‘A fraud and a bubble are two different things’: Crypto shocks a financial historian who literally wrote the book on financial bubbles

The crypto space lost more than $2 trillion in value last year. But for crypto loyalistsit’s different”Crypto Winter.” remember 2018—when Bitcoin prices dropped by 80%, and the media called it “dead” over 90 times? Don’t worry, they say. The Fed is raise interest rates and inflation and recession fears are making investors confusedso they just retreated.

the thaw of the world’s second largest crypto exchange, FTX, the eruption of Luna and its sister algorithmic stablecoin TerraUSD, and the collapse of high-profile crypto lenders such as Celsius and BlockFi, just bumps in the road, crypto proponents argue. But William Quinn, a senior lecturer at Queens’ University Belfast whose research focuses on financial bubbles, is not so sure.

Quinn believes that the cryptocurrency boom of the last decade is a “stupider bubble than any previous bubble” in financial history, or “a smarter Ponzi than any previous Ponzi”—or a third option .

“So we have two possibilities,” he wrote in an article on journalist David Gerard’s website last week. “And the truth is probably somewhere in between.”

Quinn, who wrote the book Boom and Bust: A Global History of Financial Bubbles in 2020, said that the cryptocurrency “bubble” will not look like the financial bubbles of the past.

The so-called “Tulip Mania” of the 17th-century Dutch Golden Age was more of a “popular narrative” than a true financial bubble on a modern scale, he said, arguing that it “created more very meaningful compared to crypto. bubble.” And the Dot-com bubble that started in the late 90s is nothing but a “very flattering comparison” to crypto, according to the historian.

“The problem is that crypto and blockchain, unlike the internet, are not very useful,” he argued.

For Quinn, there may not be a financial bubble in history worth comparing to the cryptocurrency mania of the past decade—it may be something else entirely.

What makes the crypto bubble so unique

Quinn writes that cryptocurrencies have three defining features that make them stand out from past financial bubbles.

First, they have no “use value” unless others are willing to accept it. Second, they don’t generate cash flows. And third, some have mining costs that can only be paid in fiat, or government-issued, currencies. For example, Bitcoin miners often buy power tools, mining computers, and real estate with US dollars.

“Not all major cryptocurrencies are like this, but most are close,” Quinn wrote. “It’s really awesome characteristics for an investment.”

Quinn argues that these three unique characteristics mean that the real question is whether to classify crypto as a “fraud” or a “bubble.”

“Every previous bubble I’ve encountered has involved a commodity, a collectible, or an asset with associated cash flow…[b]ecause of history, to create a financial asset with no related cash flow and sell it as an investment would have been considered fraud,” he wrote. “And a fraud and a bubble are two different things.”

Quinn is careful not to portray all cryptocurrencies in the same light. He wrote that others, like Bitcoin, shouldn’t be considered frauds because they don’t have a primary “perpetrator.”

“Bitcoin was created as a sincere—if somewhat disjointed—political project, and operates independently of its creator. It is a bad investment in the same way that a fraud is a bad investment, but this is not a fraud,” he wrote.

Blockchain promoters

Of course, for every crypto skeptic, there is a supporter ready to counter their argument. Even some of Wall Street’s most respected investors have become crypto bulls. Billionaire hedge funder Bill Miller said in January 2022 that he had 50% of his net worth in Bitcoin. In May, he called cryptocurrency “insurance” against financial disasters in “Richer, Smarter, Happier” podcast.

And the financial services industry is also dependent blockchain technology in recent years. Current Visa president Ryan McInerney, who is set to become CEO in February, told luckby Alan Murray on Nov. that there may be “new use cases” for blockchain in payment systems.

“We’re doing a lot of work on different opportunities using blockchain,” he said. We think it’s possible (it might be part of the future payment system), but we’re in very early innings. It is yet to be seen.”

Carmelle Cadet, the CEO of Fintech startup Emtech, also spoke luckby Sheryl Estrada in October that blockchain tech is the future and CFOs are likely to adopt it in the coming years because it allows companies to account for assets and their ownership through a secure, decentralized ledger.

An improvement on past Ponzis?

However, Quinn argues that most cryptocurrencies can be viewed as a form of “enhancement of the traditional Ponzi scheme,” and he’s not the only one with that view. JPMorgan Chase CEO Jamie Dimon made a similar claim in September last year, calling cryptocurrencies “decentralized Ponzi scheme” in testimony to the US House Committee on Financial Services.

“The idea that this is good for anyone is unbelievable,” he said, arguing that Bitcoin and other cryptocurrencies are “dangerous.”

And NYU professor emeritus Nouriel Roubini has repeatedly bashed cryptocurrencies over the years, even calling them “Ponzi scam“and a form of”corrupt gambling” in recent interviews.

Cryptocurrencies like Bitcoin work in the same way as Ponzi schemes, according to critics like Roubini and Quinn, with new investors paying off early investors because there are no actual ones. cash flow generated.

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