A recent interview given to the journalist George Buhnici touched among other things upon the cryptocurrency issue. The explanations that I provided of why cryptocurrencies are in fact speculative cryptoassets that anyone can invest in as long as they know what they are doing triggered a wave of criticism from the crypto apostles who watched the interview.
I will insist. I think the big mistake that all these enthusiasts of the digital transformation we are currently undergoing are making is that they are considering this asset class as a new technology app, a new app, that will start amassing likes and will be “downloaded” by more and more people. They ignore the fact that cryptocurrencies cannot go from being a speculative cryptoasset to an “established currency” without making sure that they do have a function, an economic raison d’être.
Let’s imagine that in the 2008 crisis the only circulated currency was crypto. This would have meant that “quantitative easing” would not have existed. In other words, the complete financial system freeze and the related domino effect could not have been countered by central banks printing money to prevent a financial crash. To put it differently, it would have spelled the collapse of the global economy, social tensions would have exploded and the world would have turned back a few decades. Money supply management is a critical element of crisis management that cryptocurrencies don’t allow.
True, it is precisely this quality of not being able to “be printed” that makes them so attractive to some today, but the fact is that, without this instrument in central banks’ toolkit, economies would have experienced shocks in 2008 and 2020 of a violence rarely seen in human history. Have central banks gone overboard in terms of the quantitative easing provided? Have they become its prisoners? Has it led to increased social polarization? The answer is probably “yes”, but that is another discussion, and one that does not justify doing away with the ejector seat that loose monetary policy represents.
Another major impediment to establishing cryptoassets as currency lies in their very success, the expectation by users that they price value driven by speculation will skyrocket. Let’s imagine that you have 100 euros in your pocket and you expect the exchange rate to shoot up from 5 lei to 10 lei in the next few months. In other words, you expect to be soon buying twice as many goods with your 100 euros than you currently do. Would you use your money today or would you rather postpone your purchases to take advantage of the escalating exchange rate?
This psychological reaction, otherwise present in a deflationary environment, also applies to cryptocurrencies. If you have 1 Bitcoin and you expect a spectacular increase in its value, why would you use it today to buy a really nice car when you could sit on it for one year and buy a car and a studio apartment. This propensity to wait, to not use cryptocurrencies in the hope of a much higher purchasing power, causes them not to be employed as currency, but to be put aside. A currency that does not circulate is not currency.
The decisions of some major banks to carry out cryptocurrency transactions is seen to warrant the future of these instruments and are used by cryptocurrency proponents as an argument. It is not necessarily a valid one. Those banks simply act as brokers of financial instruments for which there is a demand to meet. A telling example was provided by JP Morgan Chairman Jamie Dimon. “I personally think that bitcoin is worthless. I don’t think you should smoke cigarettes either. It makes no difference to me. Our clients are adults. They disagree. That’s what makes markets.” Dimon went on to explain.
This is why JP Morgan offers its clients access to cryptoasset-based funds, even if its chairman believes they have no value.
Fourthly, we should neither forget that the use of cryptocurrencies as method of payment in the shadow economy has probably created a bubble that will burst once the trading in these assets gets regulated. Supervisory authorities, central banks that have imposed a plethora of KYC and anti-money laundering requirements on traditional financial systems, cannot turn a blind eye to the development of a parallel financial system, likely to be used by organized crime or terrorist organizations. This is unthinkable and it is only a matter of time before regulation is put in place.
At that point in time the bubble created by the channeling of dirty money into cryptocurrencies could burst. Since they no longer serve to conceal illicit transactions, the conversion of cryptoassets into large sums of money could lead to their value collapsing just as in a run on the bank situation. This important factor makes me reluctant when it comes to seeing cryptocurrencies as the new “gold” that hedges against inflation. The gold market has no more surprises up its sleeve in terms of regulation, but as far as the cryptocurrency market is concerned, the worst is still to come. And China has already taken the first step.
All this should be food for thought for those who consider investing in such assets. After all, financial markets offer risks in all shapes and sizes. The important thing is not to underestimate that risk.
Have a nice weekend!
