Cryptocurrency: Fairy Tale or Future? As crypto hype winds down, what can we learn?

• Author: Kavanagh, Liam

The late 2022 FTX scandal seems like a plausible end to the era of blockchain mania, so 2023 is a good time to look back and ask ourselves, "What can we learn from crypto thus far?" After all, local governments will face increasing pressure to adopt new technologies, not just blockchain/cryptocurrency. Artificial intelligence and augmented reality/metaverse are two examples, and there are many others. (1) Perhaps some will be useful or even revolutionary, but others may fall flat. The ups and downs of crypto/blockchain can provide guidance on how to navigate the stories [or hype] around these new technologies that promise great things for the public but also risk wasting considerable tax money if they don't work.

Six months ago, blockchain buzz had many asking whether something as life-changing as the WorldWideWeb was upon us. Some local governments were issuing cryptocurrencies, and speculation about governments going on the blockchain was bending our sense of reality. Now the story is "the crypto-speculative bubble has crashed," even though, as of this writing, prices were hovering near their peak in 2017--the first time crypto prices became an international news item. Predicting the future is tempting, but doing so ignores the lessons of crypto. In this article, we will examine some of the lessons from the crypto craze, which can be applied to navigating hype cycles generally and technology hype cycles in particular.

Economics is more about narrative than we would like to think

The prices of things have always been based on stories of value, but they can increasingly become decoupled from direct experiences of usefulness. There is rising "face plausibility" of stories heralding technological revolution, fear of missing out [FOMO] on being an "early adopter," and the growing difficulty of understanding the complex underlying technologies that are behind the hype. Because tech stories have such potential to take on a life of their own, betting on stories rather than value is tempting. These factors help explain why Robert Schiller--the esteemed economist who gave us the phrase "irrational exuberance"--has recently changed his focus to "narrative economics," advising economists to take stories seriously despite their "soft" and "subjective" feel.

However valuable or irrelevant Web3 [the collective term for crypto/ blockchain and related technologies] turns out to be, the appeal of blockchain stories until now has not been based on direct experience of using blockchain tech. Imagination and the amount of collective chatter or "buzz" play the stronger role. Buzz around Web3 rises and falls with the price of cryptocurrency--the main demonstration of blockchain technology's potential. In turn, cryptocurrencies' value rises...