Cryptocurrency prices are falling. According to a report, crypto assets have lost around US$1.35 trillion worldwide since November, and the price of some has fallen by 80% or more. Many investors feel real nerves.
The good news is that the global economy, or, for that matter, American society, is no poorer. And therefore, it is not necessary that there be a great economic response to adjust to these new prices (The other side of the coin is that if cryptocurrency prices do see another sharp rise, there won’t be much to celebrate.)
(See: Dian will audit operations with cryptocurrencies).
Over time I have gone from being a crypto skeptic to what I call a crypto optimist. Therefore, it is a good time to assess how the prices of cryptocurrencies radically lower prices will affect their social value.
One possibility is that cryptocurrency prices, even at current levels, are mostly a bubble and that cryptocurrencies are of little use. In that case, lower cryptocurrency prices mean less purchasing power for crypto holders, but that doesn’t translate into less wealth for the economy as a whole.
People who don’t own much crypto will, in the long run, have more control over goods and services. Cryptocurrency holders who were bidding against you will spend less over time. Purchasing power will shift to those who are not crypto holders.
In these scenarios, psychological losses are felt before psychological gains. Most cryptocurrency holders are unhappy at the moment, but few non-holders are celebrating that they have greater (but modest) purchasing power.
(What’s more: Cryptocurrencies plummet: the reasons that explain this trend).
However, over time, those who do not own cryptocurrencies will be able to buy more at better prices than they expected. What crypto holders lose will be more or less what non-crypto holders gain.
Let’s consider another scenario, one in which cryptocurrencies would be about to provide a lot of useful services. Perhaps crypto assets support useful savings and loans through decentralized finance, run smart contracts online cheaply, and provide useful currencies and stores of value for the pending metaverse.
Most of these services are not yet available, at least not in the form that they eventually will be. Thus, if a lower crypto price is a sign that these services will not be as valuable as expected, that means that society will be a little less rich “in the future”. This does not affect much the current standard of living.
Tyler Cowen
That’s a worst case scenario which I further think is unlikely even if the crypto revolution succeeds. Instead, the long-term value is more likely crypto term be strong and that the current cryptocurrency price declines are driven by risk and liquidity issues.
The drop in cryptocurrency prices does not appear to be the result of a new understanding that crypto institutions are irrevocably flawed. Instead, it’s due to a nasty mix of persistent inflation, higher real interest rates, lower share prices for major tech companies, and geopolitical fears.
(Read: Mercado Libre bets on cryptos and announced investments in the sector).
It’s all bad news, but not necessarily about cryptocurrencies. There are the same crypto fundamentals. Higher real interest rates make the future less valuable in terms of discounted current value, but crypto doesn’t hold a special place in this woe.
The bottom line is that even a big drop in cryptocurrency prices will not create much social concern. The Federal Reserve does not have to panic and regulators do not have to take action. Regardless of whether one is a crypto-optimist or a crypto-pessimist, on a societal level the loss of that $1.35 trillion worth is largely imaginary.
This lack of correlation between major disasters and falling cryptocurrency prices could be good news for crypto in the long run. For one thing, it shows that cryptocurrency prices can drop sharply and suddenly without inducing more general contagion. And while some blockchains have been slow to process transactions, in general, the cryptocurrency world has taken this big shock in stride.
This lack of correlation between major disasters and falling crypto prices could be good news for crypto in the long run.
another lesson is not to confuse high prices with high utility at the social level. Food prices plummeted for most of the 20th century, for example, even as food continued to provide ever-increasing value to consumers. Stronger competition in crypto markets could similarly lead to lower rather than higher prices, even as crypto-enabled services prove increasingly valuable.
(What’s more: Investment options in the eyes of experts for 2022).
It’s a good thing cryptocurrency price volatility is so socially manageable, because there’s probably a lot more to come.
BLOOMBERG
