Uncovering the bezzle
Bubble-era beliefs are giving way to nasty surprises as rising interest rates and inflation rattle markets
In his book on the 1929 stockmarket crash, economist John Kenneth Galbraith talked about the “bezzle” – the inventory of as-yet-undiscovered fraud which gave the false impression that everyone was wealthier than they really were before the crash wiped out those illusions. Warren Buffett’s colleague Charlie Munger later extended the notion to include not just fraud, but also the questionable beliefs and extrapolations that are used to justify otherwise ludicrous asset prices in a bubble phase.
We’re already seeing the price of many of such assets crashing down as rising inflation and rising interest rates deliver a rude awakening to investors. This week, it was the turn of the cryptocurrency world to experience a reality check as what was previously the third-largest stablecoin, TerraUSD, ran into trouble. The point of stablecoins is in the name – one TerraUSD was meant to maintain a stable value of $1.
Unlike some stablecoins, which are backed by actual US dollars or similar collateral, TerraUSD is what’s known as an “algorithmic” stablecoin, backed by an elaborate system whereby investors were given an incentive to arbitrage between two cryptocurrencies in such a way as to maintain a one-to-one currency peg between TerraUSD and the US dollar.
“THE DAYS OF SPURIOUS BELIEFS PROPPING UP PRICES ARE BEHIND US”
It all sounds very clever and perhaps even convincing to some. However, this week, amid the market turbulence, the “peg” gave way, and despite the efforts of its backers, at the time of writing, TerraUSD is worth less than $0.50, and it’s hard to see investors giving it a second chance.
The good news for anyone outside of the crypto world is that cryptocurrencies are not yet big enough to pose a risk to the rest of the financial system. The bad news for those hoping for an imminent turnaround in sentiment is that it’s yet more evidence that the days of asset prices being supported purely by spurious beliefs are now behind us. Those beliefs are now being tested. For example, it’ll be interesting to see what happens to other stablecoins. If these are genuinely fully backed by collateral, they should be able to survive any rush to redeem. I’m sure we’ll find out soon.
In any case, the wider lesson for investors is the usual one: don’t invest in anything you don’t understand. Take time to review your portfolio if you haven’t already. The punts and the turnaround stocks that you hoped would come good? If they didn’t in the easy times, they’re not going to now. Unless you think you have a genuinely good reason to ignore this somewhat sweeping statement, I’d say it’s time to cut your losses and hang onto the cash for better opportunities. They are sure to come.
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