At the start of 2018, the cryptocurrency market capitalisation climbed to around 710bUSD. To put this number into perspective, the market value of all physical gold - above ground - was around the 7tUSD mark at the time. That made the cryptocurrency market worth around 10% of the physical gold market. This clearly suggests that cryptocurrencies have not taken over the financial world just yet, but it is a success story worth noting given their recent meteoric rise in value. But is all this crypto craze actually justified? Do they represent long-term value or is it just a fad bound to be short lived? Understanding why this new asset class rose to prominence probably comes with understanding the economic context that allowed it to bloom.
A safe haven in the global currency war
Quantitative easing (QE) and Zero-Interest-Rate Policies (ZIRP) have been all the rage with central banking since the 2008 Subprime credit crisis. These tools for orchestrated currency devaluation have left many savers craving for alternatives to the dwindling attractiveness of their regular saving accounts. Some have found the courage to invest in the artificially propped up stock or bond markets, but their investment yields were soon too slim to warrant any more investment capital. Then came the real alternative against rising inflation: easily accessible, supposedly safe, free-to-store, decentralised and deregulated digital currencies whose supply can not be controlled by any organisation or government. What is there to dislike from the perspective of the frustrated saver? Well, the lack of guarantees probably. There is no insurance against a glitch in the system or against human errors in processing transfers. It is a high barrier of entry environment from a technological standpoint with no safety net. It is probably why cryptocurrencies tend to attract a younger crowd leaving the older generation pondering about its validity.
An escape route from corrupt political systems
Unfortunately, even in this day and age, countries run by politicians who favour the well being of their cast rather than the overall majority are still pretty common. In their fragile economies, those who manage to gather some wealth will take any opportunity to invest it in more stable countries for safe keeping. Of course, mass divestment from the country’s wealthy could lead to rising governmental debt and hyperinflation, so governments will tend to reduce their citizens ability to export their wealth. In that respect, cryptocurrencies are a potentially easy route to bypass governmental control and move money internationally.
The Libertarian dream
Imagine a financial system independent from governments. One where all companies are truly subject to free market forces. This is the very building block of free market economies and how they were supposed to operate. However, politics got in the way. History showed us that large companies - employing a large workforce - are more likely to be bailed out in case of bad dealings than any small one would. The government is the lender of last resort for multinationals. This economic injustice is working at the detriment of the stability of the economic system as the market forces are counter balanced by centralised political actions. True liberitarians are appalled by these practices and have always vouched to put a stop to them. Well, a robust cryptocurrency market could give them a great tool to achieve their goal. If cryptocurrencies succeed, governments will have to work harder at keeping their debts and money printing press in check. Cryptocurrencies can work for the people as long as technology does not fail them.
Cryptocurrencies do embody hopes for a fairer financial system. Central banks and governments are concerned for their wide adoption because they give citizens a mean of financial pressure against state wide financial actions or policies. There is no doubt governments will do their best to control their access. After all, they would want to maintain their supremacy over the financial system. But how will the public react?