Opinion | The fall of Crypto heralds a bright future

Take the dot-com craze that reached its peak in 2000. By 2010, many of them have ideas from the bubble era had been productively recycled by the next wave of start-ups. Companies claiming online airline tickets or groceries were spectacularly overrated during the boom and much ridiculed during the bust. But in the wake of that, e-commerce conquered Main Street.

This boom-bust-triumph sequence is the rule, not the exception. The bubble of the 1920s was inflated in part by excessive euphoria over the technology of the day – mass production based on Henry Ford’s assembly line and electrification of factories. In the same way, the bubble of the 1960s rode the euphoria of semiconductors and computers. Both decades ended in a crash. But mass production, integrated circuits and computers are still among the greatest innovations of the 20th century.

Or think back to the British mania of the 1840s, when the railways’ share of the total market capitalization tripled over a three-year period. In their book “Bom and Bust: A global story of financial bubbles “, William Quinn and John D. Turner report that in 1845 alone, 1238 new railway projects were launched in Britain, a count that makes the recent spread of cryptocurrencies seem modest. In anticipation of YouTube channels, Twitter threads, and home-brewed podcasts as hyper-digital currencies today, the 1840s witnessed an explosion of cheerleading railroad magazines. Victorian day traders could choose from useful manuals such as “How to Make Money on Railroad Shares” and “The Short and Sure Guide to Railway Speculation.”

Naturally, only a fraction of these railway investments could hope to be profitable. By 1850, railway shares had lost two-thirds of their value. A few promoters engaged in shenanigans worthy of a modern crypto scam: George Hudson, known as the “railroad king”, was chased into exile amid allegations of dubious accounting. But none of this changed the reality that the railways were transformative.

After the railway boom came a cycling mania. Until 1885, the penny farthing bike amplified the rider’s pedal power using the large front wheel, and cyclists tumbled from a scary height when attacked by a giant cauldron. But then the life-threatening mega wheels were replaced by smart chains and gears, while lighter steel and rubber tires created a bike that was manoeuvrable and comfortable. In 1896, bicycle-related inventions accounted for as much as 15 percent of new patents, Quinn and Turner say.

The new technology was good, but it triggered an indefensible mania. Opportunists bought bicycle companies, hyped their prospects and paid journalists and politicians to hype them even more; then they sold them through the stock market for absurd valuations. Cycle shares tripled in 1896, but then hit the well-known hole. Half of the new bicycle companies had crashed and died at the turn of the century.

All this suggests three lessons.

First, new technologies are generating investor enthusiasm, as they should be. But precisely because the technology is new, investors can not measure how much voltage is justified. Booms and busts inevitably follow.

Second, these boom-bust cycles can not tell you much about whether a technology will win. Investors are betting on things they hope can work, but the nature of early tech games is that a majority of companies go to zero. In the up-cycle, high valuations are no guarantee of success. On the way down, falling stock prices are just as bad signals.

Third, innovation and profit are not reliably linked. Trains, bicycles, and e-commerce were all real innovations, but many early pioneers went bankrupt. Conversely, Google and Facebook were not the inventors of Internet search and social media, but they captured almost all the value in these categories. Similarly, some of today’s crypto innovators will go bankrupt. But they could show the way for others.

The real test for crypto is whether it creates services that non-crypto people care about. The jury is still out on this, but the preliminary evidence is promising. Digital tokens can create smart customer incentives – think of a more sophisticated version of air miles. Cryptocurrencies can generate cheaper ways to transfer money across borders. Games to earn computer games, with digital assets that users keep in personal wallets, can add a new dimension to the already huge gaming industry. Audius, a Spotify-type service, streams music stored on a blockchain.

Today’s internet makes the storage, transmission and sharing of information frictionless. Even now we can not imagine life without it. Tomorrow’s crypto- and blockchain-enhanced internet can achieve the same for value. Legions of smart coders are working to realize this vision, and no one can say what will result. But one thing is certain: the financial markets are no more clairvoyant than the rest of us.