• Cryptocurrencies are seen by some as a manifestation of magical thinking born out of a financial crisis, but there could be something more real behind it.
• The mistakes and mediocrities made during a period of declining and zero-interest rates were obscured or forgiven, leading to the inflation of speculative assets.
• Mihir A. Desai, a professor at Harvard Business School and Harvard Law School, notes that hawkers are pitching shiny new vehicles, such as stablecoins and new ways of taking companies public without regulation, which may be resulting in greater risks and lesser returns due to a lack of understanding of trade-offs.
Cryptocurrencies have been gaining immense traction in recent years, becoming one of the most talked-about topics in the financial world. With their rise, many have wondered if the phenomenon is more than just a passing trend and if it is actually based on a real and lasting need. For his opinion in The New York Times, Mihir A. Desai, a professor at Harvard Business School and Harvard Law School, dives into the potential of cryptocurrencies, claiming that they may be a manifestation of “magical thinking” born out of a financial crisis.
Though the professor may not have intended to, he has made a case for the financial crisis being ever-present as cracks in the system persist. He explains that during a period of declining and zero-interest rates, mistakes and mediocrities were obscured or forgiven, leading to the inflation of speculative assets with low probabilities of far-off success. This has led to hawkers pitching shiny new vehicles such as stablecoins and new ways of taking companies public without the usual regulatory scrutiny, promising “greater returns while dismissing greater risks”, a situation that exemplifies a lack of understanding of trade-offs in magical thinking.
Desai further states that the rise of cryptocurrencies can also be seen as a response to the “perverse world” that the younger generations were born into, such as the increasing inequality and the financialization of the world economy, which has left many feeling neglected. He writes that this “grudge against capitalism” may be the reason behind the new interest in cryptocurrencies, which may be seen as a way to resist the status quo.
Despite the potential of cryptocurrencies, Desai warns that they come with their own set of risks, including the lack of a reliable legal framework, lack of regulation, and susceptibility to fraud. He also emphasizes that investors should understand that cryptocurrencies are speculative assets and that they should not be taken lightly.
Ultimately, Desai argues that the rise of cryptocurrencies can be seen as a sign of unrest and a call for change within the financial system, noting that it is an opportunity for “the creation of a fairer and more resilient economic system.” He adds that it is crucial for investors to do their own research before investing in any asset and to understand the risks they are taking.