When Satoshi Nakamoto created Bitcoin in 2008, it was not a scam but a very ingenious, potentially useful new invention, largely because of the “blockchain” by which transactions could be recorded in permanent form. When I spent six months in late 2017 recommending crypto-currencies for an investment service (very successfully, being fortunate indeed in my timing), the market was largely dominated by retail investors throughout the world and it was still possible to separate scams from cryptocurrencies that were legitimately used to launch new digital products. Alas, since that time financial institutions have entered the market, recently with the encouragement of President Donald Trump and his administration. As we cynics might have expected, as governments and institutional investors have entered the market, its scam percentage has got far worse.

In its early years, Bitcoin was largely the domain of hobbyists. In 2010, for example, if you knew what you were doing, and had access to large supplies of electricity from an indulgent or unobservant parent, you could “mine” an entire Bitcoin quite quickly – it was only worth about 30 cents and it cost about $20 on Daddy’s power bill, but the psychic satisfaction of achievement was worth far more than that, possibly more even than Daddy’s power cost. By 2013, there were several coins for the hobbyist to invest in; one, Dogecoin, was marketed with an image of a Shiba Inu dog, and was described by its originator as a joke. Well that joke, which was fairly easy to buy in 2013-14, now has a market capitalization of $29 billion, and if you had held it since 2013-14 would have ranked as a superb long-term investment, paying about $2,000 for every $1 you had “invested,” a compounded return of some 88.4% per annum. Kevin Dowd and I wrote in 2014 expressing our doubts about the long-term security of Bitcoin’s “blockchain” mechanism; we may have been right in principle, but our view ranked in short-term market prescience close to this column’s claim in 2004 that Alphabet Inc.’s (Nasdaq:GOOG) Google IPO was overpriced at $85 per share.

You can see why cryptos became popular. By mid-2017, their total market capitalization was about $300 billion, of which Bitcoin at $8,000 represented about 45% and a second recently successful coin, Ethereum, about 18%. Over the next six months prices more than doubled, giving the market an $800 billion capitalization at its December 2017 peak and my investment service a superb track record, just in time for me to be fired from it (it were ever thus!) Of course, with those kinds of gains, investors rushed into the market, even though coins were only available through thinly capitalized and unreliable “exchanges.” By this time, however, holding cryptos in virtual “wallets” was easier than ever. Meanwhile “mining” – creating new Bitcoins — had become more specialized than in its initial basement days, requiring heavy-duty equipment and cheap power; it was especially profitable for Chinese operators with free access to hydroelectric or nuclear power stations.

At this stage, there was a bewildering variety of new cryptos, some of them with special and valuable characteristics. Monero, for example, offered the same kind of anonymity to its holders as was once available in a Swiss bank account, a degree better than available through Bitcoin or other coins. Needless to say, since Monero offered that most precious of civil liberties, it was hated by the authorities, so shortly afterwards Americans were effectively prevented from buying it. Filecoin, on the other hand, using a variant on blockchain technology offered decentralized storage for the world’s information, a special service of unquestioned economic value.

On Ethereum, non-fungible tokens representing collectible items could be attached and ownership was through “proof of stake” rather than “proof of work,” lessening the power cost to the world’s grid. By the end of 2017, it was obvious that a price crash was likely, but provided legal problems could be dealt with, it seemed probable that crypto-currencies would become a highly varied but permanent part of the global financial system, with Bitcoin losing much of its remaining prominence as other less power-intensive coins appeared and only modest scams and theft leakage occurred.

Then the institutions got involved, and cryptos went to hell. The transition was marked by the exploits of Sam Bankman-Fried, who by setting up a crypto exchange FTX and marketing it heavily with his superb range of political and financial sector contacts, built up one of the largest cryptocurrency trading operations, with a $32 billion valuation. Naturally, with FTX providing such liquidity and political cover, institutions began to invest in cryptos, although almost entirely Bitcoin. Legal problems were addressed by massive political donations by Bankman-Fried and his family to the most unpleasant members of the Biden administration and the Democratic party in general. However, in November 2022 FTX turned out to have been engaging in fraudulent transactions and collapsed into bankruptcy, with Bankman-Fried abandoned by his political sponsors, jailed, and ordered to forfeit $11 billion.

You would think that such a politically prominent and substantial fraud and collapse would have deterred institutional investment in cryptos, but not in this market! The three decades of “funny money” the Fed has given us have distorted the worldviews of institutional as well as retail investors, so that the “bros” pushing Gamestop are fully matched in their foolishness by the institutions pumping gas into Nvidia (Nasdaq:NVDA), Tesla (Nasdaq:TSLA) and every AI stock you’ve never heard of.

The Biden administration, possibly embarrassed by its gullibility with Bankman-Fried, tried to shut down the crypto market by forcing new coin issues to register with the SEC as securities, thereby preventing them from selling coins to U.S. investors. Now the Trump administration, doubtless seeking to be the anti-Biden, has not only removed restrictions on crypto purchase by Americans, but has issued two coins, for Trump and Melania, with the Trump coin now valued at $2 billion, down from $5 billion when it was first issued to delusional Trump supporters. By that action and his maniacal support for lower interest rates in the middle of a markets bubble, Trump has dashed the hopes of those who wanted a sounder and more honest economic policy. Declaring last week “Crypto Week” merely added insult to the deep injury the market has suffered from political meddling and institutional participation.

The hopes of its proponents that Bitcoin might come to form an alternative store of value to gold are now completely dashed. Both have risen in price in recent years, pumped up by the insane global monetary policies since 2010, but Bitcoin has become a mere speculative vehicle, with dead tech companies such as MicroStrategy Inc. (Nasdaq:MSTR) achieving continued life and a $127 billion market capitalization after well merited death by becoming a vehicle for holding 600,000 Bitcoin, naturally leveraged up to the eyeballs. (God knows what MicroStrategy’s 1,900 employees do all day; surely a strategy of “Buy and hold” one item can be carried out by one man and a dog, with the dog fielding phone calls from increasingly worried creditor banks.) The forthcoming IPO for Grayscale, which controls a $21.7 billion ETF fund entirely invested in Bitcoin, is yet further indication that these particular tulips have withered in the ground.

The market’s descent into a dense cloud of noxious gas is now undeniable. Fartcoin, a memecoin with a $1.3 billion valuation, shares trading floors with ‘stablecoins’ whose reserves are anything but stable and whose recent congressional approbation will yield ever larger institutional chicanery. Bitcoin, once meant to decentralize finance, now commands 63% of the sector’s market cap. Institutional involvement hasn’t legitimized crypto; it has centralized speculation, gutted the utility of altcoins, and turned the whole ecosystem into a debauched trading vehicle for hedge funds and politically connected insiders.

All good things come to an end. The increased participation of politicians and institutional investors generally brings that end rapidly closer. Cryptocurrencies’ 17-year run has descended into speculative corruption, likely to result in lawsuits and lengthy jail sentences when it all inevitably collapses. Rational investors will avoid the sector at all costs.

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(The Bear’s Lair is a weekly column that is intended to appear each Monday, an appropriately gloomy day of the week. Its rationale is that the proportion of “sell” recommendations put out by Wall Street houses remains far below that of “buy” recommendations. Accordingly, investors have an excess of positive information and very little negative information. The column thus takes the ursine view of life and the market, in the hope that it may be usefully different from what investors see elsewhere.)