Is A Crypto Crash Coming?

People used to say that when taxi drivers started talking up stocks, a crash was coming. Today, it’s Uber drivers. Last week, two of my Uber drivers on two continents discovered I was a professor of innovation (they asked) and immediately shared stories of rapid riches. The objects of their desires were cryptocurrencies based on blockchain such as bitcoin and ether. More appear every day.

It Never Goes Down — Until It Does

One UBERian explained that his favorite version, billion coin, “couldn’t go down because of a special methodology.” I’m sure it’s a special methodology that never goes down— until it does. (Rather than challenge his logic, I suggested he sell enough to recover at least 100% of his original investment.)

Be clear, billion coin is no bitcoin. Bitcoin, ether and others are real. These methodologies have a powerful future in our global financial system, though no one can predict what that will be. We can, however, confidently predict there will be casualties.

The good news is lots of experimentation, discovering new stores of value and value exchange (not to mention blockchain applications beyond currencies; note the work of John Clippinger). The New York Times reported recently that entrepreneurs are creating new digital currencies to rapidly raise funds for early-stage ventures. So-called Initial Coin Offerings enable entrepreneurs (or scammers) “to raise large sums of money without dealing with the hassles of regulators, investor protections or accountants.” According to the article, 65 projects have raised $522 million so far in 2017.

When some of the dozens of cryptocurrency schemes crash, there will be pain. However, the long-term impact on our economy of these experiments will be positive. The more troubles occur early, the more likely economic actors might climb steep cryptocurrency learning curves.

Many researchers have explored the phenomenon of financial hysterias (notably Kindleberger and Galbraith). Rather than dwell on coming cryptocurrency crashes and the animal spirits that will generate them, I’d like to explore how innovation in investment products and methodologies generates such primrose paths. (We won’t explore cryptocurrency-related cybercrime, a critical topic outside our present scope.)

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