Even though the technology is utterly unique, there was nothing unique about the crypto bubble itself
24-Jan-2023 •Dhirendra Kumar
The collapse of crypto has given voice to many people who were saying that there was nothing to crypto and that sooner rather than later, there would be a widespread reckoning of the crypto hype. Many people view crypto as something unique in the history of financial manias - and in a technical sense, it is.
However, in theme and the exposition of the psychology of the people involved, crypto is just a repetition of almost every asset-price mania we have seen. Viewing the crypto madness as something unique prevents us from understanding this. Think about it. The dot-com mania was unique because businesses based on a global network were new. The 2008-10 global financial crisis was unique because it started from those 'subprime' based financial assets, which were something new. The 19th-century railway mania was unique because railways were a new thing. The legendary Tulip mania of 17th-century Holland was unique because investing in flowers was new.
A few days back, I read an article by Harvard finance professor Mihir Desai in which he narrates a fascinating anecdote. In his words: "At a guest lecture at a military academy when the price of a single Bitcoin neared $60,000, I was asked, as finance professors often are, what I thought about cryptocurrencies. Rather than respond with my usual scepticism, I polled the students. More than half of attendees had traded cryptocurrencies, often financed by loans." Desai blames the crypto-mania on what he calls 'magical thinking', defining it as 'the assumption that favoured conditions will continue forever without regard for history.' Certainly, this reasoning has an element of truth, and many people have said something similar.
This magical thinking about crypto is said to be helped by the widespread hype of crypto being a currency independent of governments for the first time in human history. I'm somewhat sceptical of this explanation for the widespread interest in crypto investing. I believe it was simple greed coupled with a chance that the presumably huge gains were hidden from the tax authorities. Look around yourself at people who are trading crypto. Once these two advantages have been removed, they lost all interest in crypto.
Could you ask yourself this hypothetical question? What would have been the interest level in crypto investing if the returns had never been higher than a steady 6-7 per cent a year? All the theories of independent currency would still be true, but no one would have cared. Let's not get carried away by the hype. People were investing in crypto for the same reason as in every other bubble asset from tulips to dotcoms - the graphs were pointing up sharply. It was just a hope, in defiance of logic and reality, that the good times would never end.
Even as I write this, hope is springing in the hearts of the crypto maniacs as there is a Bitcoin rally going on, with the price increasing by about 20 per cent since the year began. I have zero interest in what is going on now, but it seems pretty clear that among small Indian investors who were dabbling in crypto, there is only a tiny hard core of believers who remain. The rest have suppressed their gambling instincts and are licking their wounds.
However, this story has yet to end. Apart from crime and ransomware, crypto is tailor-made for exploiting savers who need help understanding why investments do well and why some stories are too good to be true. Greed is a constant in human behaviour, and so is the exploitation of others' greed. The fact that Bitcoin is still alive and kicking is proof enough.
Suggested read: Criminal crypto