“Bitcoin and its rivals now have a combined market valuation of more than $1 trillion. What do investors think they’re buying?
“One answer is protection against the perennial fear
that governments will inflate away all your wealth — as a recent Bloomberg
article put it, some billionaires are buying crypto in case money ‘goes to
hell.’ Indeed, there have been 57 hyperinflations in the world that we know
about. However, they all took place amid political and social chaos; do you
really think that in such an environment you’d be able to get online and cash
in your Bitcoins?”—Opinion columnist and Nobel Economics laureate Paul Krugman,
“Crusading for God, Family and Bitcoin,” The New York Times, Jan.
What’s with Bitcoin and its brethren
cryptocurrencies, anyway? (I use “brethren” advisedly; considerable
testosterone is being expended in the pell-mell push to adopt this relatively
new type of financial exchange.)
Some would argue that this is an excellent financial
innovation and that there’s nothing to worry about. But I wonder how much this
is turning into not a financial innovation, but a financial fad. As of this
month, there were more than 8,000 cryptocurrencies in existence, according to an article in coinmarketcap.com.
How much does the average investor know about
cryptocurrencies, aside from the fact that they’re supposed to be The Next Big
Thing? Are all of these on the level?
By the time this gets sorted out, I’m afraid
that many people are going to lose their shirts. For a foretaste of what this
will be like, look no further than the class-action lawsuit against Kim Kardashian, Floyd Mayweather, and Paul Pierce for their alleged involvement
in a “pump and dump” scheme involving EthereumMax, a cryptocurrency that is a “speculative
digital token created by a mysterious group of cryptocurrency developers.”
Don’t go looking for guidance from the federal
government on this, either. Aside from the fact that partisan gridlock is preventing much of anything getting done these days on Capitol Hill, let alone financial regulation, Gahyun Helen You’s recent article in Foreign
Policy Magazine makes for scary bedtime reading when it
notes, “The ability of these digital currencies to undermine control of the
monetary system and thus erode sanctions power presents a particular risk to
the United States. Absent decisive action, the U.S. market may instead be
governed by foreign frameworks.”
In 1720, the “South Sea Bubble” sparked what is often considered the world’s first stock-market crash. Even Sir Isaac Newton, the cranky scientific genius who, as England’s Master of the Mint, helped to curb much of the nation’s rampant counterfeiting, got caught up in the bubble. If a smart guy like that could get taken in, what are the odds of you and me not becoming suckers with our version of this scam today?
We’re about to learn if we’ve
learned anything at all about financial speculation over the last three centuries—or
if future economic histories are going to talk about “The Bitcoin Bubble.”
(The image accompanying this post, showing Paul
Krugman at the Brooklyn Book Festival, was taken Sept. 12, 2010, by Shankbone.)