While crypto currencies are not much of a public concern, they will leave a fine legacy by forcing much-needed reform on the financial system.
Cryptocurrencies have enjoyed a remarkable run from
obscurity to a trillion dollar valuation in just over a decade. They
are praised and condemned in equal measure by world leaders and have
even become legal tender in some countries.
Crypto has had two stages in its short life: rapid price growth and
elevation from obscurity, followed by a prolonged phase of global
recognition, controversy and volatile prices fluctuating but with no
long-term price increases. The signs now point to crypto commencing its
final, terminal phase. Cryptocurrencies will leave a fine legacy even if
they have not lived up to the crypto evangelists' promises.
The reasons why crypto has entered its final phase have much to do
with why it has been successful and what it promises and fails to
deliver (Bindseil et al. 2022, Didisheim et al. 2022). It is all down to
politics, speculation, and efficiency.
Politics is fundamental to crypto. Its foundation myth is a world
where technology replaces corrupt human beings and their organisations.
Instead of fiat money abused by governments with their extra-low
interest rates and repeated quantitative easing, we get digital money
created and governed by an algorithm programmed to be fair.
Such a crypto financial system promises to be much more efficient
than the setup we have today, with modern algorithms, programming
languages, and systems replacing a costly, error-prone, corrupt banking
system – one with centuries of legacy practices and more than half a
century of incremental changes to its IT systems, with much still based
on Cobol written half a century ago, running on IBM mainframes.
The third plank of the crypto mission is speculation, since the
number of people buying into crypto's political and efficiency aspects
is tiny – much too small to leave much mark on the world. While the true
believers are essential for shaping the crypto narrative, success and
failure come predominantly from speculators fuelled by Bitcoin's
spectacular price rise from four cents to $16,000 today.
The foundation myth is essential for crypto's success. Not only
because otherwise there is no need to replace the existing financial
order, but even more importantly, it is why crypto is not a Ponzi
scheme.
While crypto has become visible and made many speculators wealthy, it
hasn't enjoyed the success promised by the foundation myth (Danielsson
and Macrae 2022). They might not even make sense (Danielsson 2018).
After all, the financial system is still almost entirely based on old
school fiat money financial institutions. And that is a problem because
the high price of crypto is based on speculators betting on success. For
that to happen, the promises of the foundation myth will have to be
seen as within reach. Otherwise, speculators will likely lose heart and
abandon crypto. Which can then become a vicious downward spiral.
Both politics and speculation have been tested recently...
more at CEPR
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