The corporate rush to crypto may be turning into a tsunami. Publicly listed companies which are struggling to turn a profit have now decided to emulate entrepreneur Michael Saylor’s successful strategy for reviving a dying company: loading up on cryptocurrency and riding the boom. It’s a form of circular investing, whereby a company issues shares to buy Bitcoin and then uses its increased holdings to boost share prices, allowing it to issue yet more shares. But what’s novel, and undeniably risky, about this current wave is that firms are eschewing Bitcoin to buy niche currencies or memecoins, such as Donald Trump’s own token, $TRUMP.

Of course, they may reckon they’re gambling with the bank’s money. The assumption driving these high-risk trades would seem to be that, should the market crash, the government will bail them out. Trump has repeatedly shown he’ll use his political power to bolster the fortunes of his friends while punishing his enemies, and his family, along with many of its close associates, would stand to lose a lot of money in a crypto crash. So, for now, this may well be a one-way bet.

Yet, as a comment on the state of the economy, this mania is a worrying sign. The fact that the strategy has become a Hail Mary for companies in trouble doesn’t commend it as a dynamic approach. However, it appears that making money in the real economy has become challenging. For all the hype about the US market setting new records every day, it’s almost entirely an AI story at this stage.

Most of the rapid increase in share values since the start of the year is due to the Magnificent Seven, which now account for nearly one-third of the total value of all publicly listed companies in America. The other 4,700 companies aren’t doing so well. The S&P Midcap 400 index, which provides a snapshot of the health of the companies that dot US high streets, is basically flat for the year and down since Trump took office. That squares with an increasing slew of reports pointing to an economy in which activity is slowing but prices are rising.

It also bears noting that the current rally is being driven almost entirely by retail investors. Over the last half year, institutional investors have been selling but retail investors have been buying the dips and turning handsome profits. But that may end in tears. Research from earlier this year has shown that when retail investors go to war with institutional investors, they usually end up losing big.

Barring a major breakthrough that widens the gains of AI beyond the narrow circle of the Magnificent Seven to the economy as a whole, the market and economy will eventually realign — and it will probably be the former which suffers. Given that even within the crypto sector the new rush to niche products is seen as a loser, it seems likely this sub-sector will be in the front line of the damage.

When that happens, the government and central bank will have to decide whether to let the free market rule, or to once again socialize investors’ losses as was done in 2008. Given that the bailouts back then drove the popular outrage which eventually led to Trump’s rise, it would be a supreme irony if when the moment comes, the President decides he is on the side of the establishment after all. But that’s the bet investors appear to have made.

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John Rapley is an author and academic who divides his time between London, Johannesburg and Ottawa. His books include Why Empires Fall: Rome, America and the Future of the West (with Peter Heather, Penguin, 2023) and Twilight of the Money Gods: Economics as a Religion (Simon & Schuster, 2017).

jarapley

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