Why crypto will rise again
The mayhem in the cryptocurrency market has excited the obituary writers. Stocks are down, bonds are down, but bitcoin, ethereum and other digital tokens have plummeted. Taken together, crypto assets have lost more than twothirds of their value since November. Some $2 trillion in notional wealth has evaporated.
But obituarists should note: The bust tells us precisely nothing about crypto’s future. History is littered with technologies that crashed but still proved transformative.
Take the dot-com mania that peaked in 2000. By 2010, many of the ideas of the bubble era had been productively recycled by the next wave of start-ups. Companies touting online air tickets or groceries were spectacularly overvalued during the boom and widely ridiculed during the bust. But in the aftermath of the aftermath, e-commerce conquered Main Street.
This boom-bust-triumph sequence is the rule, not the exception. The bubble of the 1920s was inflated partly by overblown euphoria about the technology of the time – mass production that built upon Henry Ford’s assembly lines and the electrification of factories. Similarly, the bubble of the 1960s rode the euphoria about semiconductors and computers. Both decades ended with a crash. But mass production, integrated circuits and computers remain among the 20th century’s greatest innovations.
Or think back to the British mania of the 1840s, when railways’ share of total stock-market value tripled in a three-year period. In their book “Boom and Bust: A Global History of Financial Bubbles”, William Quinn and John D. Turner report that, in 1845 alone, 1,238 new railway projects were initiated in Britain, a tally that makes the recent proliferation of crypto tokens seem modest. Anticipating the YouTube channels, Twitter threads and home-brew podcasts that hype digital currencies today, the 1840s witnessed an explosion of cheerleading railway periodicals. Victorian day traders could choose between handy manuals such as “How to Make Money in Railway Shares” and “The Short and Sure Guide to Railway Speculation.”
Naturally, only a fraction of these rail ventures could hope to be profitable. By 1850, railway shares had lost two-thirds of their value. A few promoters engaged in shenanigans worthy of a modern crypto con: George Hudson, known as the “Railway King,” was chased into exile amid allegations of dubious accounting. But none of this changed the reality that the railways were transformative.
After the railway boom came a bicycle mania. Until 1885, the penny farthing bicycle amplified the rider’s pedal power by means of its oversize front wheel, and cyclists tumbled from a scary height when ambushed by a pothole. But then those life-threatening mega-wheels were replaced by clever chains and gearing, while lighter steel and rubber tires created a bike that was maneuverable and comfortable. In 1896, bicycle-related inventions accounted for fully 15% of new patents, Quinn and Turner tell us.
The new technology was sound, but it set off an unsound mania. Opportunists bought cycle companies, hyped their prospects, and paid journalists and politicians to hype them even more; then they sold them via the stock market at absurd valuations. Cycle shares tripled in 1896 but then hit that proverbial pothole. Half of the new bike companies had crashed and died by the turn of the century.
All of which suggests three lessons. First, new technologies generate investor excitement, as indeed they should. But precisely because the tech is new, investors cannot gauge how much excitement is warranted. Booms and busts inevitably follow.
Second, these boom-bust cycles can’t tell you much about whether a technology will triumph. Investors bet on things they hope might work, but the nature of early-stage tech bets is that a majority of ventures go to zero. During the up cycle, soaring valuations are no guarantee of success. On the way down, plunging share prices are equally poor signals.
Third, innovation and profit are not reliably connected. Trains, bicycles and e-commerce were all genuine innovations, but many early pioneers went bankrupt. Conversely, Google and Facebook were not the inventors of internet search and social media, yet they captured nearly all the value in these categories. In similar fashion, some of today’s crypto innovators will go bust. But they could point the way for others.
The real test for crypto is whether it creates services that non-crypto people care about. On this, the jury is still out, but the tentative evidence is promising. Digital tokens can create clever customer incentives – think a more sophisticated version of air miles. Crypto payments may generate cheaper ways to remit money across borders. Playto-earn computer games, with digital assets that users stash in personal wallets, may bring a new dimension to the already vast gaming industry. Audius, a Spotify-type service, streams music that is stored on a blockchain.
Today’s internet renders frictionless the storage, transfer and sharing of information. Already, we cannot imagine life without it. Tomorrow’s crypto – and blockchain-enhanced internet may achieve the same for value. Legions of smart coders are working to realize this vision, and none can say what will result. But one thing is for sure: Financial markets are no more clairvoyant than the rest of us.
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Sebastian Mallaby is the Paul A. Volcker senior fellow for international economics at the Council on Foreign Relations and a contributing columnist for The Washington Post.