Contrary to popular belief, Nayib Bukele is not completely out of the mark.
The young, handsome and hipster president of El Salvador – who has a short beard and walks around in a back-facing baseball cap – has been harshly criticized by global monetary authorities and has caused concern, even among his neighbors.
As the first country in the world to legitimize bitcoin after adopting it as a legal tender last September, El Salvador’s timing was unfortunate to say the least.
This was reinforced 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 upset the nation’s finances, even though the price fell. .
But his plan to build a bitcoin city, shaped like a coin and with the coin’s emblem shaped in the central square, was not without foresight.
Located under a volcano, the city was to be powered by geothermal energy and become a “sanctuary of freedom from a world of tyranny”.
Instead, the plans – which were engulfed by a firestorm when digital currencies crashed and El Salvador’s $ 100 million effort was more than halved – have become emblematic of the fast-paced imagination that supports the crypto world.
It is a reality shock that is likely to have much broader and more serious consequences for the global economy than many are aware of.
Millions of mostly unsophisticated investors have been tricked into pouring billions of dollars into what appears to be a hoax, monitored in many cases by anonymous, some criminal, entities in a totally unregulated environment.
It was a breathtaking sight to see.
This is not to say that the technology behind digital currencies is worthless. Also, not all digital currencies are counterfeit. But many are and exist for no other purpose than to cheat innocent spectators out of their money.
Of the over 19,000 existing cryptocurrencies, a handful offer any kind of purpose, tool 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, allegedly founded by the mythical Satoshi Nakamoto, or anyone who goes by that alias, was designed to make traditional currencies redundant, to create a brave new world free of government and central bank control.
After 13 years, it is a bitter failure.
Instead, it has been captured by global central banks.
The great bitcoin boom since the global financial crisis, and especially since the pandemic, has been driven almost exclusively by the fact that central banks have injected huge amounts of liquidity into the global economy.
With zero interest rates, 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 to go crazy, even sensible and wise minds thought, why not jump on board?
Now the opposite is in full swing.
As central banks cut back on liquidity and raise interest rates, risk appetite disappears. This created a full-scale crisis in the crypto world. Liquidity is drying up, clearing houses are under pressure, and traders are suffering heavy losses.
These losses are passed on to the public.
Bitcoin and its mini-me imitators have been tried to be embraced by the financial establishment, especially in the last three years. The temptation was just too great considering the amount of money flowing through them.
Investment banks, pension funds and even established banks have all dipped their toes in the water, increasing the presumed credibility of these “investments”. Most have simply engaged in a commission-based service, thereby cutting the ticket on transactions.
But this transition to the mainstream has established a link between traditional investments, such as stocks and digital currencies, helping the sharp rise in cryptocurrencies to over $ 3 trillion ($ 4.3 trillion) in November last year.
The pressure on interest rates began to rot late last year.
Since then, more than two-thirds of the market has been wiped out, revealing 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 may accelerate the decline in global stock markets as players try to raise money wherever they can, affecting spending and ultimately economic growth more broadly.
Collapses create momentum
At its peak, terra was valued at about $ 40 billion.
A so-called stablecoin, it was intended to preserve its value against the US dollar, to easily allow transfers between cryptocurrencies and traditional currencies.
But he had no dollars or gold as security. Instead, it relied on “smart contracts” and algorithms that worked between its sister crypto luna. When the tide suddenly went out last month, she was terribly exposed.
Its collapse was accompanied by accusations that dark forces were deliberately undermining the operation.
Instead, it helped reveal the stark similarities between the revolutionary and bold new world of cryptocurrencies and traditional banking and finance.
There is only one difference: no regulation and no protection for investors.
Almost 14 days ago, Celsius, a digital platform that attracted its 1.7 million customers by asking, “If you do not 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 its business model – where it paid interest of up to 18% to holders of up to 40 cryptocurrencies, including bitcoin and ethereum. , and borrowed them at 20% – was a traditional model. securities lending activity.
These claims have been rejected, even though it looked like the same pattern for all money lending companies over the last 3,000 years.
As the official interest rate was barely above zero, the premiums clearly indicated that the risk was very high. But those involved were tricked into believing they were part of a bold new world that did not live up to financial standards.
To make matters worse, the platform bet currencies against others to increase returns – a strategy that worked wonders when everything was hot.
But now that is no longer the case.
Celsius CEO Alex Mashinsky, who has made it a point to criticize banks and the financial system, has not been heard from since the platform “suspended withdrawals” fourteen days ago. The self-aggrandizing tweets have ceased.
Once again, conspiracy theories are emerging. The allegations are that malicious forces were at work undermining what could have been a threat to the established global financial order.
However, this has been nothing more than the result of a traditional liquidity pressure, and the financial model built around cryptocurrency trading is as old as the hills.
The only difference is that the hype and hysteria surrounding cryptocurrencies may have evolved into the most exaggerated bubble since the Dutch became tulip-crazy in the 17th century.
Like tulips, digital currencies, tokens and blockchain technology will not go away. But digital assets that serve no purpose other than to drive speculation will continue to come under pressure as interest rates rise. And it will continue to inflict pain on many millions of investors.
Unlike other financial crises, however, the US Federal Reserve will not come to the rescue in this.