At a guest lecture at a military academy when the price of one Bitcoin approached $60,000, I was asked, as finance professors often are, what I thought about cryptocurrencies. Instead of responding with my usual skepticism, I polled the students. More than half of the participants traded cryptocurrencies, often financed by loans.
I was stunned. How could this population of young people spend time and energy in this way? And these students were hardly alone. Appetite for crypto is strongest among Gen Z and Millennials. Over the past 15 years, these groups have become investors at unprecedented speeds and with extremely optimistic expectations.
I saw cryptocurrencies not just as an exotic asset, but as a manifestation of the magical thinking that infected some of the generation that grew up after the Great Recession – and American capitalism, more broadly.
For these purposes, magical thinking is the assumption that favorable conditions will continue forever regardless of history. It is the minimization of limitations and compromises in favor of techno-utopianism and the exclusive emphasis on positive outcomes and novelties. It is a combination of virtue and commerce.
Where did this ideology come from? The period of exceptionally low interest rates and excess liquidity provided fertile ground for fantastic dreams to flourish. Pervasive consumer-facing technology has allowed individuals to believe that the latest platform company or arrogant tech entrepreneur can change everything. Anger after the 2008 global financial crisis created a receptivity to radical economic solutions, and disillusionment with traditional politics relegated social ambitions to the world of commerce. The hothouse of Covid highlights turbocharged all those impulses while we sat bored in front of the screen, fueled by seemingly free money.
With Bitcoin now trading at around $17,000, and amid falling stock values and layoffs in the tech sector, these ideas have begun to explode. The unraveling of magical thinking will dominate this decade in painful but ultimately restorative ways—and that unraveling will be most painful to a generation conditioned to believe these fantasies.
Cryptocurrency is the most ideal vessel for these impulses. Speculative assets with weak underlying pre-determined value provide a blank slate upon which meaning can be imposed. Crypto promoters have promised to replace governments by replacing traditional currencies. They promised to discard the traditional banking and financial system through decentralized financing. They said they could fend off the Internet giants’ alleged pressure on commerce through something called Web 3.0. They insisted that we could reject the traditional path to success of education, savings and investing by early inclusion of dogecoin, a meme coin intended as a joke that peaked at a market capitalization of over $80 billion.
These illusory and ridiculous promises share a common anti-establishment sentiment fueled by a technology most of us have never understood. Who needs governments, banks, traditional internet or native wisdom when we can act above all?
The major financial markets began to manifest these same tendencies, as magical thinking pervaded the wider investor class. During periods of recession and zero interest rates, mistakes and mediocrity were covered up or forgiven, while speculative assets with little likelihood of long-term success inflated enormously in value. Hawkers offering shiny new vehicles—like “stablecoins” that purportedly transformed speculative assets into stable ones and new ways to list companies without typical regulatory scrutiny—promised higher returns while rejecting higher risks, a hallmark of the ignorant trade-off in magical thinking. For a long time, many investors bought the equivalent of lottery tickets. And many won.
The real economy could not avoid the contagion. Companies flourished by inflating their scope and ambitions to feed the desire for magical thinking. WeWork, a mundane company that provided flexible workspaces, is portrayed as a spiritual enterprise that will change the human condition. Its value soared, masking the questionable activities of its founders. Facebook and Google reimagined themselves as tech powerhouses, rebranding as Meta and Alphabet. They were looking for broad opportunities that they could develop at will in the metaverse or with their “moonshot projects”, when in reality they are prosaic (though extremely effective) advertising businesses. Now they struggle with many of their fantastic efforts.
More broadly, many corporations have embraced broader social missions in response to the desire of younger investors and employees to use their capital and employment as instruments for social change. Another manifestation of magical thinking is the belief that the best hope for progress on our greatest challenges—climate change, racial injustice, and economic inequality—is in corporations and individual investment and spending choices, rather than political mobilization and our communities.
I admit that this screed reflects my own experience. For the past decade, being a finance professor has meant being asked about crypto or new valuation methods for unprofitable companies — and being laughed at (and ignored) when I go against traditional instincts. I’m told that every business problem can be solved in radically new and efficient ways by applying artificial intelligence to ever-increasing amounts of data with a touch of design thinking. Many graduates coming of age in this period of financial vertigo and expanding corporate ambitions have been taught to chase these shiny objects with their human and financial capital instead of investing in sustainable pathways—a habit that will be harder to instill later in life.
Embracing novelty and ambition in the face of huge problems is commendable, but the unbridled variety of these admirable traits we’ve seen so much of in recent years is counterproductive. Business fundamentals haven’t changed just because of new technologies or low interest rates. The path to prosperity continues to be solving problems in new ways that sustainably deliver value to employees, capital providers and customers. Over-promising the scale of change brought about by technology and business and financial opportunities to a new generation will only lead to dissatisfaction as those promises falter. All these new investors and owners of cryptocurrencies may be harboring a kiva towards capitalism, instead of understanding the perverse world they were born into.
The end of magical thinking is upon us as cryptocurrencies and values are collapsing — and that’s good news. Interests will resist this trend by continuing to propagate fictions. But rising rates and a return to more routine business cycles will continue to create the rude awakening that began in 2022.
What comes next? Let us hope that a revitalization of that great American tradition of pragmatism will follow. Speculative assets without any economic function should be worth nothing. Existing institutions, however flawed they may be, should be improved, not replaced. Risk and return are inevitably linked.
Corporations are socially valuable because they solve problems and create wealth. But they should not be trusted as arbiters of progress and should be balanced by a state that mediates political issues. Concessions are everywhere and inevitable. Managing these trade-offs, rather than ignoring them, is the recipe for a good life.
The New York Times