How the Crypto Crash Could Be Good for Crypto

(Bloomberg Opinion) -- These days, cryptocurrencies are far from the rage. Many have lost 80 percent or more of their market value from their peak in January, and some have fallen off the map altogether. But perhaps that development is precisely what we need for crypto to take the next step forward.

For context, railroad stocks collapsed after a bubble in the 19th century, but still the railroad continued to transform our world. Internet stocks plunged in the dot-com crash of 2000-2002, but that in turn cleaned out the bad companies and paved the way for the subsequent tech revolution, including the rise of Amazon and Google.

This history is no guarantee crypto will take off. But it does show that a price collapse does not have to herald the end of a technology or its relevance.

One problem crypto has had is that too many junky ideas were tossed around and then often funded by ICOs (initial coin offerings). That is hardly a surprise, given that the asset class went from basically zero to more than $800 billion value at its peak. People will try to get their share of that pie, and that will lead to thousands of white papers, startups, frauds and, yes, some valuable innovations.

But from an outsider’s point of view, it is hard to tell good from bad. With many people crypto still has a dubious reputation, due to lingering and not entirely accidental connections with get-rich-quick schemes, money laundering and the drug trade. New markets, including valuable ones, are often abused at first.

Now the time has come for crypto to go on a diet. No more easy money. No more thoughts about ICOs leading to quick riches. The rhetoric is shifting toward a more cautious or even apologetic tone. The corresponding reality can perhaps be one of greater focus and relevance.

We’re at the point where crypto finally has to prove its social worth. But what might that mean? Imagine using crypto as a medium of micropayments to pay for media on the internet. Or perhaps you'll use the blockchain to verify your identity, rather than telling some stranger on the phone the last four digits of your Social Security number. Or how about a system for self-executing, zero-cost contracts? (For example: I will give $10,000 to a charity if 10 other people do.) Maybe the burgeoning field of virtual reality will rely on crypto to support some of its transactions, starting with virtual sex, which the major banks might stay away from. Alternatively, I might use crypto assets to send money to Mexico, avoiding the steep charges from current money transfer systems. In the more utopian visions, crypto leads to the rise of entirely self-governing systems, powered by the blockchain.

For all the experimenting and theorizing, however, bitcoin and other crypto assets have yet to really change the world in those ways. Now is the time to make a big push on these and other fronts, because the money won’t be in crypto unless it is helping to solve some concrete problems.

If cryptocurrencies are little more than “the new gold,” and try to survive as investment assets only, they will probably lose their luster and fade into irrelevance. Crypto needs a good story, and ultimately that has to move beyond the heroic innovation of Satoshi Nakamoto and become a story of practicality.

The crypto world also has to work harder to remedy its current deficiencies. Probably you’ve heard that mining bitcoin is bad for the environment, because it uses a lot of energy, or that the information on the blockchain is unwieldy to transfer. Those costs can be limited by such practices as “proof of stake” and “sharding,” if further innovation makes those practical.

By the way, if you are confused by the terms “proof of stake” and “sharding” (and others), that is probably a good thing. As the tech guru Stewart Brand is reported to have said, the proliferation of terminology in crypto is a sign that new ideas and possibly important new technologies are afoot.

Journalist Daniel Gross wrote a perceptive but rather ill-timed book in 2007, called “Pop!: Why Bubbles Are Great for the Economy,” which argued that bubbles can spur useful investment in new and still uncertain sectors. But his point — which is not always correct, of course — was neglected in the pain of the financial crisis. It is also true that the subsequent popping of those bubbles can be good, both to bring prices back to reality and to impose discipline and identify the most useful innovations.

Think of bitcoin and other crypto-assets as like a company that is finally receiving a cash call. I am modestly optimistic, but it is time to put up or shut up. Let us hope that this “do or die” moment will once again bring out the best in entrepreneurs.

This column does not necessarily reflect the opinion of the editorial board or Bloomberg LP and its owners.

Tyler Cowen is a Bloomberg Opinion columnist. He is a professor of economics at George Mason University and writes for the blog Marginal Revolution. His books include “The Complacent Class: The Self-Defeating Quest for the American Dream.”

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