Does crypto add to the money supply?

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This is a reader request from Jerry Kate:

Is the crypto effectively adding to the M2 or M3 money supply and therefore inflationary (outside the control and models of central banks), or is the crypto’s velocity so low that it acts (like stocks) as a store of value with no impact on inflation? Will the answer to the previous question change if the crypto’s market capitalization doubles, or if the crypto is modified to add velocity, or integrated into the banking system to generate multiplier effects? Should central banks be worried?

I think you could ask monetary economists this question and get “confirmed” answers, but the answers would disagree with each other. My opinions are as follows:

1. If crypto prices are bubbles, they will encourage more spending and therefore they would be inflationary, albeit slightly. And this process could not last very long. In the old-school “Gurley and Shaw” sense, crypto is a kind of outside money and net worth, and therefore spending will increase.

2. Alternatively, let’s say that crypto assets have use cases that justify current prices, but these use cases are not yet actively used at the moment. Crypto assets are then mildly inflationary now, but an offsetting deflationary impulse will kick in once these use cases arrive and drive down the prices of goods and services in the market.

3. Or, let’s say crypto prices aren’t fizzy, and are justified by current usages. You then have a more or less compensatory increase in aggregate demand and aggregate supply.

4. An additional question is whether the velocity of (traditional) money is higher or lower in the crypto industry. I don’t know the answer to this question. This is a possible effect, but probably not a major one. If the crypto is sucking up money in some sort of shell game “separate from the real economy,” it can be mildly deflationary.

5. Jerry also asks about “integrating crypto into the banking system.” It could mean a number of things. In one scenario, stablecoins are invited to become banks, and then they are regulated as banks. It would then be like having more money market funds, and it could be largely inflationary on a one-off and modest basis, although of course you have to compare the effects of these money market funds to the “wild west crypto effects” they get. were moving.

Any other points of view or scenarios to consider? Overall, I don’t see this as a significant effect in quantitative terms, but it’s still worth thinking about the logic of the question.

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