From crypto to housing, collapse of speculative wealth could refocus investment on real growth

Investors hoping to make a killing as cryptocurrencies rebounded from this year's plunge in valuations got a rude surprise last week after one of the most trusted exchanges for crypto trading, FTX, filed for bankruptcy.

But while old-school financial advisers may be tut-tutting at young and inexperienced crypto investors who they say should have known better, there are new signs a decline in speculative investments may be part of a trend that goes far beyond bitcoin and its many imitators.

Suddenly things like house prices, tech company valuations and fintech innovations, including cryptocurrency, that so recently seemed to be shooting for the moon are coming back down to Earth.

Although many people are getting their fingers burned as soaring speculative investments slump, there are those who say the trend will benefit the economy.

Instead of encouraging get-rich-quick speculation, rising interest rates mean a return to the old-fashioned kind of investments that use money and workers more efficiently to create real economic value.

Some experts say that the most recent bitcoin decline does not mean that the financial innovation of cryptocurrencies has come to a dead end. Nor is housing or the new technology implicit in social media companies such as Twitter or Meta's metaverse innately bad or useless.

But as interest rates rise and money gets tight, suddenly what seemed like an investment that couldn't lose has been exposed as one where the business model simply does not justify that optimism.

"A rising tide lifts all boats," goes a familiar business aphorism. But Warren Buffett, a longtime advocate of slow growth, has added another that has become almost as famous: "Only when the tide goes out do you know who's been swimming naked."

But as central bankers raise interest rates, it is not just reckless speculators and mismanaged businesses that are suffering, said Lisa Forbes, a manager at SEED Winnipeg, a non-profit that teaches business skills and helps to find small loans for new entrepreneurs.

"I'm working with people who [have what] you probably call ... micro businesses," said Forbes, whose clients often run single-person businesses such as cleaning contracts, small catering services or e-commerce retail.

Forbes grew up in Winnipeg, but her family comes from Peguis First Nation — about 100 kilometres north of the city — and many of her clients have indigenous backgrounds. She said rising interest rates are already hurting.

More and more, small self-financing entrepreneurs are reluctant to leave safe jobs and throw themselves into riskier ventures.

"The incredibly fast increase in interest rates is making it so that we've got people that are shy about wanting to get a loan," Forbes said, adding that can mean their business never starts or is under-capitalized and ultimately unsuccessful.

While much bigger, Software as a Service (SaaS) startups and their venture capital backers — the backbone of recent tech business growth — are also retreating from risk, with reports of North America-wide business failures.