I have an #economics question. If people buy cryptocurrency with real money, and that cryptocurrency collapses, does that ease inflation?

@john not necessarily, all the actual money that was put into it went somewhere, likely the pockets of the early adopters and the founders of the particular coin. I would consider it having a net zero effect on the larger economy except for shuffling large sums of currency into fewer hands

@panegyr Got ya, I think I was confused by the notion that you're transforming it into a different currency, but you're not. It's just a bad investment (which probably makes inflation worse?)

@john @panegyr To the extent that you're able to buy things directly with cryptocurrency or borrow fiat currency against it, it does count as part of the money supply in the very broadest sense, so high cryptocurrency values, like high home values, can indeed contribute to inflation. This is true of any asset you're able to borrow against or "spend".

@freakazoid @panegyr So a collapse would lower inflation in that case?* But no more than in contributed in the first place?

*Not in the way I was imagining though, which was a bit more setting-money-on-fire sort of a way.

@john @panegyr Insofar as it counts as part of the money supply (though not in any way that's tracked), the loss of wealth from cryptocurrency value really is "setting money on fire". M2 (the broadest measure of the US money supply that's still tracked) doesn't change, but the people who are harmed are now less willing/able to spend money, so in some sense wealth has indeed been destroyed.

You could consider both the original inflationary effect of cryptocurrency *and* the disinflationary effect of cryptocurrency's decline to be secondary impacts of monetary policy. Cryptocurrency's initial rise was in part caused by investors seeking returns at a time when loose monetary policy had driven returns from more traditional investments like stocks and bonds into the toilet.

If you'll recall, several years back the news was talking about huge increases in the price of art. That was caused by the same phenomenon. Cryptocurrency and NFTs were the next phase when even art was too expensive.


@freakazoid @john @panegyr

The use of Crypto for purchases of goods and services seems negligible. As a result, the price of houses and pork bellies denominated in dollars (and as Panegyr noted, the number of dollars didn't change) shouldn't directly be influenced by the price of crypto. In this view -- and I'm not a macro/finance guy so take with a grain of salt -- a high price of crypto works like the stock market, making people feel wealthier and hence willing to spend more aggressively, and not a "more or fewer dollars chasing goods" perspective that counting crypto in the money supply would suggest. It has been possible to buy a few goods with crypto -- I recall seeing coffee for sale with BTC in Seoul around 2016 -- but the use of crypto as money must have been negligible. As a result, the main effect of the evaporation of crypto value is in making people feel less wealthy.

Indeed, to argue this perspective in a different way, if crypto is to be counted in the money supply (and I think it basically should not), general equilibrium says that a change in its price is just a change in exchange rates. No one thinks that the fall in the British pound is a significant contributor to US inflation; indeed if anything the effect goes the opposite way: the fall in the pound reduces demand for US goods and services, tending to reduce US prices.

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