When the history of cryptocurrencies is written, either they will be lauded as a key technological advance in finance, or they will go down as just another investment scam.
Economist Paul Krugman had no trouble saying that Bitcoin and its ilk are Ponzi schemes. A Ponzi scheme follows the “greater fool” theory of investing. Even though the investment may not be really worth what it is selling for currently, one invests because someone else is going to pay even more for it tomorrow.
The psychology of investment manias
All investment manias have common features. Even the brightest people can succumb to the lure of quick gains with minimal effort. This was apparent in the Madoff Ponzi scheme that mostly targeted wealthy elite investors.
Like the cryptocurrencies of today, buyers had little knowledge of the true value of the investment and were guided mainly by the fact that the market price was rising.
That sort of irrationality leads to some bizarre equivalences. At the height of the tulip mania in Holland from 1636 to 1637, a rare type of bulb was used to purchase a home. In the dot-com boom of 1999, companies with revenues smaller than a corner store had market valuations of billions of dollars.
Such improbable valuations reflect the intense euphoria that inflates all investment bubbles.
Pie in the sky
Investment manias are called that for a reason. They resemble the mindset of a person who is experiencing the manic phase of bipolar…
