Marc Hochstein is the managing editor of CoinDesk and a former editor-in-chief of American Banker.
The following article originally appeared in CoinDesk Weekly, a custom-curated newsletter delivered every Sunday exclusively to our subscribers.
“It seems like the dotcom bubble all over again, or the housing bubble all over again.”
That’s Robert Shiller, the Nobel Prize-winning Yale economist, quoted in Fortune magazine’s cover story on bitcoin.
So: dotcom or housing? Pick one, professor. Because there’s a meaningful difference.
Debt bubbles, like the one that overheated the U.S. housing market in the 2000s and ultimately sparked a global financial crisis, leave behind encumbrances. Tech bubbles, like the 1990s internet mania, leave behind infrastructure.
The last great debt bubble gave us $700 billion of bailouts and more than 2,000 pages of legislation (not counting the reams of regulations putting the Dodd-Frank Act into practice) in the U.S. alone.
Rather than ending “too big to fail” we ended up with the biggest TBTF institutions ever, zombie foreclosures that sat vacant for years waiting to be repossessed, and the spectacle of Occupy Wall Street stinking up a public park and scaring the children.
The last great tech bubble, on the other hand, funded the rollout of fiber-optic cable networks and research into 3G mobile computing. It fueled the development of smartphones (Apple, Samsung), algorithmic search (Google), big data logistics and e-marketplaces (Amazon, Alibaba), social media (Facebook, Twitter), cloud computing (Dropbox, AWS), the platform and app economies (Airbnb, Uber) and so forth. (To be fair, tech-stock shenanigans from that era were also a factor that led to Sarbanes-Oxley.)
As with a century earlier, when a boom-bust cycle in the 1880s and 1890s left behind a national railroad system, the dotcom bubble totally transformed the economy.
So while cryptocurrencies are almost certainly in a bubble – I mean, come on, dogecoin’s market capitalization is above $1 billion, and its software hasn’t been updated in two years – the pertinent question is what kind of bubble.
True, either way, there will likely be steep financial losses, tears, layoffs, business failures, a funding drought, recriminations, pious editorials, lawsuits (meritorious and otherwise), prosecutions, congressional hearings, political grandstanding, unfunny “Saturday Night Live” skits and, quite possibly, burdensome new regulations.
But there probably won’t be bailouts.
For one thing, bitcoin and its myriad clones and mutations are, even now, too small and too segregated from the broader financial system to warrant such an intervention.
And given the threat that decentralized money poses to tax collection and financial surveillance, it’s not something most governments would be inclined to rescue from the abyss.
So crypto bagholders will be on their own – as it should be. If you don’t see why, google “moral hazard.”
Further, if someone makes a stupid bet on a cryptocurrency that goes south, his losses are limited to the cash he invested. (Hopefully not from his retirement savings.)
In sharp contrast, when housing prices returned to earth, the suckers who had taken out subprime mortgages still had six-figure debts hanging over their heads. Even after the borrowers mailed the house keys to their lenders, the foreclosures left a stain on their credit reports for years before they could get their financial lives back.
So the potential damage from this bubble is limited when compared to the crash of 2008. And arguably the upside is greater.
Because this bubble could leave behind the rails of a new and improved financial system.
It is true that, as Lightning Network co-founder Elizabeth Stark recently noted on Twitter, many of the people doing important infrastructural work in bitcoin do so as a labor of love, not for the money. As the old saying goes, cypherpunks write code.
And it’s hard to imagine many of the frivolous initial coin offerings (ICOs) out there leaving much of a legacy, apart from souvenir white papers (our era’s version of those vintage stock certificates you can buy for a few bucks from Wall Street sidewalk vendors).
But it’s also hard to imagine that none of the blockchain projects being showered with money by venture capitalists and, increasingly, ICO “contributors” (an unfortunate euphemism) will amount to anything. The ones that do may form an important, if intangible, infrastructure for global digital commerce.
Possibly in ways we can’t yet imagine. The spreadsheet and the relational database are examples of applications of pre-internet computing that no one foresaw as they were building computers – transformative technologies that no one could have conceived of until after all the investment in a new platform was done.
And of course there’s the internet itself, whose humble beginnings were in Cold War military commanders’ need for a resilient communication network in the event of a nuclear attack.
Robert Shiller will always be a hero for calling out the U.S. housing market’s excesses when it was politically incorrect to do so. But he’s mistaken for speaking of financial bubbles as if they were interchangeable and equally destructive.
A final note: One good thing did arguably come from the last debt bubble, albeit indirectly.
If the crisis hadn’t shaken the world’s faith in centralized institutions and financial intermediaries, we might not have gotten bitcoin.
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