The price of crypto currencies has now officially collapsed. Indeed, Bloomberg reports that the plunge is even worse than the dot-com crash of 2001.
I have followed the crypto-story for the last two years. As regular readers may recall, I have never believed in the viability of these artifacts.
The reason of my skepticism was founded on the strategic position of crypto currencies as an innovation. Indeed, the effects of the disruption theory of Clayton Christensen combined with the fundamental mechanics of financial transactions made crypto currencies an almost impossible winner in the long run. BTW, I consider the story of crypto-currencies as disruptive doubtful, but the advices of Christensen apply anyway.
First of all, Clayton Christensen warns very clearly about the power of states and regulatory bodies as a catalyst or hinder for the adoption of new technologies. In addition, Christensen explains that disruptive technologies that try to insert themselves in the value chain dominated by established players almost always lose. This is corporate strategy 1.01 independently of whether the case is disruptive or not.
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In the case of crypto currencies, both factors were at play. First, central banks hate crypto currencies, irrespective of what these institutions may say. The reasons are simple, as I described in my earlier post (in Norwegian) “Bitcoin – ignorans og grådighet“:
Bitcoin enthusiasts have chosen to ignore the role that the state has as the most powerful player in the market. No state will tolerate a currency that they do not control and which they can not or do not know how to tax. In addition, a parallel decentralized currency will challenge the ability of central banks to control money supply and hence interest rates, inflation and economic development.
Central banks around the globe have tried to suffocate the expansion of cryptocurrencies. In the post “The ECB just killed Bitcoin in Europe- this is why” I describe some of their actions against Bitcoin in Europe- and by extension crypto currencies in general.
- In order to crack down the anonymity aspect of Bitcoin, one of its fundamental features, the EU commission launched a regulatory proposal to implement a data base containing the real identities of bitcoin users as well as the adresses of the bitcoin virtual wallets.
- In a letter dated already 18.10.2016, the ECB urged the EU Commission to discourage the use of bitcoin as payment vehicle for any kind of goods and services. “The reliance of economic actors on virtual currency units could in principle affect the central banks’ control over the supply of money“
Similar, and sometimes erratic, actions have been seen in China, Korea and Japan.
Secondly, the value of crypto currencies for the vast majority of traders was defined by its price in the currencies controlled by central banks. In practice, this means that cryptos were hopelessly inserted in the value chain controlled by their sworn enemies. The exception is Venezuela, but again that whole country is an exception in itself.
As mentioned earlier, the fundamental mechanics of financial transactions have also made crypto-currencies as a transaction instrument highly impractical, at least in its “bubble state”.
- The world needs currencies to be stable to other currencies. If the price rises sharply in a short period of time, as many cryptos have experienced, the velocity of money sinks. People choose to wait and accumulate the currency in order to buy goods and services cheaper later on. Thus, the currency loses its value as a transaction vehicle.
- If the price instead varies unpredictably, people and companies will simply stop making transactions with the currency because the hedging instruments become too expensive. This has also happened with crypto currencies.
Both phenomena make crypto currencies de facto inviable as transaction instruments.
The wild evolution of crypto currencies is the result of many ignoring the most fundamental laws of market economy and the sheer power of the states as market players. For innovators and investors focused on creating new products and services with real value and chances to succeed, the lessons of crypto currencies are indeed highly valuable and worth to remember.
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