I have long been a crypto skeptic, but as it worms its way into America’s financial infrastructure, it is getting harder and harder for me to maintain the argument that it will crash and burn. So I have revised my opinion. Crypto does have a future — as a speculative asset that enhances risk for gamblers, the paranoid, and less sophisticated investors, all the while diverting capital from more productive uses.
See? I told you I had changed my mind.
Something about crypto has never sat well with me. It contradicts everything I understood about money: It is volatile and hard to use, and it solves a problem there is already a better solution for: Government-issued money is pretty great. Even stablecoins, which could become a viable means of payment with new federal regulation authorized by the law President Donald Trump signed last week, can’t match the dollar.
Yes, blockchain technology may prove to be a good alternative to the clunky and flawed payments system. Crypto is also a useful currency for anyone engaging in illegal transactions or living in a country experiencing hyperinflation. But these use cases do not begin to justify the price of Bitcoin, let alone all the other cryptocurrencies.
But I have learned to let all that go and accept crypto’s existence. Markets are weird sometimes, and they can stay weird for a long time.
What bothers me is this: If you look at the long history of financial disasters, they always start the same way. There’s an asset or strategy sold as risk-free, yet it also manages to deliver above-market returns. That should be a bright red flag that something is wrong and will end badly. It is the hard truth of markets: Bigger rewards can come only from taking more risk. Yet crypto’s defenders will say it is the ultimate hedge against the collapse of the dollar and possibly the entire US economy — and yet it is also priced as a very risky asset. This makes me uneasy.
As crypto enters the mainstream, however, my worries are changing. I see three potential futures.
One is that — my revised opinion notwithstanding — crypto will collapse after all, and the price will go to zero or something close to it. Trump is readying an executive order to allow it in people’s 401(k) plans, and even if it is blessed by the SEC, there is always a risk that a speculative asset with no intrinsic value will crash. If that’s the case, these last 15 years will be remembered as a weird quirk of financial history. The regulatory law Trump signed last week makes this scenario less likely, since there is now a population of captive buyers.
Another, more likely scenario is that crypto is here to stay. It will be mostly owned by investors who want lots of risk in their portfolio; those who are financially naïve; and those who distrust both the government and the global financial system and believe there is a non-trivial probability it will all collapse. (There could be significant overlap in all these groups.) These investors think cryptocurrencies offer a hedge and will allow them to profit from a world in which the US economy collapses and yet they still somehow have internet service.
It is impossible to estimate how many of these people there are, but there are a lot. They already prop up a decent chunk of the gold market — another asset that is supposed to be safe but is actually quite volatile.
There is no financial calamity here. But it is not a benign scenario, because there is a lot of capital going to an asset that does not serve the economy in any real way. Speculating on crypto is not like investing in a company that makes things. This means there will be less capital funding the real economy, instead going toward something that is effectively a collectible, in that its primary value is its limited supply.
The third scenario is that, despite everything, this all goes well. Perhaps the dollar will collapse, and we will all start using cryptocurrencies for everyday transactions. Maybe stablecoins will overcome their issues and replace the credit-card and banking industries. Maybe some other use case will emerge.
If any of that happens, all those people who put their 401(k) in crypto will be vindicated. It’s possible, I suppose. But I wouldn’t bet on it.
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