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Cryptocurrencies have been around for 12 years now, and for much of that time they were a pretty easy subcultural fixture to ignore, like SantaCon or the Golden Globes. But in 2021, it became much harder to do: last week, the combined value of cryptocurrencies plummeted after six months of rampant growth, wiping out $ 1.3 trillion in wealth – and knocking down the rest of the purse with it.

“As the world of cryptocurrencies has exploded over the past year, its impact on real businesses and therefore on financial markets has also increased,” the Times’ Matt Phillips wrote of the recession. “JPMorgan analysts recently noted that the market value of cryptocurrencies, as a share of the economy, is greater than the total stock of subprime real estate debt before the financial crisis.”

Why have cryptocurrencies become so popular and is their integration a threat to the economy in general? Here is what people are saying.

What is the point of cryptocurrency?

All money is, to some extent, an object of faith: a $ 100 bill is worth what $ 100 buys only because we believe it and because that belief is upheld by the US government. What cryptocurrencies do, in effect, is take the state out of the equation: instead of a bank, they rely on networks of powerful computers running around to verify transactions, a process. which in turn generates more units – or “coins” – of currency. Each transaction is recorded using a cryptographic technology called blockchain, a kind of public ledger that is almost impossible to modify. Bitcoin, the first and still by far the largest cryptocurrency, went live in 2009, and thousands more have been created since.

But why? Supporters of cryptocurrency claim that it has many socially productive uses:

• Because many cryptocurrencies are limited – the number of Bitcoins, for example, will never exceed 21 million – many people in high-inflation countries, like Argentina and Venezuela, have been able to avoid losing their savings by buying cryptocurrency.

• Since cryptocurrency transactions take place far beyond the reach of the state, they can be a valuable tool in evading censorship. “In Russia, Vladimir Putin can target an NGO and freeze his bank account, but he cannot freeze his Bitcoin wallet,” Alex Gladstein, director of strategy at the Human Rights Foundation, wrote for the time in 2018.

• Some 1.7 billion people do not have access to formal banking infrastructure, but two-thirds of them have a mobile phone. “If your phone can give you access to the things you would need from a bank, well you’ve just uninvented the need for banks and fundamentally changed how the monetary system works” in parts of the developing world, John Lanchester wrote for The London Review of Books in 2016.

But in practice, cryptocurrencies have failed to deliver on their revolutionary promises. Like Megan McArdle Explain in the Washington Post, cryptocurrency payments can be slow to clear and bear high fees, which makes them an impractical option for everyday shopping, and most businesses still don’t accept them. “Bitcoin has been around for over a decade, but it’s still an inconvenient way to pay for things, inferior to dollars or credit cards in almost every way,” she wrote. And as with all the promise of the bank of the unbanked of the world? It turns out, like Yaya Fanusie wrote Forbes, that “people mainly lack financial services because they lack income and not the other way around”.

As a result, many economists have come to view cryptocurrencies less as a form of money and more as a kind of speculative asset, like gold or art, whose dizzying price fluctuations make it an attractive gaming medium. “Everyone has read the stories of teenage crypto millionaires – or the pizza bought with Bitcoin that would now be worth millions,” Erin Griffith of The Times wrote. “AT do not to get involved is, in crypto-language, “to have fun staying poor”. “

At the same time, cryptocurrencies have social costs that other forms of gambling do not:

• In February, Treasury Secretary Janet Yellen, warned that the level of anonymity offered by cryptocurrencies could lead to “an explosion of risks related to fraud, money laundering, terrorist financing and data privacy”. While only a small fraction of cryptocurrency transactions reportedly linked to criminal activity, they have contributed to an increase in ransomware attacks such as those carried out against Colonial Pipeline this month, which crippled fuel delivery in the southeastern states -United.

• Cryptocurrency transactions require enormous computing power compared to other payment methods: Researchers at the University of Cambridge have estimated that Bitcoin uses more electricity than all of Argentina. “All of this represents so little of total global transactions, but has the carbon footprint of entire countries,” Camilo Mora, a climatologist at the University of Hawaii at Manoa, told The Times. “So imagine it takes off – it’s going to ruin the planet.”

Both of these concerns appeared to be contributing to last week’s market rout: On May 12, Elon Musk ad that Tesla would stop accepting Bitcoin due to its climate costs; the following week, China ad that it would restrict the mining and trading of Bitcoin, in part to crack down on criminal activity.

Will the crypto craze die off or get worse?

Cryptocurrencies may not be as transformative as their fiercest boosters hoped, but they also haven’t turned out as crazy as their staunchest critics have warned: Bitcoin has crashed several times. times before, and Monday he still had it bounced.

“One fact that even gives crypto-skeptics like me pause is the sustainability of gold as a highly valued asset,” wrote Times columnist Paul Krugman. “When John Maynard Keynes called the gold standard a ‘barbaric relic’ in 1924, he was right. But the mystique of metal and its valuation endure. It is conceivable that one or two cryptocurrencies will somehow achieve similar longevity. “

Right now that’s not a concern for most people, but it could be in five years, Justin lahart wrote for the Wall Street Journal. Compared, for example, to the housing market, the cryptocurrency market is still small and much more isolated from the rest of the economy.

But that could change if cryptocurrency continues to become more mainstream, “if more people start to think of cryptocurrencies as an asset class and if they start to find their way into retirement accounts,” he said. he explained. “The fallout from a crash would be even greater if many investors borrowed to increase their cryptocurrency holdings or used their cryptocurrency holdings as collateral for loans.”

At that point, Princeton economist Markus Brunnermeier told Lahart, “A lot of people would lose a lot of money, and they could challenge the whole system. Why did no one protect them?

But there is reason to believe that a cryptocurrency crackdown may be imminent. Besides Yellen, the heads of the European Central Bank and the Securities and Exchange Commission have called this year for a new regulatory framework to oversee cryptocurrency exchanges. It is possible that such an intervention, whatever it may be, will bring the substance to permanently fall out of the cryptocurrency market.

But it’s also possible that regulation will make cryptocurrencies more attractive by limiting their volatility. “The idea that regulation cools activity in innovative new markets is intuitive, but not necessarily accurate,” argued Brian Feinstein and Kevin Werbach, professors of legal studies and business ethics at the Wharton School of the ‘University of Pennsylvania, in The Times. In a peer-reviewed analysis of several years of data for The Journal of Financial Regulation, they found no evidence that regulatory announcements affect the volume of crypto transactions.

“Some of our most important public policy debates are about how regulators should approach new technologies,” they wrote. “Gene editing, artificial intelligence and derivatives in high finance have recently come under the spotlight. Now, it seems, it’s cryptocurrency’s turn.

Do you have a point of view that we missed? Write to us at [email protected]ytimes.com. Please note your name, age and location in your response, which can be included in the next newsletter.

READ MORE

“Transaction costs and ties: why I am a crypto-skeptic” [The New York Times]

“Bitcoin Mania” [The New York Review of Books]

“For $ 800, you can also participate in this joke” [The New York Times]

“As cryptocurrency review grows, industry turns to K Street” [The New York Times]

“Bitcoin replaces gold as an inflation hedge” [Bloomberg]