Crypto pokes its nose into America’s financial woes

But the questions linger, and also suggest other forces at play. There is a good chance that one of them is cryptocurrencies.

It is well accepted that the availability – or scarcity – of money affects the economy by changing businesses and consumers’ willingness and ability to spend. That’s why the Fed printed trillions of dollars to bolster the US economy in the aftermath of the 2008 financial crisis and again during the pandemic. It is also why the Fed is now trying to tighten the money supply to cool spending and inflation. The most widely used cryptocurrencies, such as Bitcoin and Ethereum, can easily be converted into dollars, so it is reasonable to believe that they can have a similar impact on the economy.

There was little danger of that for much of their short existence. In mid-2020, about a decade after Bitcoin’s debut, the global market capitalization of cryptocurrencies was just $250 billion, according to crypto data provider CoinMarketCap, a fraction of the $18 trillion in circulation at the time, measured by so-called M2 money. supply. But crypto’s footprint expanded considerably in the months that followed, reaching a market cap close to $3 trillion by the end of 2021.

Here’s what happened to the economy at the same time: Inflation, as measured by the consumer price index, rose 9.4% from June 2020 to the end of 2021, the highest over any comparable period since the early 1980s. The S&P/Case-Shiller US National Home Price Index rose 29%, well above any comparable period going back to the index’s inception in 1987, including the run-up to the housing bubble in the mid-2000s. Job openings more than doubled to close to 11.5 million from 5.5 million, by far the largest increase in absolute numbers or in percentage terms since the data series began in 2000.

Then came the crypto bust. Since the end of 2021, cryptocurrencies have given up $2 trillion of market capitalization, and their global market cap has fallen by two-thirds to around $1 trillion. While economic numbers are reported with a lag of a month or more, there are signs that inflation, the housing market and the labor market may also be cooling. Inflation expectations have fallen, as have the prices of certain CPI components, particularly petrol. Growth in house prices appears to be slowing, and in some places prices may actually fall. Job vacancies fell 1.7% this year through May, and some employers say it’s getting easier to find workers.

I am not suggesting that cryptocurrencies are solely or mostly responsible for these broader economic trends, not least because it is difficult to determine how much of the global crypto gains and subsequent losses are attributable to Americans. But they are a factor, and possibly a big one. In a Redfin survey conducted near the crypto peak in December 2021, 11.6% of first-time home buyers said at least part of their down payment came from crypto gains. That was up from 8.8% in 2020 and 4.6% in 2019, tracking crypto’s meteoric rise during this period.

Crypto profits also appear to have contributed to labor shortages. In a survey conducted by consumer data provider CivicScience last October, 11% of respondents said that crypto gains allowed them or someone they know to quit their job. That figure is 44% for respondents earning less than $25,000 a year, and a shocking 75% for those earning $25,000 to $50,000, the pay range for jobs where shortages have been most acute, such as retail, health and social care, travel and free time. .

One reason central bankers inject money into the economy during downturns is that having more dollars floating around makes people feel richer, which is unsurprisingly what the rise in cryptocurrencies seems to have done. More than half of respondents to CivicScience’s survey said investing in cryptocurrency increased their personal wealth. The highest percentage was in the $25,000 to $50,000 cohort, where more than 60% said cryptos made them richer.

If cryptocurrencies continue to fall or fall further, I suspect respondents in new surveys will point to lower crypto prices as a reason they returned to work or cut back on spending or put off buying a home. It would be another indication that cryptocurrencies can move the economy in ways that matter to economists and the Fed.

One of the early and recurring warnings about cryptocurrencies is that they could eventually disrupt central banks’ efforts to stabilize the labor market and inflation. That day is probably already here. More from other writers at Bloomberg Opinion:

• The need for global Stablecoin standards: Cunliffe & Alder

• Thanks for Crypto’s well-timed meltdown: Editorial

• Bitcoin’s real value tied to gold and tech stocks: Aaron Brown

This column does not necessarily reflect the opinion of the editors or Bloomberg LP and its owners.

Nir Kaissar is a Bloomberg Opinion columnist who covers markets. He is the founder of Unison Advisors, an asset management firm.

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