This column was first published in SvD Näringsliv, in Swedish, on May 24th, 2021.
$1 trillion went up in smoke in last week’s cryptocurrency crash. Elon Musk and China got most of the blame, but the problem showed a deep contradiction among the proponents of cryptocurrencies.
When Tesla’s CEO Elon Musk tweets about cryptocurrencies, the market moves.
Mostly upwards, as in the case of dogecoin – the joke that became one of the world’s ten largest cryptocurrencies, much based on the support of Musk.
This week we also saw examples of the opposite, when Musk somewhat dizzily expressed concern about the environmental impact that bitcoin has. The cryptocurrency fell sharply, and many wondered why his environmental analysis came now. It is no secret that the production of new cryptocurrencies is an environmental culprit, and what’s more – Tesla only bought bitcoin for $1.5 billion months earlier and announced it would accept it as a means of payment.
Bitcoin took another turn when the Chinese central bank warned financial institutions of accepting cryptocurrencies. The statement was not noticeably different from the stance expressed by Chinese authorities in both 2013 and 2017, but nevertheless contributed to concerns about increased regulation.
The above movements in the market would not have been so strange, if they had been about a more normal asset. Sure, volatility is unusually high, but there are other financial products that can have similar movements.
But cryptocurrencies are not normal in this regard. The whole idea behind everything is called decentralized finance (defi). With defi, there are no central platforms that govern either monetary policy or economic measures. It is an economy that is network-based and managed from node to node, and which together creates an economy where everyone can participate.
In a decentralized financial world, it is therefore strange that Elon Musk’s statements are carefully analyzed in the same way as they are with Jerome Powell, the chair of the US Federal Reserve. The slightest indication of a change in course creates immediate surges. It was precisely this type of institution that this new world would avoid. How could we end up in a place where Elon Musk became something of a dictatorial central bank chair – one that no one asked for?
The answer lies in the immature market that cryptocurrencies still consist of. In simple terms, its participants can be divided into two distinct groups: the enthusiasts who believe in a decentralized financial world, and the investors and speculators who agnostically see an opportunity for good and immediate returns. Possibly you could add a third group – the professional criminals who use crypto to anonymously launder and transfer money. The latter group, however, may get a little sweatier in the future when the US Treasury Department just proposed that all crypto transactions over $10,000 needs to be registered with the US Internal Revenue Service. A clear indication that more regulation is on the way.
The first two groups do not have much in common other than that they are in the same market. But where enthusiasts see an emerging new financial infrastructure, investors see fast money. More hype gives higher prices and better returns. This also applies to the enthusiasts where many quickly became millionaires on their early insights about cryptocurrencies, whether it was their intention or not.
When Elon Musk tweets positively, everyone with cryptocurrencies gets richer. But that effect has been treacherous for the enthusiasts. You can not cheer on when an individual increases the value of your portfolio by thousands of percent, and at the same time think that it is problematic when the opposite happens. But of course it’s easy to be idealistic – until you see how rich you have become on his latest tweet.
For the cryptocurrency world to reach its full potential and approach the decentralized financial world, it might be most appropriate to look at the relationship with Elon Musk. Should one simply end it?
As the situation is today, he acts as central bank governor in a market that says it does not need one.
This column was first published in SvD Näringsliv, in Swedish, on May 24th, 2021.