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Last week I argued that cryptocurrency is here to stay. Now I would like to explain to some of my crypto friends why some parts of the mainstream economic and financial world don’t take them more seriously. To put it bluntly: many of you don’t understand cash economics very well.
There are two common mistakes.
First, the dollar is not about to collapse, nor will it be replaced by a crypto asset. The United States is one of the world’s two largest economies and the center of the English-speaking world. It has the power of taxation, the strongest network of alliances, and the most powerful army. Yes, he’s printed a lot of dollars since 2008, but he’s also taken steps to reduce the speed at which those dollars are flowing.
Price inflation rates are expected to be higher over the next two years or so, but some of the immediate inflationary pressures are already easing; timber prices, for example, are falling. Over a 10-year horizon, the US government can borrow at a real interest rate close to zero, which is hardly a sign of a doomed empire.
The US government is also not about to go bankrupt or to resort to hyperinflation. The US debt-to-GDP ratio may well reach 200 percent, but the poorer, smaller nation of Japan is doing well with similar debt levels. Keep in mind that national wealth, while difficult to estimate, can be up to six to eight times greater than GDP. So a debt-to-income ratio of 200% could mean a debt-to-wealth ratio as low as 25%. It is far from the end of the world. Think how comfortable you would be if you only paid off 75 percent of your mortgage.
On the contrary, crypto is more likely to hurt the currencies of countries that are doing very poorly, like Venezuela. The Fiat currency will not disappear, so in the long run, the crypto could actually increase the value of the dollar by stifling the rise of potential competitors.
A second point, often overlooked in the crypto community, is that crypto prices will not continue to rise at high rates indefinitely. It doesn’t matter whether money supply deflation is built into a crypto system or valuable new uses are discovered every year. At some point, the market will determine the value of crypto and embed this information into a high price for these assets. From that point on, the expected rates of return will be, dare I say, normal.
Compare the crypto market to the art market, which for a long time failed to grasp the potential value of an Andy Warhol painting. For years, prices have gone up a lot. At this point, however, a liquid market remains, and the expected value of an investment in Warhol is not necessarily better or worse than the value of an investment in other well-known works of art.
It is a very defensible (albeit contested) view that the market still has not appreciated the full value of crypto. This state of affairs may still last for a while, but it will not last for decades.
The irony is that so many of the arguments put forward by crypto types involve particularly low monetary rates of return on crypto. To the extent that crypto is useful as collateral or for liquidity purposes, people will be more willing to hold crypto at lower monetary rates of return, just as they are willing to hold cash, or just like uses of collateral for US Treasuries increase their price. and lower their expected rates of return.
If we finally come to a world in which stocks are expected to rise 5% to 7% per year, and Bitcoin by 1%, then that will be a sign that crypto has. The more general point is that while crypto has been a very unusual asset class for all of its history, it won’t act like an unusual asset class forever.
I understand why crypto advocates may look askance at the rebuke of mainstream monetary economists. Few economists have done much to advance or develop crypto ideas, and sometimes they didn’t care. Satoshi and Vitalik Buterin are not only important innovators, but also the two most important monetary economists of our time. And whatever the long-term value of crypto, the markets got it wrong.
That said, the standardization of crypto theory as well as value is underway. It will be less fun than the radical and upside down crypto status quo. But it’s still something to celebrate.
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