If the stock market is not the economy (if not), cryptocurrencies like Bitcoin are not really the economy. Still, crypto has become a fairly large asset class (and has brought huge capital gains to many buyers). By the fall of last year, the total market value of cryptocurrencies had reached nearly $ 3 trillion.
But since then, prices have plummeted, clearing the market capitalization of about $ 1.3 trillion. As of Thursday morning, Bitcoin prices were almost half down from their November peak. So who is hurt by this crash and what does it bring to the economy?
Well, I see an unpleasant similarity to the 2000s subprime crisis. No, cryptocurrencies do not threaten the financial system — the numbers are not big enough to do that. However, there is increasing evidence that cryptocurrency risks are disproportionate to those who do not know what they are in and are inadequately in a position to deal with the downsides.
What is this cipher? From Apple Pay and Google Pay to Venmo, there are many ways to make digital payments. However, mainstream payment schemes rely on a third party (usually a bank) to ensure that they actually own the asset to be transferred. Cryptocurrencies probably use complex coding to eliminate the need for these third parties.
Skeptics wonder why this is necessary and argue that cryptocurrencies can be a cumbersome and expensive way to do things that are easier than others. Therefore, even 13 years after the introduction of Bitcoin, there is still little legal application to cryptocurrencies. In my experience, the reaction tends to take the form of an incomprehensible word salad.
Recent developments in El Salvador, which adopted Bitcoin as fiat currency a few months ago, seem to be pushing skeptics. Residents trying to use currency find themselves facing huge transaction fees. Still, crypto is effectively sold: it looks futuristic and the government can resort to the fear of old-style gold bugs to inflate your savings, and huge past profits. Was attracted to investors worried about missing out. Therefore, cryptography has become a large asset class, even though no one can clearly explain what its legitimate purpose is.
But now the crypto has crashed. Maybe it will recover as it did in the past and soar to new heights. But for now, prices have dropped considerably. Who is the loser?
As I said, there is a disturbing echo of the subprime crash 15 years ago.
Cryptography is unlikely to cause an overall economic crisis. It’s a big world, and even a $ 1.3 trillion loss is only about 6% of US gross domestic product. this is, Falling house prices When the housing bubble burst.And activities like Bitcoin mining are environmentally destructive but economical. The little things Compared to the residential building Plunge It played a major role in causing the Great Recession.
Still, some people are hurt. who are they?
Investors in cryptocurrencies appear to be different from investors in other high-risk assets, such as stocks, which are disproportionately composed of wealthy, college-educated whites. According to a survey by research agency NORC, 44% of crypto investors are not white and 55% do not have a college degree. This is consistent with anecdotal evidence that crypto investment is becoming very popular among minority groups and the working class.
NORC says this is great and “cryptocurrencies open up investment opportunities for a wider variety of investors.” But I remember an era when subprime mortgage lending was celebrated as well. It was when they were welcomed as a way to open up the interests of their homes to previously excluded groups.
However, it turned out that many borrowers did not understand what they were doing. “Why are the most risky loan products sold to the least sophisticated borrowers,” said Ned Grarich of the Federal Reserve Board, who is renowned for his futile warning of increasing economic dangers. rice field. Then he declared, “The question answers itself.” When the bubble burst, home ownership plummeted.
And cryptocurrencies are almost as dangerous as asset classes can get, as their huge price fluctuations look independent of fundamentals.
Now, those of us who still don’t know which cryptocurrency is better than money laundering and tax evasion may just overlook the picture. Perhaps the rise in Bitcoin and its rivals’ reputation (although not used) is more than a bubble in which people buy assets just because others have made money from their assets in the past. Represents. And it’s okay for investors to bet on skeptics.
But these investors must be well-prepared to make that decision and have sufficient financial security to bear the loss if the skeptics turn out to be right. Must be.
Unfortunately, that’s not what’s happening. And when you asked me, the regulator made the same mistakes that he made in subprime. They cannot protect their people from financial products that no one understands, and many vulnerable families may come at a price.