If the stock market isn't the economy, which it isn't, then cryptocurrencies such as Bitcoin aren't the economy either. Nonetheless, cryptocurrency has grown to be a significant asset class (and has provided significant capital gains to many investors); by last fall, the combined market value of cryptocurrencies had reached about $3 trillion.
Prices have since plummeted, wiping out almost $1.3 trillion in market value. As of Thursday morning, Bitcoin’s price was almost halfway down from its November peak. So, who is affected by the crash, and what will it mean for the economy?
Well, I'm noticing some uneasy comparisons with the 2000s subprime disaster. No, crypto does not pose a threat to the financial system since the numbers aren't large enough. However, there is mounting evidence that the risks of crypto are disproportionately borne by those who have no idea what they're entering into and are ill-equipped to deal with the consequences.
What exactly is this cryptocurrency craze? Digital payments can be made in a variety of methods, including Apple Pay, Google Pay, and Venmo. Typical payment methods, on the other hand, rely on a third party — usually your bank — to verify that you possess the assets you're sending. Cryptocurrencies use complicated coding to ostensibly eliminate the need for third parties.
Skeptics question why this is necessary, arguing that cryptocurrencies end up being an inconvenient, expensive way to perform things that might have been done more easily in other ways, which is why, 13 years after Bitcoin's introduction, cryptocurrencies still have few legal applications. In my experience, the reaction usually takes the shape of a jumble of nonsensical words.
Recent events in El Salvador, which only a few months ago made Bitcoin legal cash, appear to bolster the skeptics: residents attempting to use the currency face exorbitant transaction fees. Despite this, crypto has been well marketed: it manages to appear futuristic while also appealing to old-school goldbug worries about the government inflating away your money.
However, cryptocurrency has now crashed. Perhaps, as in the past, it will recover and soar to new heights. However, prices are currently at an all-time low. Who are the losers in this scenario?
As I previously stated, there are frightening parallels to the subprime mortgage crisis of 15 years ago.
Cryptocurrency is unlikely to trigger a global economic downturn. It's a wide world out there, and $1.3 trillion in losses is only roughly 6% of US GDP, a far lesser knock than the effects of decreasing home prices when the housing bubble burst. And, while Bitcoin mining is environmentally harmful, it is economically insignificant compared to the collapse of the housing market, which contributed significantly to the Great Recession.
Even so, some people are suffering. What are their names?
Crypto investors appear to be distinct from those who invest in other hazardous assets, such as stocks, which are predominantly made up of rich, college-educated whites. According to a survey conducted by the research group NORC, 44 percent of crypto investors are nonwhite, and 55 percent lack a college diploma. This corresponds to anecdotal evidence that crypto investment is gaining traction among minorities and the working class.
This, according to NORC, is fantastic since "cryptocurrencies are opening up investment opportunities for a wider range of investors." But I recall a time when subprime mortgage lending was similarly lauded, as a method to bring the benefits of homeownership to previously underserved communities.
However, it emerged that many borrowers had no idea what they were getting themselves into. "Why are the riskiest loan products sold to the least skilled borrowers?" queried Ned Gramlich, a Federal Reserve officer who notably warned in vain about mounting financial perils. "The question solves itself," he concluded. When the housing bubble burst, the number of people who owned a home plummeted.
And cryptocurrencies are about as dangerous as an asset class can get, with their massive price volatility that appears to be unrelated to fundamentals.
Now, perhaps those of us who can't see how bitcoins can be used for anything other than money laundering and tax evasion are simply missing the point. Perhaps the rising value (but not use) of Bitcoin and its competitors indicates more than a bubble, in which people acquire an asset only because others have profited from it in the past. It's also fine for investors to take the side of the skeptics.
However, these investors should be well-qualified to make that decision and financially stable enough to endure the consequences if the critics are correct.
Unfortunately, this is not the case. And, in my opinion, regulators have made the same mistake they did with vulnerable people.
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