Physicists are constantly rethinking how bubbles burst. It’s one of those nagging problems in physics, deceptively simple, like working out the forces that keep a bike upright. The problem is that while bubbles pop around us all the time, those pops occur in a fraction of a second, making the basic principles hard to glimpse. But a few years ago, using exceptionally quick cameras, scientists noticed an unusual phenomenon: bubbles, when they rupture, form many other bubbles—“daughters,” they call them—that encircle the parent. In other words, a bubble contains innumerable others waiting to be created and destroyed in an instant.
How many bubbles lie in wait during this speculative spring? In recent months, money has floated away from reality and entered new realms of weirdness: nonfungible tokens, memecoins, and stonks. Ask an economist why, and they will tell you money has had few places to go. During the pandemic, a lot of money has been printed. For many people, it went straight to groceries and rent; but others were already flush and seeking returns. Money couldn’t be left in cash, because cash doesn’t pay, and inflation loomed; bonds aren’t returning what they once did. So at first stocks were the sensible choice, especially tech stocks whose soaring values could be rationalized with the remote work year.
But logic can only carry a valuation to so many trillions of dollars. So why not invest in bitcoin? People piled in, and the value rose to dizzying, and perhaps worrying, heights, recently surpassing $60,000, and helping along those NFTs and Dogecoins. Even many of those investors fear a bubble, so they are eager for the debut of Coinbase, the cryptocurrency exchange seen as a safer, friendlier exposure to the crypto world. Today, Coinbase will begin trading on the Nasdaq as a $100 billion company, at least on paper, among the most valuable debuts in history and roughly on par with Facebook in 2012. Surely this is solid ground.
Market debuts are supposed to say something about the future. A group of bankers and venture capitalists work together to decide what a thing is worth now, building in expectations for how it will grow. Today’s Coinbase is based around buying and selling coins like bitcoin and taking fees for it; the future Coinbase is built on something grander, involving more coins and a wider array of cryptocurrency-infused products, like NFTs and “decentralized” loans. Some analysts are skeptical. There are questions about whether this “cryptoeconomy,” as Coinbase CEO Brian Armstrong puts it, will prove to be as big as promised. Critics have pointed out that even if this reality does materialize, the industry will attract more competition (as it already has) and drive down Coinbase’s fees.
In the interim, Coinbase is a bitcoin company. This was never exactly a secret, but the documents for its public listing reported that around 60 percent of the company’s revenue comes from fees on trading bitcoin. In any case, the other coins traded on its platform rise and fall with bitcoin. (Another parent bubble and its daughters.) The company depends on bitcoin’s volatility and its potential upside. Amid the surge in crypto prices early this year, the company’s first-quarter revenue was $1.8 billion, more than all of last year. In 2019, when the price of bitcoin was a lot lower and no one was talking about it, Coinbase lost $30 million.
All of this means that Coinbase’s listing is a little like bitcoin’s stock market debut, too. Which is weird, when you think about where bitcoin started. In his 2019 book, Narrative Economics, the Nobel Prize–winning economist Robert Shiller describes the rise of bitcoin as a feat of storytelling. There was the benefit of being the first, he writes, and in the technology’s unique independence from authority, which the story held made it a hedge against government collapse and inflation. Others, including Bloomberg’s Joe Weisenthal, have gone so far as to call bitcoin a “faith-based” asset. Faith as in religion. It started with its pseudonymous prophet, Satoshi Nakamoto, who compiled the code and vanished. It has code words, a sacred white paper, a ritualistic schedule for “halving” the creations of new blocks on the chain. Yes, all assets require faith. But faith in the dollar is not faith in a physical paper or a coin, it’s in the US government. With bitcoin, the faith is in the thing itself, the network that generates the coins and keeps them secure.
The conviction of bitcoin’s adherents is important, given the lack of earthly evidence for its value. Bitcoin is scarce, sure, because the code ensures only 21 million bitcoins will ever be created. But that doesn’t make it an investable asset on its own. There are limited use cases. Bitcoin can’t be spent efficiently, much as people are trying to make that happen. The network in which people place their faith is still somewhat immature, leading to fears that the bitcoin market could be subject to manipulation.
The masses have not been resoundingly faithful to this movement. The mathematical epidemiologist Adam Kucharski, known for his work explaining the transmission of diseases like Covid-19, writes about bitcoin as a form of contagion spread through word of mouth and media mentions. But in network terms, the series of booms and busts reveals a “disconnected” contagion—an epidemic that flares up but doesn’t spread too far. During a frenzy lots of people jump in, and the value rises, for a while, but the overall impact is limited. Recent surveys suggest that fewer than 10 percent of Americans have dabbled in cryptocurrency. About half of those people said they have regrets.
But recently, the narrative has been changing. A handful of corporations, including Tesla and Square, have placed their bets, and hedge funds and banks are getting involved. The story now is less about freedom from governments and more about money that has no better place to go. That was the logic presented last month in a report to investors from JP Morgan laying out why the bank now considered cryptocurrency a viable investable asset. Bitcoin’s ups and downs had brought change in their wake. Each run brought more people in, and this had brought more rules and definitions, more regulators paying attention, more infrastructure provided by the likes of Coinbase. The market was maturing. It would remain volatile, but it would be logical volatility from which financiers could extract a profit. They could place their faith in their fellow investors.
Here was an appropriate corollary to gold, the JP Morgan analysts wrote. Personal investors were banned from speculating on gold in the 1930s, but in 1974 it became legal again. At the time, it was weird money. Brokers raced to sell ingots through the mail, promising a surge in demand that would propel their value to new heights. But, at least at the start, most people saw it as too volatile. “I’d sooner play blackjack with my money,” a dentist from Dayton, Ohio, told The New York Times on the day of legalization. (He was no stranger to gold, which was then used in tooth fillings.) And yes, it surged and collapsed, and it did that a few more times. But over time it was tamed. Gold underwent a gradual alchemy from a new asset to a standard part of an investment portfolio. It came to be more predictable, a hedge that moved according to market forces that could be learned and managed.
Today, believing in Coinbase as it makes its debut requires you to believe in bitcoin. But maybe we’re heading toward the reverse. Maybe soon you won’t need to believe in bitcoin at all to think it has value. Your faith could be placed in Tesla or Coinbase or any other public corporation or hedge funds that hold cryptocurrency in their portfolios—the very systems that, according to the storytellers, bitcoin was supposed to avoid and potentially even end. Perhaps, in the end, new forms of money can only stay weird for so long.
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