Elon Musk, Jeff Bezos, Sam Bankman-Fried: Why has so much wealth been destroyed?

Elon Musk spent $44bn (£37bn) to buy Twitter two weeks ago. He now says it might be bankrupt – not him, but Twitter. So what happened to that $44bn?

On Monday last week, Sam Bankman-Fried had a net worth of $16bn. On Friday, his companies filed for bankruptcy and that net worth had apparently shrunk to zero. So what happened to the $16bn?

It is true that Elon Musk has many other assets, including his shareholding in Tesla. The Bloomberg Billionaires Index still ranks him top of the global league table, with $189bn on Friday’s close in New York, and Twitter must surely be worth something. No one knows what other assets Sam Bankman-Fried might have – maybe not very much – so his is a very different tale. But the common theme is the destruction of wealth, which should make us all think of the nature of wealth and, in particular, what is real and what is a shadow.

This matters because a lot of wealth has been destroyed. You can see this in all sorts of ways. Let’s start with billionaires. Out of the top 10 in that Bloomberg tally, eight are poorer now than they were at the end of last year. Musk is down by almost $82bn. Jeff Bezos, chairman of Amazon, is the next biggest loser, down $68bn.

The only two winners were industrialists in India: Gautam Adani, who with $138bn is now number three in the world, and Mukesh Ambani, with $92bn at number eight. The only other non-American in the top ten is Bernard Arnault, in second place, worth $160bn. He has built up the world’s largest luxury group, LVMH Moët Hennessy-Louis Vuitton. Even in these tough times, luxury is a good business to be in.

What has happened to billionaires has happened to most investors on a more moderate scale. The value of the entire stock of cryptocurrencies has fallen. We reported how $200bn had been wiped off cryptocurrencies in the space of two days last week. Millions of individual crypto-investors have been hammered in recent months, with one losing $40m with the collapse of Celsius Network. Sadly, there will be millions more with the FTX bankruptcy. My quick tally of the top 30 cryptocurrencies was some $783bn on Friday’s close. At their peak in November last year, they were worth $3,000bn.

Traditional assets have also fallen in value. For example, the S&P500 is down by 17 per cent this year, but the fall in non-traditional assets has been far greater. Why? The answer goes to the very root of the nature of wealth. There are many ways of trying to put a value on an asset, but stripped down they fall into two groups.

One valuation is the amount you pay now for an income stream in the future. For bonds, the calculation is explicit: the yield you get in interest payments to the maturity of the bond, when you also get back the capital. For equities, the sums are less clear because you don’t know how large the dividends will be, or what will happen to the company in the long run: will it be taken over – or go bust?

Nevertheless, you are basically buying an income stream. Much the same goes for property. You are buying the future rental payments. If you choose to live in the property you are, so to speak, paying yourself the rent. Prices of properties go up and go down, but there is a basis of assessing the value: what you would have to pay in rent to occupy the property in question.

With the second group of assets, there is no income stream. You are buying something different. It could be security. People buy gold because they know that for thousands of years it has been a store of value. It could be beauty. People buy paintings for the delight that they give to the viewer. It could be social status. In the UK, there is an established (if disgraceful) path for the rich to buy peerages by giving money to political parties. Exclusive clubs have high membership fees. But most frequently it is the expectation of some future capital gain, and the allure of that was particularly evident in the crypto-world.

One truly cringe-making example of people being enticed into crypto, and using FTX, was the infamous commercial with Tom Brady and Gisele Bündchen, which you can watch here. It was made just over a year ago and shows the then-golden couple ringing people they knew to lure them in. The really clever aspect was the idea that ordinary people were being invited to join an exclusive club, with the catchphrase “Are you in?” and the reply “I’m in”.

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The warning that crypto was risky and this was not investment advice appeared in tiny print for about three seconds at the end.

With the first group of assets, there are rational ways of putting a value on them. With the second, there is no rational value. That does not mean there is no value, simply that it is impossible to calculate what it is. And that brings us back to what has happened in recent weeks.

Some of the losses – those of Jeff Bezos and his shareholding in Amazon, for example – can be explained. The business is doing all right, but not as well as people hoped. But in the case of FTX there was really no value at all, except the membership of a club created by an inspirational entrepreneur, and with members that included Tom Brady and Gisele Bündchen. The full story has yet to emerge, but already it is clear that, when the illusion was shattered, the wealth evaporated. There was nothing there.

And Twitter? Well there is something there, so it must be worth something. But no one, including Elon Musk, can know what that is… except that it is less than the $44bn he paid for it.