Crypto going the way of the Beanie Baby bubble

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Photo by Thought Catalog / Pexels
Photo by Thought Catalog / Pexels

Crypto speculation
Cryptocurrency has to be one of the most-talked-about technological innovations of the last 10 years. Speculation about what it could make possible has run wild among neophytes and experts alike. Some of these predictions seemed quite optimistic and futurist, while others urged people to remain skeptical, as the high-risk nature of things like cryptocurrencies can lead to the destruction of one's financial stability. This is due to the fact that cryptocurrencies are speculative ventures that often rely on hype and exclusivity to drive growth, which is likely to create bubbles in the market when it shifts. Some have likened crypto to the Wild West, in reference to the lack of proper regulations, due to the technology being so new.

Still, despite this, cryptocurrencies and related blockchain technology were a growth behemoth throughout the last decade, only to experience a sharp decline in value (from an estimated at $3 trillion in 2022, to $1 trillion in 2023) over the past few years. This article hopes to shine a light on why.

An overview
When discussing how hype can undermine and create bubbles in crypto markets, it's beneficial to briefly go over what cryptocurrency (and its tangential forms) is and how it works. Cryptocurrency is any virtual asset that is logged and purchased on a public blockchain. The blockchain acts as a series of statements ("blocks") recording all participants' transactions, in a decentralized system. It is a currency (go figure!) hosted on the blockchain that can be used in transactions or traded.

Another form of blockchain technology are NFTs, certificates of ownership of unique digital identifiers housed on the blockchain. These identifiers can come in many different shapes, often a piece of art. The seller creates an artificial scarcity, selling only a fixed number of whatever item. This is why companies market these assets on exclusivity. After the certain number are gone, the only way to acquire these assets is through the resale market.

When particular assets were accompanied by a lot of hype, their resale price skyrocketed. Bored Apes (a popular NFT touted by many celebrities, including Jimmy Fallon, Paris Hilton, Eminem, and Snoop Dogg, to name a few) sold for millions of dollars on resale.

The term NFT refers to a "nonfungible token," which means that on the blockchain, it cannot be replaced or copied. Off of the blockchain, however, on the internet, the NFT's likeness can be copied, sent, and multiplied infinitely. Many NFT holders, faced with social media trolls copying and pasting their NFTs ad nauseam, claimed that such a thing "isn't allowed." This stands diametrically opposed to the fact that there are no enforced rules prohibiting this, only an honor system.

The validity of the exclusivity of NFTs — and if said exclusivity on the blockchain meant, well, anything...materially — quickly became a point of discourse. Critics compared NFTs to owning a star, or being sold a certificate of ownership of the Brooklyn Bridge. As you can imagine, this contributed to the decline in the public perception for cryptocurrencies.

Beanie Babies and crypto
The editor of this publication likened crypto's story to the Beanie Baby bubble, an analogy that rings true. When the hype surrounding Beanie Babies reached a critical mass in 1999, a bubble forming and bursting was likely to occur in the speculative market. When the creator of Beanie Babies decided to end the series of toys, it caused a nosedive in demand. This cultural shift away from Beanie Babies caused the bubble to burst, and the value of the brand would never recover.

The way in which markets can be manipulated by cultural changes is important to recognize, especially when considering that any promise of "guaranteed returns" are based on current market trends, or projected ones. As mentioned, the market is constantly changing due to outside factors. While Beanie Babies provide a fun example to compare crypto to, there are many other comparable markets, like the dot-com bubble of the early 2000s.

Under this critical lens, it is hard to believe the cryptocurrency market was valued at $3 trillion just two years ago. Such a high-risk investment with high losses doesn't seem like it would be such a profitable endeavor. And it isn't, necessarily. As mentioned before, the crypto market has lost over 60% of its value, equating to over $2 trillion.

Most of that was held by the companies pushing the product. Those on top often made back their investment multiple times over, leaving the project before most people lost their (sometimes very large) investments. This tactic of heavily hyping an asset to consumers and investors, only to exit as prices hit their peak, is commonly referred to in the crypto community as a "pump and dump." This practice is very common, specifically because investors know they can make a ton of money doing it, with little to no consequences.

Others (who are most likely selling crypto, or received a large payout from engaging with it) claimed it was the start of a new, freer, fully decentralized economic system. While the technology itself could present potential (given the proper circumstances of use and oversight), to think it could replace our current economic system without government involvement, in the opinion of this writer, is naive. Furthermore, the environmental impacts of this technology highlight its unsustainability as a realistic alternative to big banks. Thankfully, as the technology ages, attempts at regulation are becoming more common, but how that manifests changes in the system is yet to be seen.

The ability of this technology to operate without adequate, regulatory oversight can hopefully be further remedied by more public knowledge on the matter. This could lead to comprehensive legislation being passed. Important insight can be gained simply by recognizing the unraveling of crypto companies by their own malpractice due to lack of proper regulation.

A popular example of this is the Bahamas-based cryptocurrency exchange company FTX. It came under fire when it was revealed its CEO was housing exchange tokens in an associated trading firm that he owned. This led rival companies to sell all of their stock, causing the market price of FTX to plummet. This also led to a crash of the exchange, due to the number of people trying to withdraw their currency. This scandal has also had a measurable effect on the market, increasing skepticism around investing in crypto. Multiple firms filed for bankruptcy in addition to the loss in value.

I hate to burst your bubble
Due to all of these factors, larger investors, such as celebrities, sports, and brands, have cut ties with cryptocurrency and its various uses. Examples include JP Morgan cutting ties with Binance (a popular exchange firm) and basically all of Hollywood walking back their endorsements. It would seem the risk related to lack of regulation is becoming increasingly toxic as consumers recognize the likelihood of being manipulated into investing in a sinking ship.

While abandonment by investors is certainly the reason for this shift away from crypto, the public's perception of NFTs and related crypto projects is instrumental in driving people away. Just as Beanie Baby demand fell in unison with the hype surrounding the product, fewer people taking seriously and being interested in crypto drives growth through the floor, creating less hype for the market to run on. Pop!