Currencies & Commodities Gold

What is the crypto collapse telling us?

24 Jun 2022 1 month(s) ago

Crypto has fallen by about two thirds and the debate is heating up.

The gloss of cryptocurrencies has certainly been tarnished over the last few months. Their total ‘value’ has fallen by about two thirds from the peak.

Seems that as times get tough they are not quite the safe haven everyone thought.

Bitcoin has suffered a similar fate:

The devotees are just putting it down to volatility. The critics thinks it is a sign the fad is over. The horrible Bill Gates thinks it is just a ‘greater fool’ phenomenon whereby investors punt that the other person is a greater fool then them and they will get out early.

There are two obvious ironies with this. First, the ‘collapse’ is valued in the much demonised fiat currencies. Isn’t that supposed to be meaningless. The second is that the cryptocurrencies were supposed to take the corrupt human element out of money: make it “trustless”. It is now completely subjective; the human element is all that is driving the price. Unlike with shares, for examples, there are no fundamentals such as earnings, to determine value. It is pure perception.

This is not the first time this has happened, of course. The explosion of derivatives over the last three decades is algorithms based on exploiting shared perception – or other alogorithms. Smoke, in other words.

This brings us to another contradiction, or flat out falsehood. Cryptocurrencies, especially Bitcoin, are supposed to save us from a system corrupted by government control (the much demonised ‘fiat currency’) by allowing private actors to invent their own rules. In fact, governments left the field to private actors 40 years ago. It was called financial deregulation – a nonsense because finance IS rules so can’t be deregulated.

In this sense, the emergence of cryptocurrencies is just an extension of the world wide debauch with money. Governments gave up, except at the most basic level, and private players took over. When everything went south in 2008 those private actors blamed ... wait for it ... governments. The hypocrisy was breathtaking. Crypto then continued that theme by inventing another type of money. At least they won’t blame government when it goes pear shaped, I suppose.

Cryptocurrencies are not currencies; they are digital assets. Another way of storing wealth which is basically predicated on a shared distaste for governments and regulators. It is supposed to be an escape from all that, but is it?

Others go for precious metals because they are tangible and there is a history of them being stores of value. That will certainly be less volatile than crypto.

But two other obvious stores of value are very conspicuous and not commented on. One is property, which globally is worth over $US200 trillion and is the oldest asset there is. And property rights are the very bedrock of capitalism so the entire system would have to collapse for that to go away. With complete system collapse all bets are off, including anything transacted over the internet. It is hardly worth planning for something so cataclysmic, other than going off the grid entirely.

The other store of value is the stock market. The people who demonise all powerful corporations tend to overlook the fact that they are listed on stock markets. What would it take for stock markets to disappear? No easy scenario presents itself.

There is no doubt the global financial is sick, but the diagnosis is inaccurate. And that includes the overly certain pronouncements of the cryptocurrency devotees.


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