Why Did Crypto Collapse? (And Will It Rise Again?)

May 26, 2021 Topic: Cryptocurrency Blog Brand: Techland Tags: CryptoEconomicsFinanceBitcoinBitcoin Collapse

Why Did Crypto Collapse? (And Will It Rise Again?)

The model of decentralized currency appeals to some. However, as a practical matter, a central regulatory authority controlling currency can in many cases be useful.

Cryptocurrency is having a rough week. After noted billionaire, Tesla CEO and cryptocurrency fan Elon Musk grudgingly admitted that Dogecoin, 2021’s most successful coin, was “a hustle” during his Saturday Night Live appearance on May 8, the price of the currency abruptly collapsed, from an all-time high of 74 cents to a low of 27 cents two weeks later, a decrease of 270 percent.

Other cryptocurrencies were soon to follow. Ethereum collapsed from $4500 to under $2000; Bitcoin, the largest and most successful token, fell from nearly $60,000 to $32,000 over the same time frame. These wild fluctuations have caused many of crypto’s gains since the beginning of 2021 to evaporate, and although their prices are beginning to recover, billions of dollars have been lost. With this in mind, it is worth exploring cryptocurrency’s potential drawbacks, potentially offering clues for why it collapsed in the first place.

It Was Never Worth Anything, to Begin With

This cynical observation makes note of the fact that cryptocurrency has no intrinsic value. Cryptocurrencies are, at their core, strings of numbers that correspond to values of tokens. These tokens have no physical form and no real-world (or even virtual) uses. Crypto advocates have claimed that they represent a “store of value,” but a store of value, like any other, is only valuable if people believe the value exists. The crypto crash over the last two weeks can be understood as crypto holders simply collectively believing their holdings were worth much less.

It’s Bad for the Environment

All major crypto tokens are distributed via “mining” – that is, computers take turns attempting to solve a mathematical puzzle, and whichever computer succeeds first is awarded a certain number of tokens. To mine more efficiently, many people have set up banks of powerful computers specifically designed to mine tokens – particularly Bitcoin, given its extremely high price – twenty-four hours per day.

The trouble with this is that these computers are tremendously expensive to run. They are also enormous energy consumers. It has been estimated that mining Bitcoin alone consumes more energy worldwide than the Republic of Argentina

As the climate crisis worsens, this has led many to question the need for Bitcoin and the electricity it consumes. Even Musk, nominally a fan of the currency, announced earlier in the week that Tesla would no longer deal in the currency, leading to a collapse in its value.

Decentralized Currency Isn’t a Great Idea

The model of decentralized currency appeals to some. However, as a practical matter, a central regulatory authority controlling currency can in many cases be useful. For instance, during a recession, many governments will engage in deficit spending, trying to stimulate the economy through printing money and making it change hands. (This is arguably the goal of the current stimulus check regimen during the pandemic.)

However, such spending is much less possible with a currency such as Bitcoin, which the government does not have the authority to print at its command.

Setting aside this abstract notion, there are real consequences to the lack of oversight of Bitcoin. Most worryingly for the U.S., Iran is thought to be mining the currency to evade Western sanctions. In this sense, although many Americans lost thousands of dollars, many in the national security community have cause for celebration for Iran’s sudden misfortune.

Trevor Filseth is a news reporter and writer for the National Interest.