Home / Opinion / Columns /  Crypto bros sure kept the faith but did not notice the obvious

On 11 November, FTX, the world’s third largest crypto exchange, went bankrupt. In the few days before that, the price of Bitcoin, the most popular crypto, fell by a further 25%. This fall was perhaps one of the last nails on the crypto coffin.

It is important to understand what made cryptos so popular in recent years. Indeed, the crypto story gels with a narrative that prevails in the minds of many millennials and zoomers, as they see the world around them. Why are narratives so important? As Robert Shiller writes in a research paper titled ‘Narrative Economics’: “The human brain has always been highly tuned towards narratives, whether factual or not, to justify ongoing actions, even such basic actions as spending and investing."

Bitcoin, the first crypto, was invented in late 2008, around the time central banks of the West were starting to print huge amounts of money as part of their crisis-response efforts to save large financial institutions run by highly paid and educated experts. Very few economists saw that crisis coming. Once it broke out, governments chose to save large financial firms, citing the fear of knock-on effects on their economies, but didn’t do much to alleviate the pain felt by common people. So, the narrative that emerged was that experts, financial institutions, central banks and governments cannot be trusted. Given half a chance, they will use and abuse the financial system for their own benefit.

Bitcoin and other cryptos emerged in response to this narrative. As Darren Tseng, Stephen Diehl and Jan Akalin write in Popping the Crypto Bubble, the idea was “to reinvent money from first principles independent of current power structures". In that sense, cryptos were “intended as a peer-to-peer medium of payment". The idea was to develop a form of money that would bypass the conventional financial system and let us make and receive payments to and from each other without them.

The fact that this could happen over the internet only added to its appeal. As Tseng, Diehl and Akalin write: “For many millennials and young adults, organized religion and the nation-state are declining as a primary form of identity... Internet groups are where they spend their time, find friends and seek validation. For many in this mode of thinking, it is a seemingly natural proposition that the internet itself should be the issuer of money… independent of national boundaries." This narrative helped create an initial audience for Bitcoin. Around 2013, once the mainstream media discovered Bitcoin, cryptos turned into a speculative investment and the dream facilitating peer-to-peer payments faded. Even now, nearly a decade-and-a-half after Bitcoin was invented, no legal commerce on some scale is carried out in cryptocurrencies.

Once crypto emerged as an asset for speculation, influencers quickly came in. Their faith-based sales pitch was that the future is crypto. This was necessary, given that cryptos neither had any use value (as with commodities), nor any fundamental value (like stocks). Hence, it was important to keep getting newer believers into the crypto game; believers who would keep the faith and pump more money into the crypto ecosystem, ensuring that prices kept going up and strengthening that faith.

Anyone who questioned this was dismissed with what the authors of Popping the Crypto Bubble term as a “set of thought-terminating cliches". For example, “Have fun staying poor" (by not investing in crypto) was a popular insult.

This was no different from what happens when bubbles are at their peak. As John Galbraith writes in A Short History of Financial Euphoria: “The euphoric episode is protected and sustained by the will of those who are involved, in order to justify the circumstances that are making them rich. And it is equally protected by the will to ignore, exorcise, or condemn those who express doubts."

Of course, along with this, low interest rates that have prevailed post-2008 sent people, in particular the young, in search of higher returns. This dynamic only became stronger after 2020, once the covid pandemic broke out.

The trouble was that many individuals involved in building markets where cryptos could be traded as a speculative asset were only interested in making a quick buck. This explains why many crypto exchanges are based in jurisdictions that have lax regulatory requirements. Further, given that crypto exchanges get regularly hacked, “the operational risk of engaging these exchanges is unusually high" and leads to loss of customer funds. As Tseng, Diehl and Akalin write: “In 2018, the number of customer funds lost was $1.7 billion, while in 2019, this figure increased to $4.4 billion."

Finally, signs of crypto being an unsustainable bubble were all there. Nonetheless, crypto believers, referred to in some circles as ‘crypto bros’, chose to do what most believers do when a bubble inflates, which was to unsee the obvious. As Walter Bagehot put it in his all-time classic, Lombard Street, first published in 1873: “All people are most credulous when they are most happy; and when much money has just been made, when some people are really making it, when most people think they are making it." In this scenario, “almost everything will be believed for a little while". And that was the crypto story.

Vivek Kaul is the author of ‘Bad Money’.

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