Is there a sheriff in the Crypto Wild West?

Here is a commercial clip that actor Matt Damon – aka Jason Bourne on screen embodies the hero of action movies ” The memory in the skin “,” Death in the skin “, etc. – no doubt he would have liked to pass in silence. Only here it is, the price of cryptocurrencies in October 2021, the airing date of this announcement entitled” Fortune favors the bold[1] (“Luck Smiles Bold”) and meant all the good things he thought about the Crypto.com site, it’s not the same anymore. That’s the least we can say from the collapse in cryptocurrency prices[2] evaporated hundreds of billions of dollars.

A drop in prices from $ 67,000 to $ 19,000

While the global cryptocurrency market weighed more than $ 3 trillion six months ago, its value is just $ 1 trillion in mid-June. And this has further declined in recent days, particularly under the effect of recent measures taken by central banks to curb runaway inflation.

The fall of these cryptographic values ​​- and in particular that of Bitcoin, whose value dropped from a high of $ 67,000 in November 2021 to $ 19,000 in mid-June 2022 – is like Jason Bourne’s stunts: dizzying.

To measure the extent of the damage, MarketWatch’s Twitter account concluded 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, they’re worth around $ 481 today. [3]. “

If this message, dated May 13, 2022, were to be updated in mid-June, it would be enoughonly $ 250 … And some netizens joke:Matt Damon was in Ocean’s 11, 12, 13. You cryptocurrencies just fell victim to his latest heist. “

A financial bubble context

In his popular work, Economy of the common good “, Jean Tirole, Nobel Prize in Economics, recalls that a” bubble exists when the value of a financial asset exceeds the “fundamental” of the asset, which is the present value of the dividends, interest or income it will produce today and in the future[4]. “.

Compared to the macroeconomic context of recent years (easy money for low or even zero interest rates – a phenomenon largely maintained by the facilitation for quantity central banks – low inflation, growth in the values ​​of technology companies …), it is easy, in retrospect, to see that all the ingredients of this sequence (access to credit, speculation, transactions) have been brought together for a bubble to form.

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

In the case of cryptocurrencies, it was enough that several macroeconomic indicators were wrong to make the whole thing falter.

Here, the global economic slowdown, the uncertain economic situation and the inflationary pressures strongly opposed by central banks highlight the fact that these crypto-assets are not the safe havens so vaunted by some.

To simplify, we could say that “the king is naked”. Because the seven-month corrections in the cryptocurrency market 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 presumed “store of value” character?

The market answers to these few questions are known: collapsing prices and near failures of several transaction platforms: Celsius, Babel Finance, TerrasUSD or even Coinbase, which recently announced the elimination of 18% of its workforce (around 1,100 places)[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 actually have no value, because there is no fundamental value behind Bitcoin, unlike a share or a property.

Is there a sheriff in the Crypto Wild West?

It may be that this crisis of confidence affecting cryptocurrencies, including all media for digital currencies, is leaving lasting traces. Perhaps not a cold winter that would freeze all forms of development of these innovative technologies, but rather, and in any case 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 of being new reliable intermediaries by allowing the passage to be freed from all institutional financial institutions (banks, central banks, even states), has fallen. more a libertarian utopia than an economic reality, the designers of these digital media will have to adapt to new forms of regulation aimed at better regulating this Far West of cryptocurrencies.

In Europe, the draft MiCA (Market in Crypto Assets) regulation should soon harmonize the legal and regulatory environment to impose a framework on which to place the development of these new technologies on the issuers of these digital assets. Clearly, trying to regulate to better protect and, above all, be able to establish what these digital assets still seriously lack: confidence. Without this confidence “, an essential ingredient in all monetary history since the beginning of humanity, the cryptocurrency building will continue to falter. The saying is well known:

Trust is gained in drops, but it is lost in liters.

The time has come for this leak to be plugged so that all these lost liters can one day be found.

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NOTES

1 https://youtu.be/9hBC5TVdYT8

2Crypto-assets represent virtual goods stored on an electronic medium that allow a community of users who accept them in payment to carry out transactions without having to resort to legal tender.

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

4 Jean Tirol, Economy of the common goodPUF. (See chapter 11 “What is finance for?”)

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