Today I was shocked to see the CFO of the Commonwealth Bank of Australia suddenly resign to go join a crypto start up called Block.one, the seller of the EOS token. This is an unusual step for a senior executive of the 13th largest bank in the world by market capitalisation. We’re starting to see more and more of these high profile resignations from traditional financial institutions.

At first, I thought, “OK, this must be the start of the big brain drain” into cryptocurrency and blockchain companies. Which might be true, but it also makes me think back to the stories of the dotcom bubble in the late 90’s.

To be honest, we’re probably still early in the mania. One way to know when you’re really in the midst of mania is when everyone is starting to talk as though “this time is different”. There will start to be a false sense of security that ‘this really is the next big thing’. We will see many people quit their boring day jobs to go work at ICO-money backed start ups. Many of these projects will simply never pan out.

A tiny portion of them might end up having real long term value. But it’s almost impossible to tell in advance. So we’ll probably see investors indiscriminately putting money into ‘the crypto market’ without really taking the time to distinguish the wheat from the chaff.

Referring to the dotcom bubble, Fred Wilson, venture partner has commented:

“A friend of mine has a great line. He says ‘Nothing important has ever been built without irrational exuberance’. Meaning that you need some of this mania to cause investors to open up their pocketbooks and finance the building of the railroads or the automobile or aerospace industry or whatever. And in this case, much of the capital invested was lost, but also much of it was invested in a very high throughput backbone for the Internet, and lots of software that works, and databases, and server structure. All that stuff has allowed what we have today, which has changed our lives … that’s what all this speculative mania built.”

Except, I think these irrational exuberance examples were mostly caused by fiat credit expansion. These caused the market to ‘overreach’ before it was truly ready, thanks to the false signals sent by fiat credit expansion.

I suspect that we’re seeing a similar pattern play out again, this time with cryptocurrency and ‘blockchain technology’. Murray Rothbard had remarkable insight in his explanation of the Austrian theory of the business cycle:

Invariably, the booms and busts are much more intense and severe in the “capital goods industries”—the industries making machines and equipment, the ones producing industrial raw materials or constructing industrial plants—than in the industries making consumers’ goods. – “Economic Depressions: Their Cause and Cure”, p.106 of The Austrian Theory of the Trade Cycle and other essays

Notice how many of these start ups are not producing immediate consumer goods for consumption today, but rather they are promising esoteric things like smart contracts, and dApps. These could be understood as a kind of ‘futuristic capital good’. Except I believe that the market is over-reaching for these technologies due to the credit expansion brought on by fiat money. This ‘artificial’ availability of savings for investment has brought about extremely speculative long-term future capital goods.

If I had to speculate, I believe the big valuations and rally are yet to come. The big cryptocurrency market rally in November and December of 2017 was just the warm up.