A Short History of Crypto Euphoria

• Author: Andreas Adriano
• Pages: 20-21

F

inancial bubbles are easy to identify after the

fact. But how do you spot one in advance?

It’s a question that has ummoxed genera-

tions of economists, not least the many who

failed to foresee the global nancial crisis. Now, with

the rise of crypto assets, the question is taking on

renewed relevance. Rather than engage in more or

less informed intellectual speculation on the subject,

we decided to consult the preeminent expert on

bubbles: John Kenneth Galbraith.

Granted, the eminent Harvard professor and

best-selling author of e Great Crash, 1929 and

e Af‌f‌luent Society died in 2006, three years before

Bitcoin came into existence. But Galbraith predicted

what could happen in a caustic book, A Short History

of Financial Euphoria, in which he analyzes major

speculative events in history, from the tulip mania

of 1630s Holland to the Wall Street crash of 1987,

and identies their common features. His taxonomy

would have nailed the dot-com bubble and the 2008

crisis. So let’s apply some of his criteria to crypto assets.

“e thought that there is som ething new in the world…”

“e world of nance hails t he invention of the

wheel over and over again, often in a sli ghtly more

unstable version,” Galbraith wrote.

What does a leading crypto evangelist have to say?

In an e-book titled Bitcoin vs. the 2018 Recession, Remy

Hauxley, a self-described “cryptocurrency educator,”

says Bitcoin is “unlike anything we have ever seen. It’ll

change the world.” Hauxley calls Bitcoin “a new form

of gold, of money, of stocks. It’s a trifecta.” (He doesn’t

explain why a recession is so surely coming in 2018.)

“e extreme br evity of the f‌inancial memory…”

“Financial disaster is quickly forgotten,” Galbraith

observed. “When the same or closely similar cir-

cumstances occur again, sometimes in only a few

years, they are hailed by a new, often youthful,

and always supremely condent generation as a

brilliantly innovative discovery in the nancial and

larger economic world.”

It has been about a decade since the 2008 crisis

and almost a generation since the dot-com bubble,

so the irrational exubera nce of those two periods has

largely faded from memory. Many Bitcoin traders

are too young to remember either episode.

“e specious association of m oney and intelligence…”

Galbraith noted that people often think that “the

more money, the greater the achievement and the

intelligence that supports it.” Rich people receive

adulation for being rich, and those less well-o follow

in their footsteps and make the same investments. is

provides a stock of greater fools to keep the speculative

engine running and, in the short term, reassures the

rich that they are in fact smarter than the rest.

“Speculation became more and more intense…”

“e bulbs might now change ha nds several times

at steadily increa sing and wonderfu lly rewardi ng

prices while still u nseen in the ground,” Galbraith

wrote, describing the Dutch mania for tulips.

In the old days of bricks and mortar, an initial public

oering, or IPO, was a kind of corporate rite of passage

for a start-up. Nowadays, it’s the initial coin oering,

or ICO. Instead of stock, ICO investors buy tokens

redeemable in the new currency once, if, it goes into

circulation. Unlike stock, tokens don’t confer any

ownership rights. Block.one, in the most successful

ICO so far, has raised more than $1.5 billion since

July 2017, despite the clear indication that its tokens

“do not have any rights, uses, purpose, attributes,

functionalities and features.” All told, ICOs raised $6.5

billion in 2017, and more than $4 billion in the rst

quarter of 2018, according to the Wall Street Journal.

An eminent economist’s taxonomy of bubbles is applied to the latest f‌inancial fad

Andreas Adriano

A Short History of

Crypto Euphoria

20 FINANCE & DEVELOPMENT | June 2018