The plunge in crypto prices doesn’t seem to be the result of a newfound understanding that crypto institutions are irrevocably flawed. Instead it is due to an unpleasant mix of persistent inflation, higher real interest rates, lower equity prices for the major technology companies and geopolitical fears. All of that is 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 discounted value terms, but crypto has no special place in that misfortune.
It’s a good thing that crypto price volatility is so manageable at the social level — because we’re probably in for a lot more of it.
The bottom line is that even a large fall in crypto prices won’t create a lot of social worries. The Federal Reserve doesn’t have to panic, and the regulators don’t have to take action. Regardless of whether you are a crypto optimist or a crypto pessimist, at the social level the loss of that $US1.35 trillion in value is largely imaginary.
This lack of correlation between major disasters and the decline in crypto prices could prove to be good news for crypto in the longer run. For one thing, it shows crypto prices can fall sharply and suddenly without inducing a 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 usefulness. Food prices plummeted during most of the 20th century, for example, even as food continued to provide increasing value to consumers. More vigorous competition in crypto markets could, in similar fashion, bring lower rather than higher prices, even as crypto-enabled services proved increasingly valuable.
