By Chyung Eun-ju and Joel Cho
Cryptocurrencies had a powerful allure: no risk from inflation, high returns, complete privacy, easy to transfer anywhere and no regulations or tax fees. Stories of investors making quick profits had people flocking to cryptocurrencies hoping for the same. And then the big crash happened. Celebrities who endorsed crypto became silent; Coinbase, BlockFi, and Crypto.com laid off staff; Binance and Celsius Network LLC suspended withdrawals, swaps and transfers.
For years, crypto was marketed as an inflation hedge. Coinbase, a United States crypto exchange, stated that cryptocurrencies are "more resistant to inflation than fiat currencies like the U.S. dollar." So why has crypto plummeted as inflation peaked?
Consider the "rule of 72," which can approximate the effect of inflation on an individual's purchasing power ― divide 72 by the annual interest rate to find out the amount it takes for an investment to double. According to this rule of thumb, it will take around eight years for a consumer's wealth (in dollars) to halve. There's a financial joke going around, which says that cryptocurrencies can lose half their value in just a couple of months.
While the dollar is a fiat currency ― authorities can print more dollars at will ― Bitcoin's supply is limited meaning the total number of Bitcoin ever will be around 21 million. During an inflationary outbreak, the Fed will intervene to correct the inflation by raising interest rates until they clearly see that inflation has been tamed.
In other words, inflation results in higher interest rates, making cryptocurrency less appealing. The dynamic of high inflation rates and high interest rates make riskier investments less attractive than safer investments. As the inflation index increases, the stock market seems to be falling which is rippling through the crypto market.
Bill Gates stated at a TechCrunch event that he thinks cryptocurrencies and NFTs are "100 percent based on the greater fool theory." In a Reddit Q&A session, he wrote that he didn't own any digital assets because he likes "investing in things that have valuable output. The value of companies is based on how they make great products. The value of crypto is just what some other person decides someone else will pay for it."
Other wealthy investors such as Warren Buffet and Jamie Dimon are, let's say, skeptical about cryptocurrencies ― Buffet referred to bitcoin as "rat poison squared."
Although it is undeniable that we are in the midst of a serious crypto crash, we still believe in the potential of blockchain technology and the decentralized nature of cryptocurrency. The technological advancements and potential benefits that cryptocurrency represents are undeniable, but, as we have mentioned earlier this year, they still require adequate regulation for proper growth.
The recent crash that has taken the cryptocurrency market by storm is an indication of how unstable the market was, especially considering the hype and popularity that crypto companies have created in the last couple of years around their digital assets through "trendy" endorsements by celebrities.
A financial crash of this magnitude is not an unprecedented event. In 2008, the world faced the Global Financial Crisis, which resulted in the adoption of stricter regulations to guarantee more liquidity over assets and other financial reforms to prevent a similar crash in the future.
Even during the dot-com boom, $5 trillion was wiped off and several companies did not survive, but the technology remained. And the companies that did survive became the dominant players. Crypto still has several uses and potential in the financial sector. When a regulatory structure is in place, we believe that several things will be tokenized. Tokens could be digital representations of anything, which could become the source of a lot of financial problems.
So, similarly, this year's crypto crash may finally accelerate the much needed regulation of digital assets. This might be the end of the cryptocurrency frenzy and a slow paced yet steady recovery to become a steadier financial asset.
Chyung Eun-ju (ejchyung@snu.ac.kr) is studying for a master's degree in marketing at Seoul National University. Her research focuses on digital assets and the metaverse. Joel Cho (joelywcho@gmail.com) is a practicing lawyer specializing in IP and digital law.
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| Chyung Eun-ju |
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| Joel Cho |
For years, crypto was marketed as an inflation hedge. Coinbase, a United States crypto exchange, stated that cryptocurrencies are "more resistant to inflation than fiat currencies like the U.S. dollar." So why has crypto plummeted as inflation peaked?
Consider the "rule of 72," which can approximate the effect of inflation on an individual's purchasing power ― divide 72 by the annual interest rate to find out the amount it takes for an investment to double. According to this rule of thumb, it will take around eight years for a consumer's wealth (in dollars) to halve. There's a financial joke going around, which says that cryptocurrencies can lose half their value in just a couple of months.
While the dollar is a fiat currency ― authorities can print more dollars at will ― Bitcoin's supply is limited meaning the total number of Bitcoin ever will be around 21 million. During an inflationary outbreak, the Fed will intervene to correct the inflation by raising interest rates until they clearly see that inflation has been tamed.
In other words, inflation results in higher interest rates, making cryptocurrency less appealing. The dynamic of high inflation rates and high interest rates make riskier investments less attractive than safer investments. As the inflation index increases, the stock market seems to be falling which is rippling through the crypto market.
Bill Gates stated at a TechCrunch event that he thinks cryptocurrencies and NFTs are "100 percent based on the greater fool theory." In a Reddit Q&A session, he wrote that he didn't own any digital assets because he likes "investing in things that have valuable output. The value of companies is based on how they make great products. The value of crypto is just what some other person decides someone else will pay for it."
Other wealthy investors such as Warren Buffet and Jamie Dimon are, let's say, skeptical about cryptocurrencies ― Buffet referred to bitcoin as "rat poison squared."
Although it is undeniable that we are in the midst of a serious crypto crash, we still believe in the potential of blockchain technology and the decentralized nature of cryptocurrency. The technological advancements and potential benefits that cryptocurrency represents are undeniable, but, as we have mentioned earlier this year, they still require adequate regulation for proper growth.
The recent crash that has taken the cryptocurrency market by storm is an indication of how unstable the market was, especially considering the hype and popularity that crypto companies have created in the last couple of years around their digital assets through "trendy" endorsements by celebrities.
A financial crash of this magnitude is not an unprecedented event. In 2008, the world faced the Global Financial Crisis, which resulted in the adoption of stricter regulations to guarantee more liquidity over assets and other financial reforms to prevent a similar crash in the future.
Even during the dot-com boom, $5 trillion was wiped off and several companies did not survive, but the technology remained. And the companies that did survive became the dominant players. Crypto still has several uses and potential in the financial sector. When a regulatory structure is in place, we believe that several things will be tokenized. Tokens could be digital representations of anything, which could become the source of a lot of financial problems.
So, similarly, this year's crypto crash may finally accelerate the much needed regulation of digital assets. This might be the end of the cryptocurrency frenzy and a slow paced yet steady recovery to become a steadier financial asset.
Chyung Eun-ju (ejchyung@snu.ac.kr) is studying for a master's degree in marketing at Seoul National University. Her research focuses on digital assets and the metaverse. Joel Cho (joelywcho@gmail.com) is a practicing lawyer specializing in IP and digital law.
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