The rise and fall and rise again of Bitcoin

Donald Trump was once a crypto sceptic. Now his re-election has sent the volatile price of Bitcoin sky-high.

These days, he’s known as 37244-510. Not quite as catchy as SBF, the three-letter acronym mentioned in hushed tones back when he was revered as the richest man in the crypto sphere.

Sam Bankman-Fried once was the bold warrior in Bitcoin’s battle for control of the future. He was the mop-top geek, the maths genius who threatened to upend banking and finance and change the way we thought about business.

In the end, he went down for the oldest and most traditional of financier foibles, stealing money from his own clients.

These days, he is best known as the nerd who presided over one of the biggest financial frauds in American history.

When he was finally sentenced in March this year, Bankman-Fried was ordered to repay more than $US11 billion.

Had he managed to run his firm FTX like a legitimate business instead of a cash cow for his own amusement, he’d now rank amongst the world’s richest after Bitcoin finally broke through the $US100,000 barrier.

Instead, he’s now a resident of Metropolitan Detention Centre Brooklyn, living in a dormitory cell and reportedly working on an appeal to his 25-year sentence.

Given he was Joe Biden’s second biggest donor in 2020, pumping through almost $US5.2 million in campaign contributions, an appeal for a pardon wouldn’t be out of the question in the government’s dying days.  

But now there might be another source of salvation — Donald Trump and his most trusted advisor, Elon Musk, part crypto devotee, part puppeteer. When Musk’s takeover for Twitter began wobbling, Bankman-Fried reportedly offered to help finance the bid with a $US5 billion loan.

And Bankman-Fried wasn’t a one-party backer. He carefully played both sides of the political divide, and was a big Republican donor too, but opted to do so on the quiet because he thought the press was, as he put it, “super-liberal”.

“I donated the same amount to both parties,” he told the Guardian in 2022.  “All my Republican donations were dark,” he said, referring to political donations kept off the public record. “The reason was not for regulatory reasons, it’s because reporters freak the f*** out if you donate to Republicans.”

Mistrust of the press is a sentiment that very much aligns with incoming President Donald Trump, whose sudden conversion to cryptocurrency has driven this latest boom.

Bitcoin’s true value

Trump, once a sceptic who dismissed Bitcoin as a “scam”, was in good company as a doubter.

Warren Buffet, considered the world’s greatest investor, has described Bitcoin as “rat poison squared”.

“I’ve seen people do stupid things all my life and I really, I empathise with that, they’re going to play the lottery, they’re going to get 60c back on the dollar and state, the numbers racket is something to be avoided,” he told CNBC last year

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“I mean, people love the idea they’re going to make more money tomorrow … the gambling instinct is so strong.”

In the past month, both the head of Australia’s corporate regulator Joe Longo and Reserve Bank of Australia Governor Michele Bullock have also voiced their concerns.

Longo told an Australian Securities and Investment Commission annual forum that Bitcoin was a good example of “the bigger fool theory” where the goal was to simply find a buyer prepared to pay even more for a worthless asset.

Bullock went further, arguing that, despite all the hype, it had no role to play in Australian society.

“Don’t call it an alternative currency,” she said. “It’s not a currency, it’s not money, it’s being used as some sort of asset class.”

“I don’t understand it,” she said. “But, you know, I don’t really see a role for it in, certainly in the Australian economy or payments system.”

Devotees dismiss these criticisms, arguing Bitcoin doubters simply don’t understand.

But it’s difficult to pinpoint any useful function Bitcoin serves. Initially, it was touted as a new means of exchange a global monetary system that would make national currencies obsolete.

Bitcoin, however, is now a teenager — a geriatric in technology terms — and after 15 years, that hasn’t happened, primarily because of its volatility.

Why spend Bitcoin on buying something if you think it will appreciate in value? And, as a seller, why accept it as a currency if you fear it might crash?

The same goes for its role as a store of wealth. It may be at record highs right now but, as this graph illustrates, it has fluctuated wildly over time in a series of booms and crashes that have undermined its ability to be a hedge against inflation and created as much poverty as it has generated wealth.

Instead, it has degenerated into a tool for speculators and gamblers.

Its defenders point to the role of blockchain, the unique ledger system that underpins bitcoin and other cryptocurrencies, and its potential for wider business applications.

That may be a legitimate argument. But it doesn’t justify the mania attached to cryptocurrencies. And when it comes to investment in new technology, it has been overtaken by the rush towards Artificial Intelligence and quantum computing.

Ironically, for all the hype that it would make national currencies obsolete, Bitcoin itself is still valued in US dollars. And those that trade it proudly measure their gains and their wealth in good, old style fiat currencies.

Less regulation — what could go wrong?

Trump is now a true believer, promising in his usual overstated mode that he plans to transform America into “the crypto capital of the planet”.

The president-elect has even suggested creating a “bitcoin reserve” that could be used to pay off the country’s $US35 trillion debt.

To encourage that, Trump and Musk are pushing for regulation around the crypto industry to be loosened, with Musk going so far as to suggest that the Consumer Financial Protection Bureau be junked.

The president-elect, meanwhile, recently announced he would fire the head of the Securities and Exchange Commission, Gary Gensler, on day one.

A noted critic of the crypto industry, Gensler decided he wouldn’t hang around for the ritual humiliation and announced he would step aside the day Trump walks into the White House, leaving many to ponder whether the crypto industry’s reported $100 million in Republican campaign funding would influence the decision on his replacement.

Gensler blazed a trail through Wall Street in a bid to stamp out conflicts of interest and boost transparency, launching court actions against multiple crypto firms.

What the incoming president has failed to grasp is that Gensler’s actions have helped underwrite the latest surge in activity in cryptocurrency.

In January, with tighter regulation in place, the SEC gave the green light for old style financiers including Fidelity, BlackRock and Grayscale to launch what’s known as Exchange Traded Funds that invested solely in Bitcoin and other cryptocurrencies.

Once approved, those funds, which ordinary investors can trade on Wall Street and on the Australian Securities Exchange, then had to load up on Bitcoin, helping drive the price higher through most of this year.

Last week, Trump announced Gensler would be replaced by Paul Atkins, a noted crypto enthusiast. Unlike many of Trump’s other appointments, however, Atkins is a well credentialed candidate with a background in law, years of experience in senior roles at the regulator and as a former SEC commissioner.

Nevertheless, he is expected to take a less aggressive stance towards the industry and possibly review many of his predecessor’s court actions.

Endorsing Atkins on his own social media outlet, Trump said: “He also recognises that digital assets and other innovations are crucial to making America greater than ever before.”

But there is a growing disconnect between Trump’s stance on cryptocurrencies and his view of the US dollar.

The greenback is considered the global reserve currency. Everything else is priced against it, be it commodities like oil and metals or other currencies. That’s something Trump wants to maintain, as a symbol of American dominance even as he wants to retreat back into isolationism.

Just last week, he threatened to penalise any country planning to shift away from US dollar dominance, aiming specifically at the so-called BRICS (Brazil, Russia, India, China and South Africa) nations.

“We require a commitment from these Countries that they will neither create a new BRICS Currency, nor back any other Currency to replace the mighty US Dollar or, they will face 100 per cent Tariffs, and should expect to say goodbye to selling into the wonderful US Economy,” Trump thundered on Truth Social.

But it was the debasement of the US dollar, through money printing, huge and ongoing deficits and soaring national debt — now approaching $US35 trillion — that led to the creation of Bitcoin in 2009.

Those deficits, and America’s national debt, are expected to explode under Trump’s high protection and low taxing policies, endangering his vision for “The Mighty US Dollar”.

Investing in Bitcoin as a national reserve to repay that debt will only further undermine the greenback.

Crypto tonight?

It’s impossible to understate the scale of the Bitcoin frenzy which, once again, is beginning to feed on itself. The devotees now feel vindicated. The sceptics have been left bemused.

Back in September, Bitcoin was trading just north of $US53,000 a token. A fortnight ago, it punched through $US100,000, sending waves of jubilation through the legions of investors, many of whom were ambushed by the downturn two years ago when it plunged to just $US16,000.

Last month, more than $US10 trillion worth of digital assets changed hands on centralised exchanges as bitcoin and its many imitators encroached even further into mainstream finance.

The latest boom fortuitously has coincided with the release of Changpeng Zhao — the brains behind the world’s now biggest crypto exchange Binance — from a federal prison in California.

Incarcerated for four months after pleading guilty to breaching anti-money laundering rules, the man known simply as CZ once was Bankman-Fried’s great rival and ultimately the architect of his downfall.

But the pair were not just business rivals. Prior to the implosion of Bankman-Fried’s FTX empire, they frequently clashed on the subject of regulation.

Born out of a desire to overthrow the existing monetary system during the depths of the Global Financial Crisis in 2009, Bitcoin’s renegade mindset sat well with Zhao even after most countries declared his Binance empire off limits and outside the law.

Bankman-Fried figured the opposite; that for Bitcoin and the crypto industry to truly deliver, it needed to be accepted by the mainstream and be properly regulated. Ironically, it was his FTX that bit the dust while Zhao’s Binance went on to global dominance.

While both this year were jailbirds, their financial fortunes headed in opposite directions.

Zhao has not only maintained his fabulous wealth, he’s expanded it, amassing one of the biggest fortunes on the planet.

During the past year, according to data analysis from Newsworthyheadlines.com, Zhao’s wealth grew more than six-fold to $US63 billion, mostly as a result of the Trump driven boom.

Even his stay in prison was profitable. As the rally tentatively took hold midway through the year, Zhao added around $US3 billion to his fortune, or an estimated $US25.6 million each day he was behind bars.

Who said crime doesn’t pay?

The great meme coin snowjob

Then there are meme coins, which have been around almost as long as Bitcoin but have no intrinsic value, earn no income and pay no dividends. And they proliferate.

Haliey Welch attracted fame midway through the year on a big night out with a girlfriend. A jovial on-camera quip about her special technique for pleasing her man was uploaded to social media and, in an instant, the Tennessee 20-something became a sensation.

Now, she’s attracted a fortune. A fortnight ago, the so-called Hawk Tuah Girl launched a meme coin, a type of crypto currency that doesn’t even pretend to do anything useful.

Within hours of the launch, the value of Hawk coin had soared to almost $500 million before suddenly losing 90 per cent of its value, wiping out most of its investors in a single day. Welch has since gone to ground.

Hawke coin has been criticised as a “pump and dump” or a “rug pull” where founders spruik the value to gullible buyers and create a buying frenzy before offloading everything.

The most famous meme coin is Dogecoin, created by two software engineers a decade ago, for the sole purpose of ridiculing Bitcoin.

To their utter dismay, it is still around and has been a favoured trading option for Elon Musk, whose new job in the Trump administration will be to jointly head DOGE (Department of Government Efficiency).

Driven entirely by social media hype, meme coins routinely soar and crash and, in an unregulated environment, are ripe for manipulation.

Despair to jubilation in just 24 months

“Remember when cryptocurrency was so heavily and onerously regulated, so unnecessarily scrutinised by the authorities that the whole market crashed in spectacular fashion as one tightly regulated crypto platform after another collapsed into oblivion?”

“Yeah, me neither. Because that’s not quite how it went, is it?”

Jemima Kelly, a columnist for the Financial Times posed this question in a piece late last month that injected a dose of reality into the current debate over Bitcoin and regulation.

When the market for cryptocurrencies crashed two years ago, what was exposed in almost every case was a web of deceit and incompetence, aided by loose or non-existent regulatory oversight.

Operating outside the finance industry mainstream, consumer protection and even licensing became an ad-hoc affair and, when the inevitable crash occurred, it hit hard.

Two years ago, they were falling like dominoes.

FTX, Celsius, Tether, BlockFi, Voyager Digital, Terraform, Luna. They all hit the skids, torching countless billions of dollars of investor cash.

The crashes were replicated around the world. Here in Australia, Blockchain Global, a cryptocurrency exchange, went under as funds and digital tokens disappeared. 

In almost every case, the story was the same. Investor funds were plundered for other purposes, often plugging holes in other parts of the leaky structure. Often, they were used for personal largesse.

Despite the cloak of rebellion under which many hide, those running these outfits operate in much the same fashion as financiers and banks have done for thousands of years. They clip the ticket on transactions, charge fees for storage and gouge commissions at every opportunity.

Both Bankman-Fried and Zhao created their empires in this very traditional manner.

Financial institutions, whether they be traditional banks or cryptocurrency exchanges, thrive during periods of exuberance. Commissions on trillions of dollars of transactions adds up pretty quickly into handsome fees and huge profits.

Not surprisingly, there has been a sudden roar from those very crypto ticket clippers, some predicting Bitcoin is now on a trajectory to push past the $US1 million mark.

The not so subtle message is: “Better get on board now.”

Can crypto overtake gold?

Mike Mangan discovered gold around the turn of the century.

Rattled by the dotcom bust and concerned by America’s plunge into money printing to boost its economy, the Sydney based former investment banker, stock analyst and funds manager turned to investing in the oldest form of wealth or, more specifically, those who mine it.

Gold, he explains, is a hard asset, a relatively unique metal because of its resistance to corrosion, it’s malleable nature, visual attractiveness and its scarcity, all of which contributed to its use in coinage and jewellery, dating back thousands of years.

“It has a history, and history and reputation are so important when it comes to finance,” he says.

That goes a long way to explaining why gold-trading dwarfs the Bitcoin market.

But Mangan empathises with Bitcoin devotees, many of whom were left disillusioned by the near collapse of capitalism during the Global Financial Crisis, and their search for an alternative.

“I wouldn’t underestimate the cognitive dissonance of people wanting to find an alternative in a system they believe is going to hell,” he explains.

The rise of Bitcoin, he says, “reflects a loss of confidence in the monetary system”.

While global currencies no longer trade on a gold standard, most countries, and particularly China in recent years, continue to amass gold as a store of wealth.

America hasn’t added to its gold reserves at Fort Knox for years but it holds the biggest reserves of any country by a long shot.

Like Bitcoin, gold too has punched through to record levels in recent months. Unlike Bitcoin, it’s rise has been steady during the past 20 years, providing a perfect hedge to the degrading of the US dollar and to inflation, as this graph in US dollars shows.

It also doesn’t easily evaporate, as cryptocurrencies often do. And if in any future global conflict power systems and electricity grids are fried, the ability to retrieve a virtual asset — one that doesn’t physically exist — will be compromised.

“Cryptocurrencies were supposed to be all about protecting yourself from a world in chaos,” Mangan says.

“But if the world does descend into the kind of dystopian future many fear, what happens to your Bitcoin?”

Credits

Words: Ian Verrender

Illustrations: Gabrielle Flood

Editor: Leigh Tonkin