Analogical thinking on Cryptocurrencies, COVID19, and the Internet Bubble

Cryptocurrencies and COVID19 have been two hot topics since 2020. While they appear totally unrelated, I found similar deep structures between them through the lens of analogical thinking.

Crypto is very technologically intensive, while the root cause of the COVID19 pandemic is a lot simpler to understand. But the spreading of both has been exponential. For a virus, the basic reproduction number (R0) is the average number of infections produced by a single infectious person. R0 represents how fast COVID19 can spread within a particular environment. It varies over time and countries. The human network is a complex connected graph in this globalized world. With a R0 in the range of 2-3, COVID19 has spread exponentially, leading to the pandemic in 2020. So how is the spread of COVID19 similar to the explosive popularity of Cryptocurrencies?

In my view, the exponential growth of the pandemic in multiple waves resembles the trend of the market value of crypto, to some extent. In 2009, the birth of bitcoin opened the era of cryptocurrency. Cryptocurrency research existed long before bitcoin. In the last decade, roughly half of Turing awards (the “Nobel Prize of computing”) can be linked to blockchain research done in the 20th century. But bitcoin is such a clever combination of existing distributed system and cryptography techniques. More importantly, it provided software to allow everyone to participate. Near religious beliefs of early adopters carried it over infancy. Then brilliant hackers developed more enhanced and advanced versions of blockchains (Ethereum) and applications. These community efforts have built a rich crypto ecosystem beyond just bitcoin. Crowd enthusiasm is bolstered by the enormous capital gain of waves of crypto valuation surge. Such success requires no comprehensive grasp of how the crypto systems work. Crypto investing started to behave like the contagious COVID19. Its high reproduction rate drives exponential propagation through the human network. This is where we are now.

What is next? In my opinion, the COVID19 virus will probably live forever as a seasonal flu for two reasons. The first reason has to do with the virus itself, which is constantly evolving to escape the immune system. The more people who are infected, the faster the virus mutations will be. The second reason has to do with human biology and behavior. Heterogeneity is very deep in our genomics, economy, culture and belief. We are doomed to have spotty and uncoordinated anti-epidemic responses. One immediate example is, low-income countries will have limited and delayed access to vaccines. The production of vaccines cannot catch up with the surge of global demands in a short time. These regions then become hotbeds for virus mutations. The mutations found in South Africa and Brazil are suspected to escape the current vaccine target.

How about crypto? There are two similar reasons for it to exist in at least the foreseeable future. Crypto technology is evolving fast, including well-known concepts like smart contracts, stablecoins, decentralized finance (DeFi), decentralized autonomous organizations (DAO), tokens, etc. Lots of startups are emerging in this space. The point is there is plenty of innovation going on and still lots of unexplored areas left. The internet has evolved over its 35-year lifespan and has reached 59% of the global population as of Oct 2020. It is remarkable how close we are as human beings. But it is also shocking to find out how different we are in beliefs. This makes me believe reaching any consensus in crypto will be a very slow and dynamic process if ever possible. That is to say, people with belief and disbelief of crypto can coexist at the same time. And they are interchangeable over time.

But will the crypto’s market value continue to grow exponentially? After all, there are reports portraying bitcoin as being the ‘mother of all bubbles’. In human history, there is no shortage of bubbles. Speculation and excessive greed are always the leading factors in those phenomenal crashes. All bubbles cause distress and harm to their victims, both large and small. But different bubbles have different intrinsic values. For many, the internet bubble of 2000 was disastrous, and yet we now know that it was a prologue of disruptive innovation. Many of the early day hypes have become reality. The hype drew tremendous attention and capital to the internet companies. This rush turbo charged the creation and selection of startups, and many tech giants were created in that period. I believe that the current fanaticism for crypto is similar to the previous internet hype. The speculation is eating the world given excessive money in the market. It is hard to judge a bubble before it bursts.

COVID19 has redefined our world, and so will the crypto. The ideology of decentralization is as revolutionary as how we built our societies. Fully decentralization seems like a utopia. Distributed ledger technology might be a more scientific and pragmatic paradigm to pursue. The crypto ecosystem is really a test field for global-scale financial and societal experiments that have never been done before. Many ideas under trials will either be materialized in its original form, or adopted by the big techs or circumscribed by the government regulations. The new era is yet to be defined. But over financialization of our society and the younger generation grown up in a deeply digitalized world are the significant forces towards virtualization and decentralization. It might take a long time until then. But the impact will be lasting and unprecedented.

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Thanks Tracy and Josh for revision and editing!