Of tulips and FTX

How should we think about crypto

Charles Mackay tells the story of a Dutch sailor who was sent to inform the boat owner that his Levantine cargo was safely in harbour. For this wonderful news, the sailor was given a herring for dinner. Spotting an onion on the cutting room table, he pocketed it to eat with his fish. Back on board his ship and perched on a roll of hemp rope, the sailor, finishing his lunch, was astonished to see the owner rushing at him in hopes of recovering his Semper Augustus. As Mackay tells the story;

“Anthony caused pearls to be dissolved in wine to drink the health of Cleopatra; Sir Richard Whittington was as foolishly magnificent in an entertainment to King Henry V; and Sir Thomas Gresham drank a diamond dissolved in wine to the health of Queen Elizabeth, when she opened the Royal Exchange; but the breakfast of this roguish Dutchman was as splendid as either. He had an advantage, too, over his wasteful predecessors; their gems did not improve the taste or the wholesomeness of their wine, while his tulip was quite delicious with his red herring.”¹

The sailor’s “onion” cost the boat owner the equivalent of $750,000 in today’s dollars.  Holland was in the grip of the tulip mania which, believe it or not, is said to have created a derivative market for bulbs.

The mania started in 1634 and lasted three years.  During that time the value of some rare tulip bulbs increased to over one million dollars.  But was that the value of the bulbs?  There are different definitions for value.  In the minds of some, value is defined by what two equal parties agree that the value is.  This transactional value is established in open markets with transparent information.   

But there is another definition of value which accounts for intrinsics.  I may be willing to pay you a lot of money for an old letter because it was written by my mother and so has intrinsic value (to me), but the transactional value of the letter is worth the energy created by burning it – which is to say, not very much.  To the boat owner, the tulip was worth $750,000. To the sailor it had the value of a common onion. The tulip craze and popular delusions like it, bring into sharp relief the need to understand which sort of value is being addressed in commercial transactions.

Two years ago, I started reading about the phenomenon of the non-fungible tokens or NFT.  People were paying significant amounts of money for unique computer code written onto a blockchain.  The code could be anything. Pictures of monkeys were especially popular at one point. Someone paid over US$6 million for a video which was then copied all over the internet. But only one person had the original video making it worth millions… apparently.  I understood nothing about the apparent value of the NFT and certainly nothing about the thought process that would lead someone to purchase with a significant amount of money a few electrons on a silicon chip.  To them, the value was intrinsic. To me, whoever paid the six million dollars was an idiot.

As an engineer I am hardly a trusted source when evaluating the artistic merit of a picture whether on paper or silicon but none of the NFT images I saw were remotely artistic according to my Neanderthal tastes.  Nevertheless, people were buying and selling these NFT’s and some were obviously making money at it.  Today I read that the NFT phenomenon was essentially an enormous game of hot potato.  Those left holding the NFT at the end of the game lost all their money because today NFT’s, like tulips, have lost their intrinsic value and are valued transactionally. Which is to say, not very much.

I am tempted to say that I understood all this two years ago when people were involved in this popular delusion but that would be incorrect.  Unfortunately, I am one of those people who lament not having bought Apple stock in 1988 or Tesla in 2010.  I have a sharp eye for stock deals but only after the price has escalated out of my reach.  On the other hand, but for my parsimonious nature, I might be the proud owner of some worthless computer images.

A more interesting popular delusion is the cryptocurrency phenomenon.  A friend of mine bought some cryptos when Bitcoin had fallen off its highs and tried to convince me that, while there is no transactional value to cryptocurrency there is no likewise no intrinsic value to plastic Canadian money.  Proponents of both currencies state that their volume is controlled, and they are very difficult to counterfeit.  They have a point.  I pointed out to my friend that I have some pocket fluff that is unique and impossible to counterfeit and would he like to purchase a rare thimble of same.  He demurred but we are still trying to find our way through the confusion of transactional versus intrinsic value.

All this has come to a head recently with the unexpected (to me) explosion of the cryptocurrency exchange company, FTX.  As I write this, the 30-year-old founder and CEO of FTX, Sam Bankman-Fried, is holed up in his US$40 million, 12,000 square foot penthouse apartment in Nassau, Bahamas.   Looking at pictures of Mr. Bankman-Fried standing in his stunning property brought to my mind Colin Firth as Mr. Darcy showing Elizabeth around the Darcy homestead in the movie series, “Pride and Prejudice”. 

Unfortunately there is a big hole in the accounting records of his companies, so it appears that Sam does not share the resolute character and selfless nature of Mr. Darcy.  Mr. Bankman-Fried has gone from a net worth of $32 billion to… Well, I suppose it depends on whether you make the calculation before or after he heads to jail.  My point is not to jump on Sam while he is down.  In fact, he looks like a nice guy, and I’ll bet he has some incredible stories to tell.  And let’s not forget that he raised US$1.4 billion.  That is not nothing.

But what are we to make of cryptocurrency?  The British cartoonist “Bob” had an interesting take on the FTX situation².  He implies that the war in Ukraine is somehow mixed up in the controversy. 

So, is cryptocurrency a way to launder fiat currencies so that the US can send money to Ukraine who will send money to FTX who will donate to the Democrat party who, as the government, will send money to Ukraine?  Is the whole cryptocurrency phenomenon a popular delusion on a par with the tulip mania?  Do governments want to destroy cryptocurrencies so that they can invade that space with their own digital currencies?  Will FTX be allowed to be discussed and investigated?  It is a very strange story and there appear to be many angles of investigation.  But, at the end of the day, I only want to know what cryptocurrency is and whether it has a role in my retirement planning.

This past week I have been watching a video series designed to scare me into thinking of Armageddon so that I will purchase the producer’s DVD’s.  The series offers interesting but well-trod theories of covid and shots and mandates and Big Tech and Big Pharma and Bill Gates and globalism.  What I find most interesting is that the series was filmed in mid to late 2021 and all the financial people interviewed promoted the purchase of gold and cryptocurrencies to protect my investment.  Given that gold has slipped and that cryptocurrencies have plummeted, I wonder what their views are today.   

And as I wonder what other people are thinking, I wonder if I shouldn’t buy just a little bit of crypto so that fifteen years from now, I am not lamenting missing “the next big thing” yet again.  Perhaps if such a purchase added flavour to my fish I would make the jump.

1. Mackay, Charles, Extraordinary Popular Delusions and the Madness of Crowds

2. I enjoy Bob’s humour and he can be found at https://www.bobmoran.co.uk/about