During a guest lecture at a military academy when the price of a single Bitcoin was close to $60,000, I was asked, as is customary for finance professors, what I thought about cryptocurrencies. Instead of responding with my typical cynicism, I surveyed the kids. More than half of the attendees had engaged in cryptocurrency trading, which was frequently financed by loans.
I was awestruck. How did this youthful population come to devote their time and energy in this manner? Moreover, these pupils were not alone. Gen Z and millennials have demonstrated the greatest interest in cryptocurrency. In the past 15 years, these groups have become investors at unprecedented rates and with incredibly optimistic expectations.
I have come to consider cryptocurrency as an expression of the magical thinking that has infected a portion of the generation that came up in the aftermath of the Great Recession — and American capitalism in general.
In this context, magical thinking is the presumption that favourable conditions will persist without consideration to the past. It is the minimization of limits and tradeoffs in favour of techno-utopianism, with a sole focus on good results and innovation. It is the confusion of virtue with business.
Where did this philosophy originate? A era of exceptionally low interest rates and ample liquidity fostered the growth of extravagant fantasies. People believed that the newest platform business or arrogant tech entrepreneur might change everything because of pervasive consumer-facing technology. Anger in the wake of the 2008 global financial crisis fostered an openness to radical economic solutions, while disillusionment with traditional politics pushed social objectives onto the realm of business. The greenhouse of Covid’s peaks supercharged all these urges while we sat bored in front of screens, powered by money that appeared to be gratis.
In light of Bitcoin’s current price of approximately $17,000, dropping stock valuations, and layoffs in the IT industry, these notions have begun to crumble. This decade will be dominated by the painful but ultimately therapeutic unravelling of magical thinking, which will be particularly traumatic for the generation conditioned to believe these dreams.
Cryptocurrency is the best conduit for these impulses. A speculative asset with a tenuous predefined value provides a blank slate upon which meaning can be imposed. Promoters of cryptocurrencies have pledged to replace governments by supplanting conventional currencies. Through decentralised finance, they swore to resist the conventional banking and financial system. They said that Web 3.0 would allow them to reject the alleged monopoly of internet companies on trade. They suggested we might reject the conventional path to success involving education, savings, and investment by investing early in dogecoin, a meme coin whose market capitalization peaked at almost $80 billion.
These deceptive and absurd promises are fuelled by a technology that the vast majority of us have never grasped. Who needs governments, banks, the old internet, or common sense when we can operate on a higher level?
As magical thinking permeated the investor class as a whole, the mainstream financial markets began to exhibit the same trends. During a period of dropping and zero interest rates, blunders and mediocrity were concealed or forgiven, and speculative assets with minimal odds of success in the far future increased in value dramatically. Magical thinking is characterised by an ignorance of trade-offs, exemplified by peddlers of shiny new vehicles, such as “stablecoins,” which purportedly transformed speculative assets into stable ones, and novel methods of taking companies public without typical regulatory oversight, who promised greater returns while ignoring greater risks. During a lengthy period, numerous investors purchased the equivalent of lottery tickets. And several won.
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The actual economy was unable to avoid infection. Companies grew by exaggerating their breadth and ambition in order to satisfy the desire for magical thinking. WeWork, a humdrum company that offered flexible work spaces, was presented as a spiritual organisation that would transform the human situation. Its rising worth obscured the dubious practises of its founders. Facebook and Google rebranded themselves as Meta and Alphabet, respectively, to position themselves as technical titans. In actuality, they are mundane (if highly effective) advertising corporations that sought expansive powers that they could manipulate at will in the metaverse or with their “moonshot projects.” They are currently having difficulty with many of their imaginative endeavours.
In response to the desire of younger investors and workers to utilise their capital and employment as tools for social change, many firms have adopted broader social missions. A further example of magical thinking is the belief that corporations and individual investment and consumption decisions, as opposed to political mobilisation and our communities, offer the best hope for progress on our greatest challenges, such as climate change, racial injustice, and economic inequality.
This screed reflects my own experience, I must admit. Being a finance lecturer for the past decade has meant being questioned about cryptocurrencies or revolutionary valuation methodologies for unprofitable companies, and being laughed at and disregarded when I countered with conventional ideas. I am informed that every business problem can be solved in radically innovative and effective ways by using artificial intelligence to ever-increasing volumes of data plus a sprinkle of design thinking. Many graduates coming of age during this period of financial euphoria and expanding corporate ambition have been taught to pursue these glittering objects with their human and financial capital rather than invest in sustainable paths; this is a habit that will be more difficult to break at older ages.
Embracing originality and ambition in the face of enormous issues is commendable, but the erratic variety of these laudable characteristics that we have witnessed so frequently in recent years is detrimental. Because of new technologies or cheap interest rates, the basics of business have not altered. The only way to succeed is to solve challenges in novel ways that give value to employees, capital providers, and customers in a sustainable manner. A new generation will become disillusioned if the extent of technological development and the potential of business and finance are exaggerated in their promises. All of these new investors and crypto-owners may have a resentment against capitalism rather than comprehending the strange universe in which they were born.
The collapse of cryptocurrencies and their valuations spells the end of magical thinking, and this is excellent news. This movement will be resisted by vested interests that continue to disseminate fictions. The painful awakening that began in 2022 will continue, however, as rising interest rates and a return to more normal business cycles continue to give a rude awakening.
What is subsequent? Hopefully, a revival of the great American pragmatic heritage will ensue. Speculative assets that have no economic use should be worthless. Existing institutions, however imperfect they may be, should be enhanced rather than replaced. Risk and reward are always related.
Businesses are beneficial to society because they address issues and generate income. However, they should not be viewed as arbiters of development and should be counterbalanced by a state that resolves political issues. Trade-offs are ubiquitous and unavoidable. Managing these trade-offs, as opposed to disregarding them, is the key to a happy existence.
