Cryptocurrency's Future: The next big thing or a repeat of the Dutch tulip craze?

• Author: Ullmann, Owen

Any doubt that the cryptocurrency phenomenon has become mainstream should have been dispelled on Christmas Day, 2021. That's when Staples Center, the Los Angeles sports arena named for a company that sells relics from a past era--paper products--changed its name to Crypto.com Arena after a Singapore-based company that did not exist until 2016. Crypto.com, a cryptocurrency exchange app, paid an astounding $700 million for the naming rights over the next twenty years, and is running television commercials featuring actor Matt Damon spouting the Latin proverb, "Fortune favors the brave."

It is just as true that fortune eludes the foolish. And it's a valid debate about which will prove to be the case. Based on the investment frenzy over private digital currency, we are witnessing either the next really big thing, as Twitter founder Jack Dorsey and Facebook CEO Mark Zuckerberg predict, or a repeat of the seventeenth-century Dutch tulip craze, as legendary investor Warren Buffet contends. Of course, the tulip bubble burst within a few years, while crypto mania has lasted for more than a decade and is getting only stronger. Just witness all the crypto commercials during the Super Bowl--Larry David's faux dismissal of the crypto craze in one tongue-in-cheek ad notwithstanding.

Since 2009, when Bitcoin first appeared as a decentralized digital currency meant to serve as a payment system, the value of a single digital "token" has exploded from a minuscule fraction of a cent to a high of nearly $69,000 in November 2021 before ending the year at $46,300, a drop that highlights its volatility--it has been known to soar or plunge 10 percent in just a few hours. Indeed, in late January 2022, as the stock market swooned, Bitcoin plummeted to below $35,000 before recovering somewhat. Although Bitcoin is still used to pay for goods or services--El Salvador adopted Bitcoin as legal tender last October--it increasingly is being acquired as an investment in a commodity, such as gold. Unlike traditional commodities, however, it has no physical properties, existing only as a computer algorithm.

Despite wild swings in prices, investors--apparently heeding Matt Damon's advice--have not been deterred from plowing mindboggling amounts of money into Bitcoin and the more than ten thousand other digital currencies it has spawned. The total market cap of these currencies at one point in 2021 approached $3 trillion, roughly equal to the market cap of Apple or Microsoft, though the crypto market cap had plunged in half during January's massive selloff. TripleA, a crypto exchange company, estimates there are more than 300 million investors worldwide. A November 2021 survey by the Pew Research Center found that 16 percent of Americans have used or traded cryptocurrencies, including 43 percent of men between the ages of 18 and 29.

Clearly, the crypto market can no longer be ignored or viewed as a niche investment, which is why governments around the world have become so nervous. And for good reason. A major appeal of cryptocurrencies like Bitcoin is that it is a decentralized system independent of governments or traditional financial intermediaries such as commercial banks. Traders can remain anonymous and transactions are verified through a revolutionary...