“A scam and a bubble are two different things”: Crypto shocks a financial historian who literally wrote the book on financial bubbles

The meltdown of the world’s second-largest crypto exchange, FTX, the explosion of Luna and its algorithmic sister stablecoin TerraUSD, and the collapse of high-profile crypto lenders like Celsius and BlockFi are just obstacles along the way, crypto advocates argue. But William Quinn, a senior lecturer at Queens’ University Belfast whose research focuses on financial bubbles, isn’t so sure.

Quinn believes that the cryptocurrency fervor of the past decade is either a “dumber bubble than any previous bubble” in financial history, or “a smarter Ponzi than any previous Ponzi” — or a third option.

“So we have two choices,” he wrote in an article on journalist David Gerard’s website last week. “And the truth probably lies somewhere in the middle.”

Quinn who wrote the book Boom and Bust: A Global History of Financial Bubbles in 2020 that the cryptocurrency “bubble” doesn’t look like the financial bubbles of the past.

The so-called “tulip mania” of the 17th-century Dutch Golden Age was more of a “popular narrative” than a true financial bubble of modern proportions, he said, arguing that it “made far too much sense to be compared to the crypto bubble.” And the dot-com bubble that began in the late ’90s is nothing but a “very flattering comparison” to crypto, according to the historian.

“The problem is that unlike the internet, crypto and blockchain just aren’t very useful,” he argued.

For Quinn, there may not be a financial bubble in history that compares to the cryptocurrency craze of the last decade – this could be something else entirely.

What makes the crypto bubble unique

Quinn writes that cryptocurrencies have three distinctive traits that make them unique from past financial bubbles.

First, they have “no use value” unless others are willing to accept them. Second, they don’t create cash flows. And third, some have mining costs that can only be paid in fiat or government-issued currencies. For example, Bitcoin miners typically buy electrical equipment, mining computers, and real estate with US dollars.

“Not all major cryptocurrencies are exactly like this, but most are close,” Quinn wrote. “These are uniquely terrible properties for an investment.”

Quinn argued that these three unique traits mean the real question might be whether to classify crypto as a “scam” or a “bubble.”

“Every previous bubble I’ve encountered involved either a commodity, a collectible, or an asset and the associated cash flows…[b]Because historically, to produce a financial asset with no associated cash flows and market it as an investment would have been considered fraudulent,” he wrote. “And a scam and a bubble are two different things.”

Quinn is careful not to portray all cryptocurrencies in the same light. He writes that some, like bitcoin, should not be considered scammers because they have no main “culprit”.

“Bitcoin was created as a genuine – albeit somewhat off-kilter – political project and operates independently of its creator. It’s a bad investment, just like a scam is a bad investment, but it’s not a scam,” he wrote.

Blockchain advocates

Of course, for every crypto skeptic, there is a supporter willing to counter their argument. Even some of Wall Street’s most respected investors have turned crypto bulls. Billionaire hedge fund Bill Miller said in January 2022 that it invests 50% of its net worth in Bitcoin. In May, he called the cryptocurrency “insurance” against financial disasters on the Richer, Wiser, Happier podcast.

And the financial services industry has also turned to blockchain technology in recent years. Current Visa President Ryan McInerney, who is set to become CEO in February, made the announcement wealth‘s Alan Murray in November that there could be “new use cases” for blockchain in payment systems.

“We’re working a lot on different ways to use the blockchain,” he said. We think it’s possible (it’ll be part of the future payment system), but we’re in the very, very early innings. It remains to be seen.”

So said Carmelle Cadet, CEO of fintech startup Emtech wealth‘s Sheryl Estrada in October that blockchain technology is the future and CFOs are likely to adopt it for years to come as it allows companies to account for assets and their ownership through a secure, decentralized ledger.

An improvement over previous Snowballs?

Still, Quinn argues that most cryptocurrencies could be viewed as a form of “improving the traditional Ponzi scheme,” and he’s not the only one with that perspective. JPMorgan Chase CEO Jamie Dimon made a similar claim last September, calling cryptocurrencies “decentralized Ponzi schemes” to testify before the US House of Representatives Financial Services Committee.

“The notion that it’s good for everyone is incredible,” he said, arguing that Bitcoin and other cryptocurrencies are “dangerous.”

And NYU professor emeritus Nouriel Roubini has repeatedly criticized cryptocurrencies for years, even calling them a “Ponzi scam” and a form of “corrupt gambling” in recent interviews.

Cryptocurrencies like bitcoin work the same way as pyramid schemes, according to critics like Roubini and Quinn, with new investors paying off early investors because no actual cash flows are produced.

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