Reality check for Cryptocurrency: Bitcoin is a scam which will only end in tears, says ALEX BRUMMER
Bernie Madoff, who died in an American jail in April, is regarded as the high priest of modern Ponzi schemes.
He paid those who entrusted their money to his asset management firm a 1 per cent income every month come rain or shine, and offered a money-back guarantee, plus capital returns, on demand.
The steady and excess rewards were made possible because Madoff used the cash in his notional £15billion of funds from new investors to pay off the old.
Fools gold: Unlike, say, investment in shares and bonds, bitcoin makes no contribution to the greater economic or public good
When the financial crisis scared investors to death and many demanded their money back at the same time, he was exposed as a rogue.
In spite of the glorious ride enjoyed by investors in bitcoin, who saw the price soar to $68,000 on November 8 before it dropped back to $48,000 towards the end of the year, this column has stubbornly refused to endorse it as a safe place to invest.
An aura of respectability provided by its adoption by the Central American republic of El Salvador as an official currency and backing from Elon Musk failed to convince me of its durability.
It must be acknowledged that fortunes have been made by early adopters and those smart enough to take profits on the way up.
Central bankers have been sceptical from the start. Former Fed chairman Alan Greenspan, appearing on CNBC, likened it to the flimsy currencies that proliferated in the US during and after the American civil war of 1861-65 and eventually disappeared.
On a visit to London last month James Gorman, Aussie chairman of investment bankers Morgan Stanley, said that rather than $60,000 (the prevailing price) he doubted it was worth sixty dollars.
Academic scepticism about bitcoin is increasing. Boston University senior fellow Robert McCauley, in a blog posted on FT Alphaville, argues that comparing bitcoin to a Ponzi scheme is unfair to Ponzi schemes!
People buy into bitcoin in expectation of handsome returns. That expectation is sustained by the profits of those who cash out. But there is no external source of income.
As in a classic Ponzi scheme old investors cashing out only do so at the expense of new money coming in.
Unlike, say, investment in shares and bonds, bitcoin makes no contribution to the greater economic or public good.
Moreover, whereas legal processes have led to the recovery of $14billion, or 70 per cent of lost funds for early Madoff investors, there is no possibility of the last bitcoin savers ever recovering their capital. Bitcoin is a scam that will only end in tears.
Merry-go-round
Asset managers, pension funds and wealthy family offices are attracted to private equity by superior returns.
There have been some spectacular successes. Blackstone’s quick flip of trading platform and financial data powerhouse Refinitiv to the London Stock Exchange is a case in point.
The remaking of Worldpay under the tutelage of Advent and Philip Jansen (now at BT) is another.
As we report today, private equity also is bringing new capital into global sporting enterprises ranging from Liverpool FC to Six Nations rugby.
Not all the cash hits useful targets. In 2021 some £31billion of private equity deals consisted of partners selling corporate assets from funds to new portfolio companies.
This apparently allows partners to return cash to earlier-stage investors.
Needless to say it can also be profitable for private equity principals who collect carried interest, usually a 20 per cent share of transaction values, as they pass ‘Go’.
Doesn’t the concept of using new funds to pay off old have a familiar ring?