Is there a sheriff in the Crypto Wild West?

Here’s a promotional video about actor Matt Damon – aka Jason Bourne – embodying an action hero on screen.” Memory in the skin “,” Death in the skin “, etc. – no doubt, I would like to pass over in silence. Only here it is, the price of the cryptocurrency in October 2021, the date of the broadcast of this announcement called ” Fortune favors the brave[1] (“Fortune smiles on the brave”) and set out to say all the good things he thinks about Crypto.com, not the same anymore. This is the least we can say after the collapse in crypto asset prices.[2] hundreds of billions of dollars evaporated.

Price collapse from $67,000 to $19,000

If half a year ago the global market of crypto assets weighed more than 3,000 billion dollars, then in mid-June its value barely reaches 1,000 billion. And this has been further reduced in recent days, especially under the influence of recent measures taken by central banks to contain runaway inflation.

The fall of these crypto values ​​– and especially the value of bitcoin, which dropped from a high of $67,000 in November 2021 to $19,000 in mid-June 2022 – is like Jason Bourne’s tricks: dizzying.

To assess the extent of the damage, Twitter account MarketWatch concluded by getting straight to the point:

If you bought $1,000 worth of bitcoins when Matt Damon’s “Fortune Favors the Brave” video came out, today it’s worth about $481. [3]. »

Had this message of May 13, 2022 been updated in mid-June, that would have been enough toonly $250… And some Netizens joke:Matt Damon was at 11, 12, 13 Ocean. You crypto guys have just been the victim of his latest heist.”

The context of the financial bubble

In his popular work Economics of the common good “, Jean Tirol, Nobel Laureate in Economics, recalls that ” A bubble exists when the value of a financial asset exceeds the “fundamental” value of the asset, that is, the present value of the dividends, interest, or rent it will generate today and in the future.[4]. “.

Compared to the macroeconomic context of recent years (easy money due to low or even zero interest rates is a phenomenon largely supported by quantitative easing central banks – low inflation, growth in the value of technology companies…), it is easy to see, a posteriori, that all the ingredients of this sequence (access to credit, speculation, transactions) were brought together to form a bubble.

Crypto, a safe haven? The veil of illusion lifts, the king is exposed

In the case of cryptocurrencies, it is enough for a few macroeconomic indicators to go wrong for everything to shake.

Here, the global economic downturn, the uncertain economic climate, and the inflationary pressures actively countered by central banks are bringing to light the fact that these crypto-assets are not the safe haven some boast about.

Simplified, we can say that “the king is naked.” Because the corrections taking place in the crypto market for seven months actually show that the fundamentals of these virtual assets are fragile, if not non-existent: what about their intrinsic value? What about their stability or their intended nature as a “store of value”?

The market responses to these few questions are known: falling prices and near-failure of several transaction platforms: Celsius, Babel Finance, TerrasUSD or even Coinbase, which recently announced that it was laying off 18% of its workforce (about 1100 posts).[5]…

Published in 2016, The Economics of the Common Good by Jean Tirol has already made this almost prophetic conclusion:

If one day the market decides that bitcoin has no value, if investors lose faith in bitcoin, bitcoin will actually have no value. because there is no fundamental value behind bitcoin, unlike shares or real estate. »

Is there a sheriff in the Crypto Wild West?

It may well be that this crisis of confidence affecting crypto assets, including all digital currency support, will leave indelible marks. Perhaps not a frosty winter that will freeze all forms of development of these innovative technologies, but rather, and at least in the short term, some cooling of the air…

In addition to the fact that this crypto-asset crisis has demonstrated that the initial promises to become new trusted intermediaries to free the passage from all institutional financial institutions (banks, central banks, even states) have fallen. more of a libertarian utopia than an economic reality, the developers of these digital media will have to adapt to new forms of regulation designed to better regulate this Far West of cryptocurrencies.

In Europe, the MiCA (Crypto Asset Marketplace) regulation project should soon harmonize the legal and regulatory context in order 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 the attempt to regulate in order to better protect and, above all, succeed in establishing what these digital assets are still sorely lacking: trust. Without it trust “, An essential component of all monetary history since the dawn of mankind, the cryptocurrency building will continue to falter. Well-known proverb:

Confidence is gained in drops and lost in liters. »

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

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NOTES

1 https://youtu.be/9hBC5TVdYT8

2Crypto assets are virtual assets stored on electronic media that allow the community of users who accept them as payment to carry out transactions without resorting to legal tender.

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

4 Jean Tyrol, Economics of the common goodPFC. (See Chapter 11 “What is finance for?”)

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