Cryptocurrency price

LOSS OF 1.35 BILLION DOLLARS! But the cryptocurrency price crash strengthens the case for crypto!

Cryptocurrency prices are falling. According to one account, crypto assets have lost around $1.35 billion since November, with some plummeting by 80%.

Cryptocurrency prices are falling. According to one account, crypto assets have lost an estimated $1.35 trillion globally since November, with some plummeting by 80% or more. Many investors are feeling a real pinch. The good news is that the global economy, or for that matter American society, is not poorer. And so there is no need for a big economic response to adapt to these new prices. (The flip side is that if crypto prices see another big surge, there won’t be much to cheer about.)

Over time, I went from crypto-skeptic to what I call crypto-hopeful. It is therefore a good time to assess how the drastic drop in crypto prices will affect the social value of crypto.

One possibility is that crypto prices, even at current levels, are mostly a bubble and the crypto isn’t doing much of any use. In this case, lower crypto prices mean less purchasing power for crypto holders, but it does not translate into less wealth for the economy as a whole. People who don’t own a lot of crypto will, in the longer term, have more control over goods and services. Crypto holders who bid against them will spend less over time. Purchasing power will shift to non-crypto holders.

In these scenarios, the psychological losses are felt before the psychological gains. Most crypto holders are unhappy right now, but few non-holders are celebrating their (modest) increase in purchasing power. Over time, however, these non-cryptocurrency holders will be able to buy more at better prices than they expected. What crypto holders will lose will be roughly what non-crypto holders will gain.

Consider another scenario – one where crypto is poised to provide many useful services. Perhaps crypto assets will support useful savings and loans via DeFi, execute low-cost online smart contracts, and provide useful currencies and stores of value for the waiting metaverse.

Most of these services are not yet available, at least not in the way that they eventually will be. So if a lower crypto price is a signal that these services won’t be as valuable as expected, it means the company will be a little less wealthy in the future. It does not affect the standard of living very much today.

This is the worst case scenario which in my opinion is unlikely even if the crypto revolution succeeds. Instead, it is more likely that the long-term value of crypto is robust and that the current declines in crypto prices are driven by risk and liquidity concerns.

The fall in crypto prices does not appear to be the result of a new understanding that crypto institutions are irrevocably flawed. Instead, it’s due to an unpleasant mix of lingering inflation, higher real interest rates, lower stock prices for big tech companies, and geopolitical fears. This is all bad news, but not necessarily bad news about crypto. The same crypto fundamentals are in place. Higher real interest rates make the future less valuable in present present value terms, but crypto has no special place in that misfortune.

The bottom line is that even a sharp drop in crypto prices will not create much social concern. The Federal Reserve need not panic and regulators need not act. Whether you are a crypto-optimist or a crypto-pessimist, on a social level, the loss of that $1.35 trillion worth is largely imaginary.

This lack of correlation between major disasters and falling crypto prices could turn out to be good news for crypto in the longer term. On the one hand, it shows that crypto prices can drop sharply and suddenly without inducing more general contagion. And while some blockchains have been slow to process transactions, overall the crypto world has taken this major shock in stride.

Another lesson is not to confuse high prices with high social utility. Food prices fell for most of the 20th century, for example, even as food continued to provide increasing value to consumers. Stronger competition in crypto markets could similarly drive prices down rather than up, even as crypto-enabled services have proven increasingly valuable.

It’s a good thing that crypto price volatility is so manageable on a social level – because we probably have a lot more of it.

Tyler Cowen is a Bloomberg Opinion columnist. He is a professor of economics at George Mason University and writes for the Marginal Revolution blog. His books include “Big Business: A Love Letter to an American Anti-Hero”.