The following article originally appeared in CoinDesk Weekly, a custom-curated newsletter delivered every Sunday exclusively to our subscribers.
“It looks like the dotcom bubble everywhere again, or the housing bubble everywhere 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, just like the one that overheated the U.S. housing market within the 2000s and ultimately sparked a worldwide financial crisis, leave behind encumbrances. Tech bubbles, just like the 1990s internet mania, leave behind infrastructure.
The last great debt bubble gave us $700 billion of bailouts and quite 2,000 pages of legislation (not counting the reams of regulations putting the Dodd-Frank Act into practice) within the U.S. alone.
Rather than ending “too big to fail” we ended up with the most important TBTF institutions ever, zombie foreclosures that sat vacant for years waiting to be repossessed, and therefore the spectacle of Occupy Wall Street stinking up a public park and scaring the youngsters .
The last great tech bubble, on the opposite hand, funded the rollout of fiber-optic cable networks and research into 3G mobile computing. It fueled the event 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) then forth. (To be fair, tech-stock shenanigans from that era were also an element that led to Sarbanes-Oxley.)
As with a century earlier, when a boom-bust cycle within the 1880s and 1890s left behind a national railroad system, the dotcom bubble totally transformed the economy.
So while cryptocurrencies are almost certainly during a bubble – I mean, come on, dogecoin’s market capitalisation is above $1 billion, and its software hasn’t been updated in two years – the pertinent question is what quite bubble.
True, either way, there’ll 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 economic system to warrant such an intervention.
And given the threat that decentralized money poses to collection and financial surveillance, it’s not something most governments would be inclined to rescue from the abyss.
So crypto bagholders are going to be on their own – because it should be. If you don’t see why, google “moral hazard.”
Further, if someone makes a stupid back 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 might get their financial lives back.
So the potential damage from this bubble is restricted in comparison to the crash of 2008. And arguably the upside is bigger .
Because this bubble could leave behind the rails of a replacement and improved economic system .
It is true that, as Lightning Network co-founder Elizabeth Stark recently noted on Twitter, many of the people doing important infrastructural add bitcoin do so as a labor of affection , not for the cash . because 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, aside from souvenir white papers (our era’s version of these vintage stock certificates you’ll buy for a couple of 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. those that do may form a crucial , if intangible, infrastructure for global digital commerce.
Possibly in ways we can’t yet imagine. The spreadsheet and therefore the electronic database are samples of applications of pre-internet computing that nobody foresaw as they were building computers – transformative technologies that nobody could have conceived of until during a ny case the investment in a new platform was done.
And in fact there’s the web itself, whose humble beginnings were in conflict military commanders’ need for a resilient communication network within 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 had been incorrectness to try to to so. But he’s mistaken for speaking of monetary 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’d not have gotten bitcoin.