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During a guest lecture at the Military Academy when the price of a single Bitcoin approached $60,000, I was asked, as finance professors often do, what I thought of cryptocurrencies. Instead of answering with his usual skepticism, he polled the students. Over half of the attendees traded cryptocurrencies, often financed by loans.
I was stunned. How did this group of young people come to spend so much time and energy? And these students were hardly alone. The appetite for cryptocurrencies is most pronounced among Gen Z and millennials. These groups have become investors over the last 15 years and have been very optimistic about it at an unprecedented rate.
I see cryptocurrencies not just as exotic assets, but as part of a generation that grew up in the aftermath of the Great Recession, and more broadly as a manifestation of magical thinking that became infecting American capitalism. It is now
To these ends, magical thinking is the assumption that favorable conditions will last forever, regardless of history. To emphasize only results and novelty. It is a fusion of virtue and commerce.
Where did this ideology come from? An exceptional period of low interest rates and excess liquidity provided fertile ground for fantastic dreams to blossom. The ubiquity of consumer-facing technology has allowed individuals to believe that the latest platform companies and arrogant tech entrepreneurs could change everything. The anger after the global financial crisis of 2008 created an openness to radical economic solutions, and disappointment with traditional politics relegated social ambitions to the world of commerce. As we sat bored in front of our screens, Covid-peak hot houses supercharged all those urges, fueled by seemingly free money.
Bitcoin is currently trading at around $17,000, and amid falling stock prices and layoffs in the tech sector, those ideas are beginning to crack. It will eventually rule in a restorative way.
Cryptocurrencies are the most ideal vessel for these impulses. A speculative asset with a dilute underlying predetermined value provides a blank slate upon which meaning can be imposed. Crypto boosters promise to replace governments by replacing traditional currencies. They have vowed to reject the traditional banking and financial system through decentralized finance. They said that through what they called Web 3.0, they could reject claims that Internet giants control commerce. They argued that traditional paths to education, savings and investment success could be rejected. Dogecoin is a memecoin intended as a joke, with a peak market capitalization he over $80 billion.
These fantastical and ridiculous promises share a common anti-establishment sentiment fueled by technology most of us didn’t understand. who is to
Mainstream financial markets have come to reveal these same trends as magical thinking has permeated a wider class of investors. Hidden or forgiven, the value of speculative assets far less likely to succeed has been greatly inflated. Peddlers touting shiny new avenues such as “stablecoins,” purportedly turning speculative assets into stable assets, and novel ways to get companies listed without typical regulatory scrutiny, You promised a bigger return while dismissing a bigger risk. Over time, many investors have bought the equivalent of lottery tickets. And many won.
The real economy has not escaped infection. Corporations have thrived by expanding their scope and ambitions to satisfy their desire for magical thinking. WeWork, a run-of-the-mill flexible workspace business, was portrayed as a spiritual company remaking the human condition. Its valuation skyrocketed, masking the founder’s questionable activity. Facebook and Google have rediscovered themselves as tech powerhouses and rebranded themselves as Meta and Alphabet respectively. They wanted a wide range of features that gave them the flexibility to do what they wanted in the Metaverse and the “Moonshot Project”. They are now suffering from many of their fantastical efforts.
Most broadly, many companies have embraced a broader social mission in response to the desire of young investors and employees to harness capital and jobs as a vehicle for social change. Another manifestation of magical thinking is that our best hopes for progress on our greatest challenges – climate change, racial injustice and economic inequality – lie not in political mobilization and communities, but in corporations and communities. It is what we believe to be a personal investment and consumption choice.
I confess that this screed reflects my own experience. For the past decade, being a finance professor meant being asked about cryptocurrencies or about new ways to value underperforming companies, refuting conventional instincts and being ridiculed (and ignored). . We hear that all business problems can be solved in radically new and effective ways with a touch of design thinking and applying artificial intelligence to ever-growing amounts of data. Many graduates who come of age during this period of economic dizziness and growing corporate ambitions are turning these glittering objects into human and financial capital rather than investing in sustainable paths. I have been taught to chase.
Embracing novelty and ambition in the face of big problems is admirable, but the turbulent diversity of these wonderful features we’ve seen so much of in recent years is counterproductive. It’s not just about new technology and low interest rates. The path to prosperity is solving problems in new ways that deliver sustainable value to employees, capital providers and customers. Over-promising new generations of the scope of change and business and financial possibilities created by technology will only invite frustration as these promises fail. may all harbor a grudge against capitalism instead of understanding the perverse world they were born into.
The end of magical thinking is near as cryptocurrencies and valuations collapse. This is good news. Vested interests resist that trend by continuing to spread fiction. But higher interest rates and a return to a more normal business cycle will continue to bring about the rude awakening that began in 2022.
what’s next? Hopefully, the great American tradition of pragmatism will be revived. A speculative asset without an economic function should be worthless. Existing flawed systems should be improved, not replaced. Risk and return are inevitably linked.
Businesses are socially valuable because they solve problems and generate wealth. But they should not be relied upon as arbiters of progress, but should be balanced by the state mediating political issues. Tradeoffs are everywhere and inevitable. Addressing these trade-offs appropriately rather than ignoring them is the key to living a good life.
new york times
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