## A Short History of Crypto Euphoria

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### Applying Galbraith’s taxonomy to crypto assets
- John Kenneth Galbraith’s framework from A Short History of Financial Euphoria is used to assess crypto assets.
- Key Galbraith themes identified in the crypto episode:
  - “The thought that there is something new in the world...” — claims of absolute novelty (e.g., Bitcoin described as “unlike anything we have ever seen. It’ll change the world.”; called “a new form of gold, of money, of stocks. It’s a trifecta.”)
  - “The extreme brevity of the financial memory...” — fading memory of the 2008 crisis and the dot-com bubble; many Bitcoin traders are too young to remember those episodes.
  - “The specious association of money and intelligence...” — admiration for wealth fuels imitation and provides a stock of “greater fools.”
  - “Speculation became more and more intense...” — rapid token trading and flipping; rise of ICOs as the modern analog to IPOs; many tokens confer no ownership rights.

### Evidence and key statistics on crypto market behavior
- ICO and token fundraising:
  - Block.one has raised more than $1.5 billion since July 2017, despite stating its tokens “do not have any rights, uses, purpose, attributes, functionalities and features.”
  - ICOs raised $6.5 billion in 2017.
  - ICOs raised more than $4 billion in the first quarter of 2018.
- Leverage and borrowing:
  - Some crypto exchanges allow investors to borrow as much as 100 times the cash balance in their accounts.
  - A LendEDU poll found a growing number of investors use credit cards to buy coins and then carry the balance.
- Price and investor outcomes:
  - Anyone who bought Bitcoin in the last two months of 2017, when the price reached almost $20,000, “has been played for a greater fool.”
- Security losses:
  - Since 2011, according to Reuters, hackers have stolen almost 1 million Bitcoins (worth over $9 billion in early May) from several exchanges.
- Relative market size:
  - At their peak, all crypto assets combined were worth less than 1 percent of global GDP.
  - Tech stocks at the height of the dot-com mania were valued at close to a third of global GDP.

### Debt, leverage, and crisis risk
- Galbraith’s assertion: “All crises have involved debt that has become dangerously out of scale...”
- The extent of debt linked to crypto is “still mostly unknown” due to opaque markets, early-stage development, and minimal exposure of major banks.
- Leverage is “clearly involved” and borrowing to join speculative runs is a known mechanism in past crises.
- Not all bubbles require excessive leverage (dot-com boom cited as an example), which can influence the severity and duration of ensuing recessions.

### How speculative episodes end and broader consequences
- Galbraith’s conclusion: speculative episodes “always end not with a whimper but with a bang...” — bubbles end badly, provoking scapegoating and collective failure to learn.
- The current crypto episode “may produce more of a whimper than a bang” given its relatively small size versus global GDP.
- All bubbles are destructive of value, wealth, and trust in institutions, even if a minority yield lasting innovations.

### Creative destruction and possible positive legacies
- Historical parallels where bubbles preceded lasting innovations:
  - The South Sea Bubble and early 18th-century investments in new products (e.g., a precursor to the typewriter).
  - Dot-com casualties such as Webvan burned through more than $800 million and failed, but the sector’s innovations later enabled services by Amazon and Walmart.
  - AllAdvantage’s advertising-for-surfing model failed, while targeted advertising matured into a profitable business—Facebook made a $16 billion profit in 2017 with targeted advertising.
- The article’s assessment: “It’s too early to say whether crypto assets will have a similar impact, though the signs are promising.” Only a few bubbles create lasting worthwhile innovations, while all are destructive in other ways.

*Andreas Adriano, Finance & Development, June 2018*

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_Source: https://www.imf.org/-/media/files/publications/fandd/article/2018/june/adriano.pdf_