Crypto is Shocking to a Financial Historian Who Literally Wrote the Book on Financial Bubbles

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The crypto space has lost over $2 trillion in value over the past year. But for the crypto faithful, this is just another Crypto Winter. Remember 2018 when Bitcoin prices crashed 80% and the media called it dead over 90 times? Don’t worry, they say. The Fed raises interest rates and fears of inflation and recession make investors nervous, so they simply pull out.

The collapse of the world’s second largest crypto exchange, FTX, the explosion of Luna and its sister algorithmic stablecoin TerraUSD, and the collapse of top crypto lenders like Celsius and BlockFi, are just bumps in the road. , say crypto proponents. But William Quinn, a senior lecturer at Queens University Belfast whose research focuses on financial bubbles, isn’t so sure.

Quinn thinks the cryptocurrency fervor of the past decade is either a dumber bubble than any previous bubble in financial history, or a smarter Ponzi than any previous Ponzi or a third option.

We therefore have two possibilities, he wrote in an article on the site of journalist David Gerards last week. And the truth is probably somewhere in the middle.

Quinn, who wrote the book Boom and Bust: A Global History of Financial Bubbles in 2020, said the cryptocurrency bubble is unlike financial bubbles of the past.

The so-called Tulip Mania of the 17th century Dutch Golden Age was more a popular narrative than a real financial bubble on a modern scale, he said, arguing it made far too much sense to be compared to the crypto bubble. And the dotcom 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, just aren’t very useful, he argued.

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

What makes the crypto bubble unique

Quinn writes that cryptocurrencies have three defining characteristics that make them unique from past financial bubbles.

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First, they have no use value unless others are willing to accept them. Second, they don’t create cash flow. And third, some have mining costs that can only be paid in fiat or government-issued currencies. For example, Bitcoin miners typically buy electrical equipment, mining computers, and real estate with US dollars.

Not all major cryptocurrencies are exactly like this, but most are close, Quinn wrote. These are particularly terrible characteristics for an investment.

Quinn argued that these three unique characteristics mean that the real question might be whether to classify crypto as a fraud or a bubble.

Every previous bubble I’ve encountered has involved either a commodity, collectible, or asset with associated cash flows[b]Because historically, producing a financial asset with no associated cash flow and marketing 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 cast all cryptocurrencies in the same light. He writes that some, like Bitcoin, shouldn’t be considered frauds because they don’t have a primary perpetrator.

Bitcoin was created as a sincere, if somewhat unbalanced, political project and operates independently of its creator. It’s a bad investment in the same way a fraud is a bad investment, but it’s not a fraud, he writes.

Blockchain supporters

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 speculative financier Bill Miller said in January 2022 that he had 50% of his net worth in Bitcoin. In May, he called out cryptocurrency financial disaster insurance on the Richer, Wiser, Happier podcast.

And the financial services industry has also been leaning into blockchain technology in recent years. Current Visas Chairman Ryan McInerney, who is expected to become CEO in February, told Fortunes Alan Murray in November that there may be new use cases for blockchain in payment systems.

We are working a lot on different opportunities using blockchain, he said. We think it’s possible [it will be part of the future payment system], but we are in the very, very early innings. It is yet to be seen.

Carmelle Cadet, CEO of fintech startup Emtech, told Fortunes Sheryl Estrada in October that blockchain technology is the future and CFOs are likely to adopt it in the coming years because it allows businesses to account for assets and their ownership through a secure and decentralized ledger.

An improvement over the old Ponzi?

Still, Quinn argues that most cryptocurrencies could be seen as a form of enhancement to the traditional Ponzi scheme, and he’s not alone with that perspective. JPMorgan Chase CEO Jamie Dimon made a similar claim in September last year, calling cryptocurrencies decentralized Ponzi schemes in testimony before the US House Committee on Financial Services.

The idea that it’s good for everyone is incredible, he said, arguing that Bitcoin and other cryptocurrencies are dangerous.

And NYU Professor Emeritus Nouriel Roubini has repeatedly criticized cryptocurrencies for years, even calling them Ponzi schemes and a form of corrupt gambling in recent interviews.

According to critics like Roubini and Quinn, cryptocurrencies like Bitcoin work similarly to Ponzi schemes, with new investors paying off early investors because no real cash flow is produced.

This story was originally featured on Fortune.com

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