Cryptocurrency: Magical Thinking or Financial Risk?


• Cryptocurrencies may be a manifestation of „magical thinking“ born out of a financial crisis.
• Mistakes and mediocrities made during a period of declining and zero-interest rates were obscured or forgiven, and speculative assets with low probabilities of far-off success inflated in value enormously.
• There are 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.

Cryptocurrencies have become an increasingly popular way to invest money, but this could be due to a form of „magical thinking“ born out of a financial crisis. Mihir A. Desai, a professor at Harvard Business School and Harvard Law School, wrote an opinion for The New York Times, stating that all of the new investors and crypto owners may have a grudge against capitalism, rather than understanding the world they were born into. Desai pointed out that during a period of declining and zero-interest rates, mistakes and mediocrities were obscured or forgiven and speculative assets with low probabilities of far-off success inflated in value enormously. This led to hawkers pitching shiny new vehicles, such as stablecoins and new ways of taking companies public without the usual regulatory scrutiny, that promised greater returns while dismissing greater risks.

Desai argued that this is a hallmark of the ignorance of trade-offs in magical thinking. He believes that investors should be more aware of the risks that come with investing in digital currencies, as well as the potential of them to be manipulated by those who are in control of the market. Despite the potential for disaster, Desai believes that the world of cryptocurrency is here to stay and that it is important for investors to be aware of the potential for financial losses. He concluded by stating that it is important to remember that the financial crisis is still present, with all its flaws and cracks, and that investing in cryptocurrencies or any other asset should be done with caution.