December 9, 2022

SBF and Crypto’s Collapse Are Part of the Pandemic Hangover

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When historians look back on the spectacular rise and collapse of the cryptocurrency market, they will conclude that it couldn’t have happened without the pandemic. And they’d be right.

Back in 2020, when much of the world was locked down and economies shuttered due to the spread of Covid-19, financial assets of all stripes began a spectacular rally that carried through 2021. This was hard to explain even for the experts. In the end, they chalked it up to too much money sloshing around the global financial system. Trite? Yes, but very true. 

The combined money supply of the US, China, the euro zone, Japan and eight other major developed economies surged by $21.5 trillion over 2020 and 2021 to a record $102.3 trillion, according to data compiled by Bloomberg. Put another way, more money was created in 2020 and 2021 than in the previous seven years combined. This unprecedented increase had two sources: generous government spending programs designed to support economies through the pandemic; and central bank policies that in essence printed money to inject directly into the financial system to keep it from collapsing.

In hindsight, it is clear that governments and central banks overreacted. The financial system was overwhelmed with cash in a remarkably short period of time. It was as if new assets had to be invented to soak up all the new money, especially with bonds paying nothing and stock values at historically highs. The crypto world became a key relief valve.The number of digital currencies exploded higher, rising from less than 3,000 near the end of 2019 to about 10,000 by the time 2022 rolled around, according to research firm Statista. The crypto market’s value went from under $200 billion to $3 trillion. Money flooded in despite crypto having very little practical use other than pure speculation. It’s not like you can walk into any restaurant, car dealership or department store and pay with Bitcoin. That day may come, but it’s a very long way off.

The financial engineers didn’t stop there. They soon invented the non-fungible token, a cousin of crypto. As Bloomberg News explains, NFTs are essentially digital certificates of authenticity. An NFT is a unique, irreplaceable identifier created by an algorithm: a distinct barcode for a digital piece of art or collectible. It helps to address a problem that’s long faced digital artists, which is how to create scarcity for an item that can be infinitely reproduced.

Like crypto, the NFT market exploded. Trading reached $17.6 billion last year, an increase of 21,000% from 2020, according to Nonfungible.com. Investors went crazy for bored apes, cryptokitties and penguins wearing hats. The price to join the Bored Ape Yacht Club by purchasing an NFT of an image of a bored ape soared to $420,430. Crypto entrepreneur Justin Sun paid half-a-million dollars for a picture of a rock with laser eyes.  


Nobody should have been surprised at the crypto frenzy. It was the culmination of a dozen years of a mismatch in policies between monetary and fiscal authorities globally.

Coming out of the 2008 financial crisis, governments largely focused on austerity to reduce heavy debt loads, leaving central banks to nurture the recovery from what was the worst downturn since the Great Depression. 

Central banks decided that they had no choice but to resort to drastic measures to keep their economies from slipping back into recession and avoid deflation. So, they lashed interest rates to near zero — or lower in some cases —  and began a policy of quantitative easing. Under QE, they injected money directly into the financial system by purchasing assets such as government bonds to keep market interest rates from rising.

Once they started down this route, they couldn’t stop and risk imperiling a sluggish recovery.

Investors, of course, knew this and were emboldened to pay ever higher prices for financial assets because central banks wouldn’t — couldn’t! — let markets fail. Central banks knew they were boxed in. They pleaded with governments to shoulder some of the responsibility, to no avail. European Central Bank President Christine Lagarde openly lobbied for looser fiscal policy. Then Federal Reserve Chair Ben S. Bernanke was “so aggressive on the monetary policy side’’ because of a lack of fiscal stimulus, Philip Orlando, the chief equity strategist at Federated Investors Inc., told Bloomberg News in 2016.

When the pandemic rolled around, central banks had no option but to step on the QE accelerator. The collective balance sheet assets of the Fed, ECB, Bank of Japan and Bank of England shot up from about 10% of their countries’ combined gross domestic products in 2007 to about 35% at the start of 2020, Bloomberg data show. They reached 59% at the peak in late 2021. 

The pandemic forced governments to finally loosen their belts. The combination led to an undeniable speculative frenzy across markets. Crypto in particular soared. But all such manias must end, as evidenced by last week’s bankruptcy of Sam Bankman-Fried’s crypto empire and the downward spiral of Bitcoin, which has collapsed 75% from its peak a year ago.

Governments are retreating back to austerity in the face of rising prices. Just ask Liz Truss, whose time as prime minister of the UK was among the shortest in history after the bond market balked at her stimulus proposals. And central banks are tightening monetary policy and shrinking the money supply to combat inflation rates that haven’t been this high since the early 1980s.

This is not to say that it was wrong for governments and central banks to act swiftly and strongly to support their economies and the global financial system. Imagine the alternative if they hadn’t. We could have been staring at economic Armageddon. Rather, the  speculative frenzies of the past decade that reached a fever pitch during the pandemic and are causing so much financial pain now probably could have been avoided if central banks weren’t forced to do all the heavy lifting in the decade after the financial crisis. Perhaps if the fiscal authorities did their part back then central bank QE programs could have been much smaller, helping to contain bubbles. That’s the real lesson learned from all this.More From Bloomberg Opinion:

• FTX Is a Feature, Not Bug, of Financial Innovation: Aaron Brown

• The Wild West of Crypto Claims Another Victim: Lionel Laurent

• Crypto Can Survive the Possible Demise of FTX: Tyler Cowen

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This column does not necessarily reflect the opinion of the editorial board or Bloomberg LP and its owners.

Robert Burgess is the executive editor of Bloomberg Opinion. Previously, he was the global executive editor in charge of financial markets for Bloomberg News.

More stories like this are available on bloomberg.com/opinion