Mihir A. Desai – The Collapse of Cryptography and the End of the Magical Thinking That Has Infected Capitalism

At a guest lecture at a military academy when the price of a single bitcoin was approaching $60,000, I was asked, as finance professors often are, what I think of cryptocurrencies. Rather than respond with my usual skepticism, I surveyed the students. More than half of the participants had traded cryptocurrencies, often funded by loans.

I was stunned. How could this population of young people spend time and energy in this way? And these students were not alone. The appetite for crypto has been most pronounced among Gen Z and Millennials. These groups have become investors over the past 15 years at rates never seen before and with extremely optimistic expectations.

I came to see cryptocurrencies not just as exotic assets, but as a manifestation of magical thinking that had come to infect part of the generation growing up in the aftermath of the Great Recession – and American capitalism. , wider.

For these purposes, wishful thinking is the assumption that favorable conditions will continue forever regardless of history. It is the minimization of constraints and compromises in favor of techno-utopianism and the exclusive emphasis on positive results and novelty. It is the amalgamation of virtue with commerce.

Where does this ideology come from? An exceptional period of low interest rates and excess liquidity provided fertile ground for fantastic dreams to blossom. Pervasive consumer-facing technology has empowered individuals to believe that the latest platform company or an arrogant tech entrepreneur could change everything. Anger after the 2008 global financial crisis created a receptivity to radical economic solutions, and disappointment with mainstream politics shifted social ambitions to the world of commerce. The greenhouse of Covid peaks turbocharged all those impulses as we bored ourselves in front of screens, fueled by seemingly free money.

With Bitcoin now trading at around $17,000, and amid falling stock market valuations and tech layoffs, those ideas have started to crack. The unfolding of magical thinking will dominate this decade in painful but ultimately restorative ways – and this unfolding will be most painful for the generation conditioned to believe in such fantasies.

Cryptocurrency is the most ideal vessel of these impulses. A speculative asset with a tenuous underlying predetermined value provides a blank slate on which meaning can be imposed. Crypto boosters promised to replace governments by supplanting traditional currencies. They vowed to throw off the traditional banking and financial system through decentralized finance. They said they could throw off the internet giants’ alleged stranglehold on commerce through something called Web 3.0. They insisted that we could throw off the traditional path to success of education, saving and investing by getting into dogecoin early, a meme coin designed as a joke that reached a market capitalization. market peak of more than $80 billion.

These delusional and ludicrous promises share a common anti-establishment sentiment fueled by technology most of us have never understood. Who needs governments, banks, the traditional internet or local wisdom when we can operate beyond expectations?

Traditional financial markets eventually manifested these same tendencies, as wishful thinking pervaded the broader investor class. During a period of falling and zero interest rates, mistakes and mediocrities were masked or forgiven, while speculative assets with low probabilities of distant success inflated enormously in value. Street vendors launching shiny new vehicles — like “stablecoins” that would have turned speculative assets into stable assets and new ways to take companies public without typical regulatory scrutiny — promised better returns while dismissing greater risks , a hallmark of trade-off ignorance in wishful thinking. For a long time, many investors bought the equivalent of lottery tickets. And many have won.

The real economy could not escape the infection. Companies have thrived by inflating their reach and ambition to fuel the desire for magical thinking. WeWork, a mundane company that offered flexible workspaces, was touted as a spiritual company that would reshape the human condition. Its valuation has soared, masking the dubious activities of its founders. Facebook and Google rebranded themselves as tech powerhouses, renaming themselves Meta and Alphabet respectively. They were looking for broad abilities that they could expand at will in the metaverse or with their “moon projects” when in fact they are prosaic (albeit extremely effective) advertising ventures. They are now grappling with many of their fantastic efforts.

More generally, many companies have come to adopt broader social missions in response to the desire of young investors and employees to use their capital and employment as instruments of social change. Another manifestation of wishful thinking is the belief that the best hopes for progress on our greatest challenges – climate change, racial injustice and economic inequality – are corporations and individual investment and consumption choices rather than political mobilization and our communities.

I confess that this screed reflects my own experience. For the past decade, being a finance professor meant being quizzed on cryptography or new valuation methods for unprofitable companies — and being smiled at (and ignored) when I thwarted traditional instincts. Every business problem, I am told, can be solved in radically new and effective ways by applying artificial intelligence to ever-increasing amounts of data with a dash of design. Many graduates coming of age in this time of financial vertigo and growing corporate ambition have learned to chase these glittering objects with their human and financial capital instead of investing in sustainable ways – a habit that will be harder to break. inculcate at an older age.

Embracing novelty and ambition in the face of huge problems is to be praised, but the messy variety of such admirable traits we’ve seen so much of in recent years is counterproductive. Business fundamentals have not changed simply because of new technologies or low interest rates. The way to thrive is always to solve problems in new ways that bring lasting value to employees, capital providers and customers. Over-promising the scope of change created by technology and the possibilities of business and finance to a new generation will only lead to disaffection as those promises falter. All of these new crypto investors and owners may harbor a grudge against capitalism, rather than understanding the evil world they were born into.

The end of wishful thinking is upon us as cryptocurrencies and valuations plummet – and that’s good news. Special interests will resist this trend by continuing to propagate fiction. But rising rates and a return to more routine economic cycles will continue to provide the rude awakening that began in 2022.

What happens afterwards? Hopefully a revitalization of this great American tradition of pragmatism will follow. Speculative assets without any economic function should be worth nothing. Existing institutions, however imperfect, should be improved rather than displaced. Risk and return are inevitably linked.

Businesses have social value because they solve problems and generate wealth. But they should not be seen as arbiters of progress and should be balanced by a state that mediates political issues. Compromises are everywhere and unavoidable. Navigating these compromises, rather than ignoring them, is a recipe for a good life.

The New York Times


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