Is There a Sheriff in the Crypto Wild West?

Here’s a publicity clip where actor Matt Damon – aka Jason Bourne embodies on-screen the hero of action movies” The memory in the skinDeath in the skin “, etc. – would undoubtedly have wanted to pass in silence. Only here it is, the price of cryptocurrencies in October 2021, the date of broadcast of this ad entitled ” Fortune favors the Brave[1] (“Luck smiles on the bold”) and meant to say all the good things he found about the Crypto.com site is not quite the same anymore. It’s the least we can say since the crypto asset price collapse[2] caused hundreds of billions of dollars to evaporate.

Price drop from 67,000 to 19,000 dollars

If six months ago the global crypto asset market weighed more than $3 trillion, its value is barely $1 trillion by mid-June. And this has declined further in recent days, mainly driven by recent central bank measures to curb runaway inflation.

The decline in these crypto values ​​— and in particular Bitcoin, whose value plummeted from a high of $67,000 in November 2021 to $19,000 in mid-June 2022 — is like Jason Bourne’s stunts: staggering.

To gauge the extent of the damage, MarketWatch’s Twitter account decided by going straight to the point:

If, when Matt Damon’s “Fortune Favors the Brave” music video was released, you bought $1,000 worth of bitcoins, today they are worth about $481 [3]† †

If this post, dated May 13, 2022, were updated in mid-June, it would suffice toonly $250… And a little netizen joke:Matt Damon was in Ocean’s 11, 12, 13. You crypto guys just fell victim to his latest heist.”

A context of financial bubble

In his popular work Economy of the public interest “, Jean Tirole, Nobel Prize in Economics, recalls that a ” bubble exists when the value of a financial asset exceeds the “fundamental” of the asset i.e. the present value of the dividends, interest or rent it will yield today and in the future[4]† †

Compared to the macroeconomic context of recent years (easy money due to low or even zero interest rates – a phenomenon largely perpetuated by the quantitative easing central banks -, low inflation, the growth of the values ​​of technological companies…), it is easy, a posteriori, to see that all the ingredients of this series (access to credit, speculation, transactions) were brought together for a bubble .

Cryptos, safe haven? The veil of illusion lifts, the king is naked

In the case of crypto-currencies, it was enough that several macroeconomic indicators had gone wrong for the whole thing to falter.

Here, the global economic slowdown, the uncertain economic situation and the inflationary pressures that are being vigorously combated by central banks bring to light that these crypto assets are not the safe havens that some have been looking forward to.

To simplify, you could say that “the king is naked”. As the corrections that have been going on in the crypto market for the past seven months show that the fundamentals of these virtual assets are fragile, if not non-existent: what about their intrinsic value? And what about their stability or their supposed character as a ‘store of value’?

The market answers to these few questions are well known: price collapse and near failures of various transaction platforms: Celsius, Babel Finance, TerrasUSD or even Coinbase, which recently announced the elimination of 18% of its workforce (about 1,100 posts)[5]†

Published in 2016, “Economy of the common good”, by Jean Tirole, already drew this almost prophetic conclusion:

If one day the market decides that Bitcoin has no value – if investors lose faith in Bitcoin – Bitcoin will in fact have no value, because there is no fundamental value behind Bitcoin, as opposed to a stock or real estate.

Is There a Sheriff in the Crypto Wild West?

It is very possible that this crisis of confidence affecting crypto assets, including all digital currency support, will leave lasting marks. Perhaps not an icy winter that would freeze all forms of development of these innovative technologies, but rather, and at least in the short term, a certain cooling of the air…

In addition to the fact that this crypto-asset crisis has shown that the initial promise to be new reliable intermediaries, allowing to free the passage from all institutional financial institutions (banks, central banks, even states), fell more of a libertarian utopia than an economic reality, the designers of these digital media will have to adapt to new forms of regulation intended to better regulate this Far West of cryptos.

In Europe, the proposed Market in Crypto Assets (MICA) regulation should soon harmonize the legal and regulatory context to impose a framework on the issuers of these digital assets in which to place the development of these new technologies. It is clear that we are trying to regulate to better protect and above all manage to identify what these digital assets are still very much missing: to trust† without this to trust “ an essential ingredient in all monetary history since the dawn of mankind, the edifice of cryptos will continue to falter. The saying is well known:

Confidence is gained in drops, but lost in liters.

It is high time that this leak is closed so that all these lost liters can one day be found.


COMMENTS

1 https://youtu.be/9hBC5TVdYT8

2Crypto assets represent virtual assets stored on an electronic medium, allowing a community of users who accept them as payment to transact without having to use legal tender.

3 https://twitter.com/MarketWatch/status/1524898004167274496

4 Jean Tyrol, Economy of the public interestPUF. (See Chapter 11 “What Is Funding For?”)

5 https://www.npr.org/2022/06/14/1105026558/coinbase-cryptocurrency-layoffs?t=1655718921410