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    RareHippo – Crypto, Bitcoin, Blockchain News & Views
    Home»Cryptocurrencies»The political economy of crypto
    Cryptocurrencies

    The political economy of crypto

    By Daniel W. Drezner
    February 1, 2022By The Washington Post4 Mins ReadNo Comments
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    I want to talk about crypto, but first a quick question: Have you tried Wordle? Full disclosure: I was a relative latecomer to this variation on the old Mastermind game.

    When it started showing up on my social media feeds last month, my contrarian instincts kicked in. Part of it might have been an aversion to something new and part of it might have been that I watched “The Game” episode from “Star Trek: TNG” too many times at a formative age.

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    The point is, I eventually broke down and tried it. It’s fun and free (for now)! As a diversion while I wait for my morning coffee to jump-start my brain, it is good. And I learned that just because something is new does not mean it should automatically be feared.

    I also have had an aversion to cryptocurrencies — so should I change my mind on that? Well …

    Compared to Wordle, cryptocurrencies are old — like nearly 15 years old. When bitcoin first broke through into the general interest media, I read up a little bit on the concept (one of my day jobs is trying to figure out whether something merits inclusion into my global political economy course). With crypto, my answer was “mostly no.”

    As a means of evading economic sanctions and engaging in illicit exchange, crypto has some utility. As an alternative to commonly accepted currencies, cryptocurrencies are absurd. They make no sense as a unit of account.

    Their utility as a medium of exchange decreases as more people use it, which is a super weird quality for any currency. And their volatility makes them a dubious store of value.

    That was then. Now, crypto markets may or may not be more efficient. Either way, they have acquired a new prominence as of late. The total size of the cryptocurrency market has grown to nearly $2 trillion dollars. It you watch any sports on television, it seems difficult not to notice that the crypto sector has gone on an ad-buying binge.

    Hall of Famer David Ortiz appeared in a commercial for FTX; Matt Damon is cutting ads for crypto.com. And crypto is starting to draw interest from pension funds and sovereign wealth funds. The market is sufficiently deep for large crypto ventures to launch super PACS to lobby against any regulation.

    That said, none of this prominence has stopped the volatility. That nearly $2 trillion crypto market? It was over $3 trillion back in October.

    The New York Times’s Paul Krugman warned last week about “uncomfortable parallels with the subprime crisis of the 2000s. No, crypto doesn’t threaten the financial system — the numbers aren’t big enough to do that.

    But there’s growing evidence that the risks of crypto are falling disproportionately on people who don’t know what they are getting into and are poorly positioned to handle the downside.”

    Krugman linked to survey data backing up his claim. According to a July 2021 NORC survey, the average cryptocurrency trader is under 40 and does not have a college degree. More disturbing: “Investors get their information about cryptocurrency investing mostly through the crypto exchanges themselves (26 percent), general trading platforms like Fidelity or Robinhood (25 percent), or social media (24 percent).”

    One rule of thumb I have for asset bubbles is that if celebrities start getting in on the game, it might be time for the smart money to get out. Already some celebrities are being sued for promoting cryptocurrencies that turned out to be classic “pump and dump” Ponzi schemes. This suggests that while crypto will not disappear, we have reached the bubble phase.

    Institutional investors are only beginning to show interest in crypto. One wonders whether the recent volatility will cause them to minimize their exposure to this market. This might stall out Krugman’s political economy concerns that crypto will simply buy congressional inaction.

    Either way, however, it sure seems like the small-time crypto investors are this decade’s equivalent of 1990s day traders and 2000s house flippers.

    Maybe we should all just play Wordle instead.

    Read full story on The Washington Post

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