Gold’s market capitalization, by comparison, is around $12.5 trillion. As of this writing, the global market capitalization of cryptocurrencies is north of $1.7 trillion. Similar risks may apply today in the crypto world.
Indeed, the crisis of confidence was so visceral that even well-capitalized titans like Berkshire Hathaway, in Warren Buffett’s words, stared “ into the abyss.” coli effect: the financial equivalent of a case of food poisoning at a local burger joint leading to a nationwide aversion to fast food. Paulson, Jr., write in Firefighting: The Financial Crisis and Its Lessons, experts underestimated the dangers of an interconnected, overleveraged system, and of the potential for an E. Few imagined that that failure was possible, or that such failure would threaten the entire financial order.Īs Ben S. Before the global financial crisis (GFC), in 2006, US subprime originations totaled $600 billion, or less than a quarter of the US mortgage market. Just as salient are the risks of financial contagion. This adds up to $76 billion in shady transactions. One study found that around one in four bitcoin users and 46% of bitcoin transactions are associated with illegal activity. What’s more, bad behavior tends to fester where capital is most unfettered. Just as it may take generations for a truly transformative technology to achieve critical mass, poor investments and outright scams can survive for decades before the bottom falls out. Irrational exuberance, natural Ponzi processes, and fear of missing out (FOMO) can generate a lot of recklessness. The crypto faithful, on the other hand, must beware the siren song of speculation. Sometimes, it can take generations for technology to realize its early promise and transform the landscape. But it was not the end of the digital handheld device. There were legions of naysayers, and it became something of a boondoggle. Think, for instance, of Apple’s handheld Newton devices in the early 1990s. The promise of blockchain technology - security, transparency, efficiency, traceability, and automation - has been discussed at length.įor this reason, crypto nonbelievers should beware of what former Intel CEO Andy Grove calls the trap of the first version. True, crypto ostensibly does have some economic value. I may not believe in the aesthetic appeal of diamonds, for example, but I cannot ignore its psychic value in the imagination of others. And investors like Charlie Munger have been rather evocative in their criticism.Ī key element of behavioral finance that we need to appreciate, however, is that perceived value is contagious. “Cryptocurrencies play almost no role in normal economic activity,” he writes. But not everyone buys the “technobabble,” as Paul Krugman calls it. The International Monetary Fund (IMF) has warned El Salvador against this course.ĭigital currency has achieved remarkable legitimacy in the minds of the masses, the media, and the markets. In Central America, El Salvador has made bitcoin legal tender and plans to develop “Bitcoin City” at the base of the Conchagua volcano.
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