Crypto Bubble? An Historical Analysis of Financial Crises
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Bibliographic details
- Authors: ANDREAS ADRIANO
- Published: June 1, 2018
- Volume: 55
Overview
- Article: "A Short History of Crypto Euphoria"
- Author: ANDREAS ADRIANO
- Publication: F&D Magazine
- Date: June 2018
- Focus: Apply John Kenneth Galbraith’s taxonomy of financial bubbles to crypto assets (Bitcoin, ICOs, tokens).
Galbraith’s criteria applied to crypto assets
- “The thought that there is something new in the world…”
- Crypto evangelists claim novelty: example cited — Remy Hauxley calls Bitcoin “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.”
- “The extreme brevity of the financial memory…”
- About a decade since the 2008 crisis and almost a generation since the dot-com bubble; many Bitcoin traders are too young to remember those episodes.
- “The specious association of money and intelligence…”
- Wealth confers adulation, reinforcing imitation and supplying “greater fools” to sustain speculation.
- “Speculation became more and more intense…”
- Rise of ICOs as the modern analogue to IPOs; tokens often confer no ownership rights.
- Block.one has raised more than $1.5 billion since July 2017, despite indications tokens “do not have any rights, uses, purpose, attributes, functionalities and features.”
- ICOs raised $6.5 billion in 2017, and more than $4 billion in the first quarter of 2018 (Wall Street Journal).
- Many investors flip tokens to others eager to join the race.
- “All crises have involved debt that has become dangerously out of scale…”
- Leverage exists in crypto markets but overall debt exposure is unclear due to market opacity and minimal bank exposure.
- Some crypto exchanges allow investors to borrow as much as 100 times the cash balance in their accounts.
- A poll by LendEDU found a growing number of investors use credit cards to buy coins and then carry the balance.
- Volatility example: anyone who bought Bitcoin in the last two months of 2017, when the price reached almost $20,000, faced severe losses.
- Security risk: since 2011, Reuters reports hackers have stolen almost 1 million Bitcoins (worth over $9 billion in early May) from several exchanges.
- “The speculative episode always ends not with a whimper but with a bang…”
- Galbraith: bubbles end badly with scapegoating; societies rarely learn from them.
- Comparative scale: at their peak, all crypto assets combined were worth less than 1 percent of global GDP, while tech stocks at the height of the dot-com mania were valued at close to a third of global GDP (Bank of England governor Mark Carney).
Risks, uncertainties, and systemic considerations
- Unknown magnitude of debt/leverage due to opaque, unregulated, early-stage market structure.
- High individual leverage available (up to 100x) and growing use of credit to finance purchases.
- Cybersecurity losses: almost 1 million Bitcoins stolen since 2011 (worth over $9 billion in early May).
- Market-size comparison suggests limited systemic immediate risk: crypto assets < 1 percent of global GDP.
Historical parallels and potential long-term outcomes
- Past bubbles produced both destruction and lasting innovations:
- South Sea Bubble, tulip mania, dot-com boom cited as precedents.
- Examples of creative outcomes from prior bubbles:
- The typewriter became a durable technology.
- Amazon (which bought Webvan) and other firms enabled fast grocery delivery despite Webvan’s bankruptcy after burning more than $800 million.
- Facebook profited from targeted advertising—the principle AllAdvantage attempted.
- Author’s assessment: It is too early to say whether crypto assets will have a lasting transformative impact; signs are promising but most bubbles are ultimately destructive of value, wealth, and trust in institutions.
Key statistics and figures (verbatim)
- Block.one has raised more than $1.5 billion since July 2017.
- ICOs raised $6.5 billion in 2017.
- ICOs raised more than $4 billion in the first quarter of 2018.
- Some crypto exchanges allow investors to borrow as much as 100 times the cash balance in their accounts.
- Bitcoin price reached almost $20,000 in the last two months of 2017.
- Since 2011, hackers have stolen almost 1 million Bitcoins (worth over $9 billion in early May).
- At their peak, all crypto assets combined were worth less than 1 percent of global GDP.
- At the height of the dot-com mania, tech stocks were valued at close to a third of global GDP.
- Webvan burned through more than $800 million in investors’ money.
- Facebook made a $16 billion profit in 2017.
Source: F&D Magazine — A Short History of Crypto Euphoria, Andreas Adriano, June 2018.
Content in this bundle
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