Housing or Dotcom: Which Bubble Does Cryptocurrency Mania Resemble?

“It seems like the dotcom bubble all over again, or the housing bubble all over again.”

That’s Robert Shiller, the Nobel Prize-winning Yale economist, quoted in Fortune magazine’s cover story on bitcoin.

So: dotcom or housing? Pick one, professor. Because there’s a meaningful difference.

Debt bubbles, like the one that overheated the U.S. housing market in the 2000s and ultimately sparked a global financial crisis, leave behind encumbrances. Tech bubbles, like the 1990s internet mania, leave behind infrastructure.

The last great debt bubble gave us $700 billion of bailouts and more than 2,000 pages of legislation (not counting the reams of regulations putting the Dodd-Frank Act into practice) in the U.S. alone.

Rather than ending “too big to fail” we ended up with the biggest TBTF institutions ever, zombie foreclosures that sat vacant for years waiting to be repossessed, and the spectacle of Occupy Wall Street stinking up a public park and scaring the children.

The last great tech bubble, on the other hand, funded the rollout of fiber-optic cable networks and research into 3G mobile computing. It fueled the development of smartphones (Apple, Samsung), algorithmic search (Google), big data logistics and e-marketplaces (Amazon, Alibaba), social media (Facebook, Twitter), cloud computing (Dropbox, AWS), the platform and app economies (Airbnb, Uber) and so forth. (To be fair, tech-stock shenanigans from that era were also a factor that led to Sarbanes-Oxley.)

As with a century earlier, when a boom-bust cycle in the 1880s and 1890s left behind a national railroad system, the dotcom bubble totally transformed the economy.

So while cryptocurrencies are almost certainly in a bubble – I mean, come on, dogecoin’s market capitalization is above $1 billion, and its software hasn’t been updated in two years–  the pertinent question is what kind of bubble.

Pain ahead

True, either way, there will likely be steep financial losses, tears, layoffs, business failures, a funding drought, recriminations, pious editorials, lawsuits (meritorious and otherwise), prosecutions, congressional hearings, political grandstanding, unfunny “Saturday Night Live” skits and, quite possibly, burdensome new regulations.

But there probably won’t be bailouts.

For one thing, bitcoin and its myriad clones and mutations are, even now, too small and too segregated from the broader financial system to warrant such an intervention.

And given the threat that decentralized money poses to tax collection and financial surveillance, it’s not something most governments would be inclined to rescue from the abyss.

So crypto bagholders will be on their own – as it should be. If you don’t see why, google “moral hazard.”

Further, if someone makes a stupid bet on a cryptocurrency that goes south, his losses are limited to the cash he invested. (Hopefully not from his retirement savings.) […]

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