If crypto is causing instability, it’s because the system is unstable

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I recently started reading Nobel Prize winning economist Robert Shillers’ Irrational Exuberance on Asset Bubbles. Wait, I should be more specific. I started reading the third edition published in 2015, during what Shiller identified as another asset surge. The modern classic economics text was first printed in 2000, before the implosion of the dot com boom, and again in 2005, before what turned out to be a collapse in the housing market.

Shiller, you might not be surprised to learn, is not a big fan of cryptocurrencies. Hes said interest in the sector is part of the Wild West mentality in the stock, real estate and bond markets. Something of a permanent bear, his bleak prognosis seems to stem from a place of concern about painful losses for investors of all stripes in addition to book sales.

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The Yale professor isn’t the only economist to see bubbles everywhere. Jon Cunliffe, the Bank of England’s deputy governor for financial stability, yesterday compared the $ 2.3 trillion crypto market to the $ 1.2 trillion sub-prime mortgage market in 2008, which contributed to this great financial crisis of these decades. Risks are not localized, but shared in this interconnected global financial system.

The crypto world is starting to connect with the traditional financial system, and we are seeing the emergence of leveraged players. And, most importantly, it is happening in a largely unregulated space, Cunliffe said. Could a major price correction in the volatile crypto market have ripple effects? Cunliffe was at a loss for details and also for recommendations.

Indeed, today, crypto is something more than just an economic niche. Major financial players, from pension funds to hedge funds, expose themselves to crypto assets by buying bitcoin directly, buying shares in investment vehicles such as trusts, and even leading capital raises for them. crypto startups. Millions of Americans trade in the crypto markets. A nation state uses bitcoin.

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It seems fair to take note, as Cunliffe puts it, of an industry that has exploded in value from $ 16 billion five years ago to the behemoth it is today. But the worries of financial supervisors are also a bit misplaced and seem designed to make crypto a scapegoat for the overheated financial markets their policies allow.

Cunliffe, to his credit, was not totally paternalistic. He warned governments and regulators against overreacting to this new tech-driven industry and added that crypto could offer sweeping improvements to traditional financial services.

Among those improvements, he might mention, is the fact that crypto offers a more interconnected economy. Crypto is something new, something scary, something potentially dangerous as blockchains and smart contracts open up access to financial services to almost anyone. It drains the power from brokers and policymakers.

But as many people talk about decoupling bitcoin from the financial system, it seems unlikely. The full picture is still emerging, sometimes crypto moves up and down as a result of classic inflation hedges, sometimes like tech stocks, sometimes independently. But it is interconnected and the growth of sectors is not complete and independent of the rise in asset prices in the economy.

See also: Bubbles are good for Bitcoin | Yanhao Max Wei

Bitcoin may be the best performing asset of all time, but its growth has coincided with the longest and most profitable equity bull market in history. The S&P 500, a benchmark index, closed a decade of bullishness starting in March 2009 with returns of 370%. It’s still growing. And the same cheap money policies and inflation is the right mindset that drives it are still at play.

Shiller, the expert on how emotions and narratives drive finance, also noted the awesome technology behind crypto. But still skeptical, he also believes his ultimate source of value is so ambiguous that it has a lot to do with our stories rather than reality. It was also true, he believes, for the tech industry of the 90s, real estate speculation, and today’s memes stocks.

But what’s the bigger story behind this bubble?

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