Nobel Prize-winning economist Robert Shiller has claimed that cryptocurrencies are just money reinvented and once all the hype wears off, the speculative bubble will burst. Shiller is well-known for the warnings he issued prior to the 1995 dot-com crash, and the 2008 financial crash caused by the housing market bubble. Could he be right again?
Shiller’s May 2018 article on the Project Syndicate website titled “The Old Allure of New Money” says that the nearly 2,000 digital currencies in existence may have created a new form of money, but the value attached to them is nothing more than a compelling story that has created unwarranted hype and speculation. He also points out that most ICOs are acting unethically.
Robert Shiller Questions Why Crypto Investment Continues
In the report by Schiller, he shows some dismay as to why people are so enthusiastic about investing in digital currencies despite the warnings; a comment that refers to Nouriel Roubini’s article published on the same website in the same month. Roubini uses figures reported on Medium.com that suggest 81% of ICOs could be scams. Roubini draws from this report that ICOs are created by charlatans and swindlers skirting securities laws by using the guise of cryptocurrencies to steal investor-owned funds.
The Idea of Reinventing Money is Nothing New
Arguably, the most valid point Shiller makes is a reference to a book written by Professor Viviana Zelizer of Princeton University. The book, named ‘The Social Meaning of Money’, backs up Robert Shiller’s statement that the reinvention of money is not a new concept. In fact, there are many cases in the past in which people have tried to do something similar to what digital currencies are trying to achieve today, but failed miserably.
An easy refute to this comment is Bitcoin, which has shown resilience and is still here after nearly a decade. Furthermore, its market capitalization has risen sharply from $30 billion just a year ago to $143 billion today.
So for the time being, it doesn’t look like Bitcoin and the army of cryptocurrencies behind it are going anywhere soon.
Are We Wrapped Up in the Excitement of Cryptocurrencies’ Innovation?
Following up on this Shiller says “money is rich in mystique and in its various embodiments.” Reading between the lines — he is making a case to say that the invention of digital money has generated a buzz that is directly responsible for the overvaluation of cryptocurrencies.
In response to this, it would be hard to argue otherwise as money is exciting, and so is innovation. To a certain extent, most individuals that invest in cryptocurrencies or an ICO are excited about what blockchain technologies have to offer.
There is actually nothing wrong with this. Creating a buzz around a new idea brings it attention and then an initial perceived value can be placed on it. Without publicity, there is little point in developing innovative ideas. Exposure is a fundamental strategy for nearly all business startups. Create the new concept, generate hype to raise funds, and make the solution being touted work sufficiently. The success of said product, solution or service will then raise the net worth of the company, further satisfying shareholders.
Red Bull is a perfect example of a company that used hype to make its product not only work but to also become extremely valuable. Red Bull failed its initial taste tests, but the founder, Dietrich Mateschitz, insisted it would become a global phenomenon because of its energy enhancing solution. With all the excitement Red Bull’s marketing team built up during its advertising campaigns, the apparently bad tasting product became a multi-billion dollar household name based on the fact that these drinks gave people energy.
Isn’t this similar to what ICOs are doing using blockchain technologies and cryptocurrencies?
Will Shiller’s Predicted Cryptocurrency Bubble Burst Happen?
It could be argued that the stigma of cryptocurrencies might eventually wear off. This is always a risk with any new product, brand, or service. As with any innovative idea, if it offers a workable solution, then it has the potential to see success in global markets.
A good example of this is when consumers lost interest in Kodak because using film became too restrictive. New digital breakthroughs, such as DSLRs, offered a more convenient and cost-effective solution. Naturally, people became excited about digitally storing their photos.
- Could the same be happening in the financial world right now?
- Are businesses and consumers now losing interest in fiat currency because of the restrictions that come with them?
Many cryptocurrencies offer or are beginning to offer a better solution to fiat currencies. According to Balaji Srinivasan, chief tech officer at Coinbase, cryptocurrencies are offering at least two solutions making them worthy of their hype:
- A way to raise capital in order to offer business and people with a new solution currently not available
- A more cost-effective and faster way to complete cross-border transactions
Should We Heed the Warnings Outlined by Roubini?
There is no hiding the fact that some ICOs have used the flexibility of cryptocurrency unethically. We only need to look back at examples such as Confido, OneCoin, and Bitconnect. It is also true that many digital currencies operate outside the realms of financial regulations in the countries they operate. However, that does not mean all of them are swindlers looking to steal our money.
Cryptocurrencies are not a standalone case either. In regulated financial markets, there are plenty of public companies that act or have acted unethically. Look at WorldCom and Enron for example; both of which were also partial contributors leading up to the aforementioned 2008 financial crash. This does not mean every public company is a fraud.
Where there is money, there will always be fraud and dishonesty. The point is that there are still plenty of honest ICOs out there. If their concept gains traction, then the associated cryptocurrency will increase in value and their business could become the Red Bull of the crypto industry. With over 2,000 cryptocurrencies out there, the odds of success are high.