Cryptocurrencies are “a manifestation of a magical thinking” born out of a financial crisis, said a finance professor. But there could be something very real behind it. Though not intentionally, the professor may have made a case for the ‘financial crisis’ being ever-present as cracks in the system persist.
In his opinion for The New York Times, Mihir A. Desai, a professor at Harvard Business School and Harvard Law School, writes that,
“All those new investors and crypto owners may nurse a grudge against capitalism, rather than understand the perverse world they were born into.”
There were mistakes and mediocrities made during a period of declining and zero-interest rates, and these were obscured or forgiven, said Desai, “while speculative assets with low probabilities of far-off success inflated in value enormously.”
In these situations, there are “hawkers pitching shiny new vehicles,” he says, giving stablecoins as examples, as well as new ways of taking companies public without the usual regulatory scrutiny – promising “greater returns while dismissing greater risks, a hallmark of the ignorance of trade-offs in magical thinking.”
OK, boomer
Desai is not an old man yelling at kids to get off his damn lawn. He was reportedly born in 1967. Per other sources, he graduated from Brown University with a bachelor’s degree in history and economics in 1989, so he’s not a member of the baby boomer generation, but of Gen X. His age is only relevant to note that he has seen firsthand the many great and exponential strides of technology during his lifetime so far – not the least of which is the birth of the Internet, as well as countless advances in, for example, payment systems.
Yet, one can’t but feel like there is at least some condescension in his article when he comments on Millenials and Gen Z investing in crypto by saying,
“I was stunned. How could this population of young people come to spend time and energy in this way?”
During a lecture in 2021, when BTC was nearing its all-time high of 69,000, Desai polled the attending students, finding that more than half of them traded crypto, “often financed by loans.” Per Pew Research Center back in November 2021, 43% of men ages 18 to 29 said they invested in, used, or traded crypto by that point. Again, Millenials and Gen Z were the most active groups.
Desai writes that,
“Those groups became investors in the past 15 years at previously unseen rates and with exceedingly optimistic expectations.”
But why?
It is not that Desai does not ask this immensely complex question: why these specific generations would and did turn to crypto? It’s that his words at times sound almost as if he’s holding the socio-economic and geo-political circumstances these generations grew up in against them – as if they have an illness called ‘crypto’ that needs treating.
Desai writes,
“I have come to view cryptocurrencies not simply as exotic assets but as a manifestation of a magical thinking that had come to infect part of the generation who grew up in the aftermath of the Great Recession — and American capitalism, more broadly.”
He goes on to say that “the real economy could not escape infection” either. Mainstream financial markets as well manifested the same tendencies “as magical thinking pervaded the wider investor class.”
Magical thinking, Desai goes on to explain, is the assumption that “favored conditions will continue on forever without regard for history,” adding:
“It is the minimizing of constraints and trade-offs in favor of techno-utopianism and the exclusive emphasis on positive outcomes and novelty. It is the conflation of virtue with commerce.”
Desai finds the origin of this “ideology” in an exceptional period of low-interest rates and excess liquidity. Individuals began believing that tech companies and “arrogant tech entrepreneurs” could change the world due to the pervasive consumer-facing technology, he said,
Then, there was the infamous 2008 global financial crisis and the anger it created, which in turn opened doors for “a receptivity to radical economic solutions.” And most recently, we saw the COVID-19 pandemic, which “turbocharged all these impulses as we sat bored in front of screens, fueled by seemingly free money.”
And while the historical instances are very real and highly relevant, it can also be said that their effect is far more complex than presented in the article. Also, Desai is either not aware of, or perhaps ignores several relevant factors (re)emerging during the lockdowns, the money-printing, and the rising fears of another economic crisis: it wasn’t just the prospect of “free money” that turned more people to crypto, but also the lack of employment, heavy financial pressures and existential concerns combined with the rising costs of living, and the desire to truly own one’s money.
Nonetheless, Desai argues that,
“Cryptocurrency is the most ideal vessel of these impulses. A speculative asset with a tenuous underlying predetermined value provides a blank slate that meaning can be imposed onto.”
While it’s to be expected that individuals would add meaning to pretty much anything, crypto – specifically the firstborn, bitcoin – was created with its slate full and the meaning already given: it is designed to act as a form of payment outside the control of any one person or entity, removing the third-party involvement in financial transactions.
To this, Desai writes that “crypto boosters” have promised, among other things, to replace governments by replacing traditional currencies, and to reject the traditional banking and financial system through decentralized finance (DeFi).
Again, this is a lot more complex topic, as there is heavy centralization in the crypto industry as well, with DeFi growing as a distinctive sector.
There isn’t a single person in the crypto industry who would deny the existence of bad actors and false promises, but these exist where people exist. It is also undeniable that the industry is working towards educating its members about any potential threats – including threats stemming from centralization and monopoly, as well as working hard to eliminate threats, as this is a way to strengthen its foothold. Otherwise, the industry would certainly collapse.
Very little of Desai’s article, if any, is focused on cryptocurrencies in detail – he stays distant from the tech or specific ideas behind the industry and its projects, but the author seems to suggest that he doesn’t understand this novel field, and is, logically, specialized in traditional finance. But then, why write about something one doesn’t understand well enough?
He says,
“These illusory and ridiculous promises share a common anti-establishment sentiment fueled by a technology that most of us never understood. Who needs governments, banks, the traditional internet or homespun wisdom when we can operate above and beyond?”
The author finds that, rather than displacing them, existing institutions, “flawed as they are,” should be improved upon.
Desai seems to leave no room for revolution in the contemporary world.
The end to (magical) thinking
There is a significant fallacy in Desai’s opinion piece: he seems to suggest that one (even a few) exception is representative of the industry. He goes on to discuss companies like WeWork, Google, and Facebook, and the “questionable activities” of the founders, as if somehow standing for the entire tech industry.
He writes,
“They sought broad capabilities that they could flex at will in the metaverse or with their “moonshot projects” when, in fact, they are prosaic (if extremely effective) advertising businesses. They are now struggling with many of their fantastical efforts.”
Bitcoin, he said, was trading at some $17,000 at the time of his writing and “amid declining stock valuations and tech sector layoffs, these ideas have begun to crack,” and added that,
“The unwinding of magical thinking will dominate this decade in painful but ultimately restorative ways — and that unwinding will be most painful to the generation conditioned to believe these fantasies.”
The good news is that the end of magical thinking is upon us, he concludes, as cryptocurrencies and valuations are collapsing. While vested interests are bound to resist it by “propagat[ing] fictions,” the rising rates and a return to more routine business cycles will “provide the rude awakening that began in 2022.”
The article reflecting author’s experience
Near the end of the piece, the author switches from the individual’s responsibilities to that of communities.
He argues that many corporations have embraced broader social missions as a result of younger investors and employees wanting to use their capital and employment as instruments for social change. Desai goes on to say that it is the communities and political mobilizations, not individuals or corporations, that have the best chance at making changes. While individuals can’t carry the burden of change (alone), the author takes the responsibility off of the shoulders of corporations, which is arguably not warranted.
He writes,
“Another manifestation of magical thinking is believing 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.”
Desai admits, however, “that this screed reflects my own experience.” He said that for the past decade, as a finance professor, he would often be asked about crypto, then be smiled at and ignored when he’d “counter with traditional instincts.”
Desai went on to say that,
“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 thinking. Many graduates coming of age in this period of financial giddiness and widening corporate ambition have been taught to chase these glittery objects with their human and financial capital instead of investing in sustainable paths — a habit that will be harder to instill at later ages.”
While embracing novelty in the face of problems is praiseworthy, “the unhinged variety of these admirable traits that we have seen so much of in recent years is counterproductive,” writes Desai.
“The fundamentals of business have not changed merely because of new technologies or low interest rates.”
Instead, he says, solving problems in new ways that sustainably deliver value to employees, capital providers, and customers is the path to success. On the other hand, over-promising the scope of new technology and the change it will create will eventually fail, bringing much dissatisfaction, said Desai.
It is something the cryptoverse can agree on as well: do not trust the hype. Do your own research.
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