Hate to burst your bubble, Dr. Thaler …
Did you see Paul Solman’s piece on the PBS Newshour? I’m usually a big fan of Solman, as long as it’s understood he’s a popularizer of economics rather than a breaking-news journalist. He’s basically Bill Nye, the Money Guy. But this report is predicated on a faulty premise: that cryptocurrency is an entirely speculative commodity trading in a bubble.
This comes from his primary source for the piece, hedge fund manager and Ivy League professor-wannabe Vikram Mansharamani, who’s still hawking his 2011 book tellingly titled Boombustology: Spotting Financial Bubbles Before They Burst.
Solman interviews a few merchants who no longer take bitcoin, citing its wild price fluctuations. Then he backs up Mansharamani’s position by including a clip of behavioral economist Richard Thaler saying bitcoin “certainly looks like a bubble to me. … But you know, bubbles sometimes keep going up.”
But completely absent from Solman’s report is anything that can contradict the premise. And there are certainly enough voices authoritative enough to make the Newshour cut who would gladly chime in. Although Thaler’s fellow Nobel laureate Robert Shiller agrees that the bitcoin market is a bubble, he’s quick to add, “but it could linger on for a good long time, it could be here in 100 years.” And then there’s Willem Bulter’s Citi Research report that refers to gold as “a six thousand year-old bubble” and “equivalent to shiny bitcoin.”
We can lament that Solman is biased against cryptocurrencies or that he doesn’t thoroughly understand them or is simply recycling old news that might have been halfway accurate four months ago. But as we hodlers know from personal experience, BTC didn’t go from $19,000 to $0. It went from $19,000 to $7,000, hitting resistance every $1,000. It has been trading in a range since mid-February and has been trending up at a cautious rate for the past three weeks.
I am deeply respectful of Thaler as an academic. In fact, I’m currently about two-thirds through his Misbehaving: The Making of Behavioral Economics and strongly recommend it to the lay reader. (I’m assigning it to my high school-aged son, whom I’m homeschooling.) So I am puzzled, to put it mildly, how someone who is so deservedly admired for demonstrating the irrationality of market behavior is singling out the crypto market. The social scientist who coined the term “invisible hand wave” to mock those who dismiss seemingly irrelevant market factors is resorting to the same lazy arguments that, earlier in his career, used to call out others on.
But our perspective won’t grow the breadth and depth of the cryptocurrency markets until it has been spun out to the broader investment community. Here’s what needs to happen before the retail investor feels confident enough in this sphere to exchange their own Federal Reserve notes for digital assets. The academics and investment professionals will then follow.
Give the world a vocab lesson. You and I know the difference between blockchain and distributed ledger and cryptocurrency and utility tokens and security tokens. Even the regulators are catching up. But this is all geek-speak to the CFP who has a booth at your community street fair.
Dump pump-and-dump. As easily foreseen by anyone who recalls the dotcom bubble, the vast majority of ICOs are doomed. Fortune reported that, just seven weeks into 2018, half of all 2017 ICOs had failed. Even crypto-assets’ strongest advocates believe that the ICO market is dicey. Until the ICO market can face analyst and regulatory scrutiny, it can never be seen as a trustworthy asset class on par with stocks and bonds.When people are taking their investment advice from Steven Seagal, something’s wrong. (You got to give Floyd Mayweather a pass. The man knows his money.)
Regulate and enforce. Crypto-assets need to follow rules. True, many of those rules have not yet been written, but that just means we need to get started drawing them up. There’s a reason why companies want to float their stocks in New York or London. It’s because of the rules around process and transparency and honest dealing. Up to a point at least, the more a market is regulated, the higher the perceived value of its securities. As active participants in this market we won’t win any acolytes with any line of reasoning that gives a pass to criminals, terrorists and tax evaders.
Add more players. Around $13 billion of cryptocurrency traded within the 24 hours preceding this writing, while traditional foreign exchange’s volume exceeds $5 trillion per day. If cryptocurrencies are truly keepers, they still have a couple orders of magnitude to grow.
Stable value. As we all know, and have already noted, cryptocurrencies change in value from one moment to the next, and that hampers our ability to buy a cup of coffee with it. Funny how those who tell you to look at a moving average of anywhere from 10 days to 200 days when analyzing any other security want you to obsess with the day-to-day and minute-to-minute girations for this particular class.
Ultimately, I’m confident that cryptocurrencies will establish themselves as a legitimate asset class among the broader investing public. Take confidence in the words of Thomas Paine. I will end here where Common Sense begins:
Perhaps the sentiments contained in the following pages, are not yet sufficiently fashionable to procure them general favor; a long habit of not thinking a thing wrong, gives it a superficial appearance of being right, and raises at first a formidable outcry in defense of custom. But the tumult soon subsides. Time makes more converts than reason.
[Amended to reflect an error of fact pointed out by @MindofJay on Reddit.]
