investors that a pandemic-triggering online sales boom was the ‘new normal’ and it had implemented a ‘flexible and lean’ supply chain. Both claims turned out to be works of fiction.
The collapse of FTX – following the fall of Luna, hedge fund Three Arrows, broker Voyager, lender Celsius, among others – has highlighted that crypto assets are almost all stories without any numbers (significant ).
Some crypto assets give investors rights to their underlying technology, but many do not. Dogecoin was literally set up as a joke.
Indeed, there have been at least three twists in the mainstream narratives about crypto assets. The first was that they could be used as a means of making virtually frictionless payments. This story, however, has been somewhat undermined by the enormous volatility in their value.
A computer programmer called Laszlo Hanyecz paid for two pizzas with 10,000 bitcoins a few years ago. Despite bitcoin’s recent drop in value, that means those pizzas are costing Hanyecz the equivalent of over $166 million today.
The second narrative suggested that crypto assets could be used to disintermediate traditional banks and the broader financial system. But it turns out that banking, while widely hated, and regulation have evolved over time to deal with some pretty basic issues around trust and cleaning up the mess when things go wrong.
One of the most amusing aspects of the FTX debacle has been the sight of anarcho-libertarian crypto-evangelicals bleating about the need for some sort of bailout. It’s not going to happen. It turns out that disintermediation works both ways.
The final story that crypto investors tell themselves is that these assets can act as a store of value and a sort of alternative to gold. In a way, that makes sense.
Gold has very few practical uses, no returns, and provides investors with no access to future cash flows. Ultimately, the precious metal appeals to humans because it is rare and shiny. Most crypto assets are also resilient and reasonably scarce: there will only ever be 21 million bitcoins, for example.
But even there, I have my doubts. Bitcoin may be finished, but the ability of the plausible-sounding tech brothers to dream up revolutionary new crypto-assets is surely limitless. For now, there is no scalable use for any of them. Instead, we’re starting to see that it’s another story unlikely to have a happy ending.