The Crypto Crash Never Happened
It’s been a rough year for most crypto investors. After massive price surges in 2021 and a deluge of marketing toward the end of the year, Bitcoin and other cryptocurrencies have lost trillions in market cap since their peaks. That’s fueled media fixation on a “crypto crash” — one of the more misleading market narratives of recent years. Crypto may have crashed, but the “crypto crash” never happened.
Crypto is notoriously difficult to define. Is it an asset class, a technology, an industry, a field? There’s a case for all of those, but the specifics of the debate are less important than the debate’s existence. It shows that there’s widespread ambiguity on the very concept of crypto, which leaves its public reputation vulnerable to media sensationalism. There’s been plenty of that in the last few years — concerns that crypto would help countries evade sanctions, laughable attempts to cast it as a national security threat, and baseless claims that crypto is nothing more than a Ponzi scheme.
The “crypto crash” narrative is merely the latest edition of this sensationalism, related to but distinct from the actual crash in crypto valuations. Cryptocurrencies have almost universally plummeted over the past year, so there’s no denying that crypto crashed. But the “crypto crash” narrative goes well beyond this simple fact — it implies, intentionally or not, that this downturn is distinct to the crypto space.
So let’s take a hard look at the numbers. Bitcoin is down 71% from its peak, while Ethereum and Binance Coin are down 72% and 56% respectively. That’s about as far as most crypto critics (sometimes called reporters) will look before proclaiming a “crypto crash”. It’s also confirmation bias in its purest form. If we want to understand whether crypto’s decline is a distinct phenomenon, we need to look at other assets. Even a cursory glance at the markets immediately challenges the “crypto crash” narrative.
As it turns out, 2022 has also been a rough year for the stock market. The tech-oriented NASDAQ Composite is down 30%, the S&P 500 is down about 22%, and the Dow Jones Industrial Average is down over 18%. Admittedly, these declines are far more modest than the past year’s crypto losses. But they show that today’s economic environment is very different from that of 2021. That’s critical to understanding crypto’s downturn in a broader context.
Crypto and stocks have declined for the same reason: they’ve fallen victim to inept monetary policy. Federal Reserve Chairman Jerome Powell, in his infinite wisdom, labeled surging inflation “transitory” last summer and didn’t drop the label until December, at which point high inflation had endured for months. Powell’s delusional insistence on low interest rates even with a booming job market and 40-year inflation highs eventually placed the Fed — and the American and global economies — in a remarkably difficult position. It could either keep rates low and risk endemic inflation, or it could raise rates to fight inflation and risk a recession. After nearly a decade of low interest rates and lax monetary policy, which incentivized riskier investments, the Fed has rapidly increased rates in its belated efforts to control inflation.
Markets have responded as they typically do to sustained inflation and sharp rate increases — there’s far less demand for risky, volatile investments. And since Bitcoin and other cryptocurrencies fall in that category, we’d naturally expect them to plunge in response to rate increases. Crypto has followed that pattern closely, so acquiescence to broader economic developments explains its downturn far better than any unique defects.
The crypto crash narrative becomes even less credible with a look at comparable assets. While the best comparisons for cryptocurrencies are other cryptocurrencies, unprofitable growth stocks are also useful. Both asset classes lack tangible profits to pass onto investors; their value is instead predicated on future growth. I can’t list every growth stock in existence, but a small sample looks strikingly like crypto. Shopify is down 78.5% in the past year, Snap is down 85%, Palantir is down 64%, and DoorDash is down 72%. These are all well-known companies with committed clients or users, and yet they’ve performed just as poorly as some of the major cryptocurrencies. Crypto’s downturn has been sharp and dramatic at times, but it’s hardly unique.
By going all-in on an easily refutable “crypto crash” narrative, crypto’s media critics pass up a far more cogent critique: crypto’s recent failure to live up to its promise. Crypto’s proponents routinely characterize it as an inflation hedge and argue widespread adoption will lead to greater use. But if crypto simply performs like any other risky asset, what’s the point? It lacks any inherent advantage over an unprofitable growth stock like DoorDash. Its integration into traditional finance and payments, celebrated by many proponents as a boon for the field, only subordinates crypto to broader market dynamics. Tesla treated Bitcoin like any other volatile asset, dumping it at the first sign of trouble. Consequently, institutional adoption risks making crypto more vulnerable to broader market selloffs and prevents it from serving as a hedge against inflation. Crypto’s growing correlation with the stock market is far more worrying than a simple downturn.
So why have we gotten a simplistic, irreparably flawed narrative about crypto’s downturn instead? The “crypto crash” narrative feeds into the sensationalist talking points pushed by some pundits and policymakers. Of course, both have a vested interest in maligning crypto. Panic sells, hence the sensationalist claims that crypto is rife with crime even though a higher percentage of cash transactions are criminal. And despite media tendencies to lionize regulators, the truth is far more complicated. Policymakers operate under a framework based on consumer protection, not consumer empowerment, and the former can certainly come at the expense of the latter. While regulators can and should focus on flushing fraudulent practices out of the crypto industry, a wholesale subjugation of crypto to federal bureaucrats would deprive investors of a potential alternative to the dollar. The facts don’t back up the “crypto crash” narrative, and there’s good reason to be skeptical of its underlying motives.
Despite crypto’s recent struggles, media salivation over its decline is remarkably misleading. There are valid critiques of crypto, but these are seldom the ones being aired. Instead, the inane “crypto crash” narrative blatantly ignores broader economic context and the underlying reasons for crypto’s decline. That narrative is a product of toxic media tendencies, a pitiful attempt to project certainty from ignorance. But the only certainty is that the “crypto crash” never happened.
