The Economist - USA (2021-11-13)

The Economist November 13th 2021 Finance&economics 75

InflationinAmerica

Thewrongkind

of hot

I

f anaverageAmericandecidedthatlast

monthwashightimetobuya newsofa

andthenspenthiseveningsdrinkingbeer

onit,hewouldhavebeenlucky.Boththe

furnitureandthebrewcosta littleless

thanafewweeksearlier.Unfortunately,

thatsameAmericanmayhavebeenpain­

fully aware that just about everything

else—hisrent,thepetrolforhiscar,his

foodandeventhatnewleafyplantnextto

thesofa—costa fairbitmore.Thebestlevel

for inflation, economists joke, is when

peopledonotnoticeit.InAmericaitisbe­

coming very noticeable. In October the

consumer­priceindexroseby6.2%com­

paredwitha yearearlier,thehighestratein

morethanthreedecades(seechart1).

Asinflationhasacceleratedeconomists

andofficialshavedebatedwhetheritisa

transitoryphenomenon—reflectingover­

stretchedsupplychains—ora morepersis­

tentproblem.Itisfarmorethananaca­

demicdebate. Ifinflationisshort­lived,

the right move for the Federal Reserve

wouldbeto lookthroughit,awarethat

jacking up interest rates may do more

harmthangood.If,however,inflationis

stubbornlyhigh,thecentralbankisduty­

boundtotameit.Thebigjumpinpricesin

Octobertiltsthedebateinfavourof“Team

Persistent”,assomehavetakentocalling

it,andputspressureontheFed.

To besure, abigchunkofAmerica’s

headline inflationisstillattributable to

the lumpy post­pandemic recovery (see

chart2 onnextpage).Gasolinecosts,for

instance,are50%higherthana yearago,

trackingthesurgeinoilprices.Usedcars

are 26%dearer than ayearago, witha

semiconductorshortageleadingtoslower

Abroadpickupinpricesputspressure

ontheFedtoraiserates

Mercury rising

United States, consumer prices

% change on a year earlier

Source: Bureau of Labour Statistics *Excl. food and energy

1

15

10

5

0

-5

2110200090801970

Core*

Headline

Fundingcryptoventures

The bitcom boom

T

hehongkongofficeofftx,a crypto­
currency exchange, is a place where ba­
sic  needs  come  second  to  business.  Food
and booze lie around desks fitted with six
screens  each.  Sam  Bankman­Fried,  its
boss, says he sleeps four hours a night on a
bean bag next to his desk—if he’s lucky. He
sees  little  difference  between  breakfast
and dinner, apart from “which restaurants
are open for delivery”.
His  restlessness  mirrors  that  of  crypto
markets, which never sleep. But it also re­
flects the speed at which the two­year­old
firm  is  growing.  Last  month  ftx an­
nounced a $420m funding round that val­
ued it at $25bn, just three months after in­
vestors gave it a price tag of $18bn. The deal
featured the crème de la crèmeof the invest­
ment  universe,  including  BlackRock,  the
world’s  largest  money  manager,  otpp,  a
$170bn Canadian pension fund, and Tema­
sek, a sovereign fund from Singapore.
ftx’s  funding  feast  is  symptomatic  of
investors’  growing  appetite  for  crypto
startups, especially those that are creating
the  tools  to  build  a  blockchain­based  fu­
ture. In the first nine months of 2021 they
raised  $15bn  in  venture  capital  (vc),  five
times  their  tally  for  the  whole  of  2020.  In
the third quarter 12 crypto unicorns—start­
ups  valued  at  $1bn  or  more—were  born,  a
record. The heady times remind some ven­
ture  capitalists  of  the  dotcom  era.  But
they’re not sure whether they are partying
like it’s 1994—or 1999.
One  trigger  for  the  capital  flows  is  the
rising demand for digital monies from re­
tail speculators. That is influencing vcs to
back crypto wallets and exchanges. Inves­
tors are also betting that, as regulation be­
comes  clearer,  institutions  will  take  it
more seriously, stirring demand for crypto
tax advisers, analytics firms and asset cus­
todians, says Matt Burton of qed, a vcfirm.
Red­hot  indicators  such  as  the  bitcoin
price, which flirted with a record $69,000
this week, are turbocharging excitement.
The  industry’s  boundaries  are  expand­
ing,  too.  Blockchain  startups  are  promot­
ing new forms of financial services (decen­
tralised  finance),  digital  ownership  (non­
fungible  tokens,  or  nfts)  or  incentive
models  (as  in  gaming,  where  users  can
earn  crypto  as  they  play).  nft ventures
have  raised  $2bn  so  far  this  year,  up  from
$31m in 2020. Four­fifths of vcdeals have
been early­stage rounds.
Most intriguing is the entry of new in­

vestors.  Successful  crypto  firms  are  rein­

vesting  cash  into  younger  ones.  The  most

prolific  is  Coinbase  Ventures,  the  invest­

ment  arm  of  America’s  largest  crypto  ex­

change,  which  sealed  24  deals  in  the  past

quarter.  On  November  5th  ftxand  other

firms launched a $100m gaming fund.

Deep­pocketed  investors  from  main­

stream  finance  are  also  pitching  in.  They

include  well­known  venture  funds,  such

as Andreessen Horowitz, an early backer of

Facebook  and  Skype.  SoftBank,  a  trigger­

happy  Japanese  group,  made  six  crypto

deals in the past quarter. They also feature

some  hedge  funds  and  asset  managers.

Such investors helped complete 15 rounds

of  more  than  $100m  in  the  last  three

months. Together these accounted for two­

thirds of total vcmoney spent.

Shan  Aggarwal,  who  runs  Coinbase

Ventures, says the craze recalls the dotcom

boom of the 1990s, when investors rushed

to back the firms that would form the foun­

dations of the web economy. In one respect

the  current  era  is  even  more  impressive:

while the internet bubble was mostly nur­

tured in Silicon Valley, the “bitcom” boom

spans Asia ($1.4bn raised this quarter) and

Europe  ($1.1bn)  in  addition  to  America

($3bn).  Crypto  unicorns  are  cantering

ahead in Africa and Latin America, too.

Whether  it  will  produce  successes  like

today’s  tech  giants  is  still  an  open  ques­

tion,  though.  It’s  early  days.  The  bounty

garnered  by  crypto  firms  in  2021  amounts

to  16%  of  the  sum  raised  by  fintech  firms

and  3%  of  that  raised  by  startups  at  large.

Big  deals  have  buoyed  the  average  size  of

investment rounds to $21m, triple the level

of 2020, but the median, at $4m, is small.

Some  valuations  look  silly:  in  Septem­

ber Sorare, a fantasy­football game played

on  the  blockchain,  closed  a  $680m  round

that valued it at $4.2bn, or 22 times sales—

more than Facebook’s multiple when it did

its initial public offering. All of which sug­

gests  that  some  investors  will  make  out

like bandits,whileothers will get their fin­

gers burned.Forgood or ill, more sleepless

nights beckon.n

A venture-capital craze feels like the
glory days of the dotcom era

Blockchain reaction

Venture-capital investments in crypto startups

Source:CBInsights

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Number of deals Funding , $bn