Has the crypto bubble finally popped?
Adit Kashyap | July 10th 2022
Source: Reuters
Introduction
We all know what cryptocurrency is. It is the digital and decentralized currency that has become all the rage in the investing world. But since its November 2021 highs of over 67,000 USD, it has become subject to one massive downturn. This begs the question, has the crypto bubble finally popped?
Source: TechCrunch
Context
Now to answer this question, we must first understand what a bubble, in economics and investing, means. As discussed in a previous article, an economic bubble is essentially a phenomenon where the value of an asset increases to a scale that is not representative of its actual value. Cryptocurrency fits this bill perfectly.
Source: CMSWire
Decentralization: Virtue or Vice?
Now let me make this clear, I love and have a firm belief in cryptocurrency. It is the means through which we can detangle ourselves from the politicized and corrupt banking and financial systems to which we are beholden. It can also incentivize the leaders of said systems to reform the banking and financial system in such a way that our money is safe and said systems are not subject to the claws of the political elite and don’t have the ability to influence the politics of the country. Of course, these demands are very idealistic. The financial system is bound to be corrupted and corruptible, it is the custodian and generator of money after all. But we can get closer to such ideals, either through the reform of these systems (again, very unlikely) or through alternative investments, one of which is cryptocurrency.
Cryptocurrency is, in a very condensed manner, a decentralized and digital currency that is completely controlled by the community that participates in it. This means that there is no central authority that can create arbitrary rules and debase the value of the asset, in this case, cryptocurrency. However, with the lack of a central authority, there is no entity to ensure the stability of the asset and save it from any major economic headwind. Once crypto goes down, chances it will keep going down. To understand this, let’s take Terra USD (UST). Terra USD is a stablecoin, meaning that it is tied (pegged) to the value of a real-world asset, which in the case of Terra USD is the US Dollar. Usually, stablecoins do this by keeping reserves of fiat currencies or gold but Terra USD, instead, uses the native cryptocurrency of the Terra Blockchain, LUNA. However, despite this supposedly fool-proof mechanism, it was fooled. $350 million worth of UST was sold for USDC, another cryptocurrency. Supposedly caused by an attacker, this caused a bank run with investors pulling out of UST, exchanging it for a dollar’s worth of LUNA (it’s the way the exchange mechanism works within the Tether blockchain, I can’t explain it in this article) which was then sold off for a large profit. This massive sell-off of LUNA caused a death spiral and a massive decline in the price of LUNA due to the massive influx of LUNA into the market. With such a decline in LUNA’s value, the confidence UST commanded in investors was gone.
Source: Analytics Insight
Inference
This shows the underlying problem of cryptocurrency. As great as decentralization is and as much as I love it, it is all speculative in the end. The very existence of any kind of investment in cryptocurrency is a bubble and like all bubbles, it will pop. Unlike stocks or forex, it can pop at any time for no apparent good reason. There is no guarantor of value in cryptocurrency. When Satoshi Nakamoto created Bitcoin, he envisioned a currency that was free from our obligation to trust a centralized third party and create an environment where trust doesn’t dictate the value of the currency. But all he did was replace one kind of trust with another. This trust is vested in your fellow investors who cannot guarantee the value of the asset you’ve invested in, unlike a central authority. What’s even worse is that the investors cannot be punished or held accountable for breaking that trust, something that a central authority, at least in theory, can. So, what I’m saying is that cryptocurrencies are inherently bubbles. There lies no real incentive to regularly use cryptocurrency as a means of exchange as it does with fiat currency. No guarantor of value, no stability, and no prospect of sustained economic growth. For anything to be deemed currency, it must command the confidence of its users, and cryptocurrency, as much hype it gets simply does not have that kind of confidence due to the very lack of a central authority that its proponents project as its most important advancement.
Let’s take stocks for example. Stocks can be defined as the total monetary value of a company in the form of the capital that it has raised from investors. These stocks are divided into shares that individual investors can purchase and own a slice of the issuing company. For the sake of simplicity, let’s only discuss publicly traded companies. In this regard, it is like cryptocurrency in that investors can purchase single units of cryptocurrency and have a say or stake in the community or network from which the cryptocurrency originates. The key difference between the two is the guarantor of value. In stocks, the issuing company provides information regarding its performance, its future predictions regarding its performance, and its plans going into the future which can stir up or fizzle out confidence in investors. This gives them a clearer picture of what is to be done in the future. Crypto investors get none of that. They must guess when the sentiment of the market is bullish and when it is bearish, and that is a dangerous game to play especially when you have gargantuan amounts of money invested. Of course, some things can give you a good idea as to when prices will go up and down, but it remains hazy due to the lack of a guarantor.
Source: NewsBTC
Has the bubble popped?
So, to answer the question: “Has the crypto bubble finally popped?” in a condensed manner, yes, but this is not the first time.
Crypto, all kinds of it, has popped in the past. Think of DogeCoin last year, and Bitcoin in 2018. The bubble is inherent in cryptocurrency. Its allure will attract more and more and more people until it cannot sustain itself and it pops, with the entire cycle repeating once again. The very existence of any kind of investment in cryptocurrency is a bubble as it on its own has no value. There is no guarantor of value which means there is nobody to protect it from any serious downfall. So, any kind of uptick in the value of any cryptocurrency is unrepresentative of its actual value. Factor this in with the fact that trust among investors, something that is quite fragile, is what is required to give cryptocurrency any value making it clear that cryptocurrency of any kind is bound to be in a bubble. And it will keep popping, even if prevailing market conditions don’t indicate anything of the sort.
Also, because crypto will always be popping, it is never going to be the "future". It is not replacing fiat currency, it is too unstable for that. It will be an important asset for a long time to come but its instability will keep just that, an asset which albeit is pretty versatile. But, it is not the currency revolution so many of us hoped it would be.