Crypto is more popular than ever and is slowly becoming more mainstream. There is a crash coming.
Lately cryptocurrencies have been on my mind. It is hard not to think about crypto given how often crypto-hyping posts comes up in my social media feeds and given the internet melodrama the various coins have been caught up with Elon Musk lately. I’ve made my position on crypto crystal clear on the blog, I’m a stalwart crypto sceptic and I have yet to come across any pro-crypto argument which would soften my stance. I could bring up tulips and quote Keynes about how long markets can stay irrational (and I have in the past), and while every die hard HODL:er will dismiss such arguments as alarmism, a lack of imagination, or being behind the times I want to explore how a crypto crash could come about and how the aftermath might look. Irrespective of your belief in (or in my case lack of belief in) cryptocurrencies there can be a lot of value in imagining possible future scenarios.
In my view a precipitous fall in the valuations of digital coins should have happened a long time ago, I just said that I wouldn’t harp on about the absurdities of crypto valuations so I won’t go in to further detail on why I think a crypto crash could very well be an event stemming from the internal inconsistency of a so called “safe-haven” “asset” class having some of the most volatile markets there are. If a crypto crash was generated by a sudden realisation that crypto has no inherent value I think the damage would be fairly contained. Obviously, the young retail investors would have a hard time, and the cottage industry surrounding crypto such as exchanges and crypto-specific news sites would have a very hard time but institutional investors have quite small crypto holdings, and as far as I know very few institutional investors own smaller coins than Bitcoin and Ethereum. All in all, a crypto crash caused by a sudden loss of faith in crypto would be a contained affair with few job losses and damage centralised on a rather small group of you retail investors.
The real risk of a crypto crash in my opinion is if it happens as a result of a broader downturn in the real economy. I often bring up how unlike most traditional asset classes crypto doesn’t have any inherent value, by which I mean that owning a unit of a cryptocurrency doesn’t entitle the owner to a cash flow or a claim on a business. If there was a large downturn in the real economy the most rational asset to sell if one needs to cover costs after losing a job or experiencing other financial misfortune is therefore crypto. Now, as we know rational humans only exist in economics textbooks so it’s anyone’s guess whether crypto would lose disproportionally more than other assets in case of a large-scale real economic downturn. That being said, institutional investors are in my view very likely to sell off crypto first if times are tough enough to warrant large scale selling in order to cover withdrawals.
As I keep saying, crypto prices are in my view completely divorced from reality and are seemingly kept at high level by the culture surrounding crypto. Crypto accounts are everywhere on social media and almost always post positive sentiments about different crypto currencies’ price and about how fiat currencies are doomed to be overtaken by cryptocurrencies. Clearly the community and culture surrounding crypto is and has been a powerful tool for crypto valuations, but as one sees often on the internet attitudes can change quickly. If the crypto community turns on a specific coin or crypto more broadly then I’d expect valuations to plummet very quickly.
Crypto reminds me of the South Sea bubble, a bubble in the shares of the South Sea Trading Company in England in the early 1700’s. To oversimplify, the South Sea Company was formed to deal with government debt and had the exclusive right to trade in the south seas i.e., South America. However, as South America was colonised mainly by the Spanish with which relations were poor the company never made significant profits from operations, instead gaining a truly incredible valuation through strong word of mouth, enormous expectations, and the company’s leadership encouraging speculation in the company’s shares. Digital currency may well be the future, and I’m sure blockchain technology has many useful applications, but paying an entry level yearly salary for a digital token which doesn’t generate income or entitle the holder to anything is madness. Sooner or later people will realise that the emperor has no clothes. I don’t know if that’ll happen next week or in 30 years but it is inevitable.
If you liked this post you can read my last post about Dogecoin here, or the rest of my writings on cryptocurrency here. It'd mean a lot to me if you recommended the blog to a friend or coworker. Check back next Monday for a new post!
Written by Karl Johansson
I've always been interested in politics, economics, and the interplay between. The blog is a place for me to explore different ideas and concepts relating to economics or politics, be that national or international. The goal for the blog is to make you think; to provide new perspectives.
Cover photo by Karolina Grabowska from Pexels, edited by Karl Johansson
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