The crypto conundrum

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The crypto conundrum

  • Sticking true to its unpredictable nature, cryptocurrencies are registering huge losses in value.
  • From the fall of Terra (Luna), the current bear market is showing a downfall for most cryptocurrencies like Bitcoin, Ethereum etc.

A case of speculative mania?

  • The most important feature of cryptocurrencies that is flaunted by their enthusiasts is their limited supply.
  • In a world where central banks create a lot of money out of thin air, it is natural for investors who are looking to protect their wealth to seek abode in alternative assets whose supply cannot be cranked up as easily.
  • Money creation by central banks causes the price of all goods to rise and also tends to accelerate the adoption of alternative assets as currencies.
  • For one, scarcity alone is not sufficient to facilitate the adoption of cryptocurrencies as money.
  • Any asset must have either use value or exchange value in order for it to possess any fundamental value.
  • This fundamental value, in turn, is reflected in the price of these assets in the long run.
  • Stocks and bonds, for instance, possess exchange value that is based on the expected future cash flow from these assets.
  • Commodities such as oil and steel possess useful value because these assets are used to run vehicles and build real estate.
  • Bitcoin and other cryptocurrencies may be scarce but it is questionable whether they possess any use value or exchange value.
  • Gold and silver have traditionally served as hedges against inflation because they possess fundamental value derived from their use as jewellery and money.
  • But bitcoin and other cryptocurrencies neither offer direct use value nor possess significant exchange value — bitcoin can buy you very few real goods and services.
  • In short, cryptocurrencies possess no significant fundamental value to sustain their current high prices.

Issuance of money

  • The monopoly that governments (and central banks) possess over the issuance of money is at the root of their power and influence.
  • It also allows central banks to tinker with the money supply under the mandate of managing aggregate demand in the economy.
  • In essence, monopoly control over money allows governments to indirectly tax citizens by increasing the supply of currencies, thus devaluing them.
  • If cryptocurrencies like bitcoin are going to challenge fiat currencies like the U.S. dollar as a medium of exchange, they would essentially be challenging the authority of the government to print and spend.
  • This is not an assault that governments will tolerate for long.
  • They will allow cryptocurrencies to exist only as long as these currencies remain a speculative asset and not a medium of exchange.