Thu, Feb 08, 2018 - Page 9 News List

To buy or not to buy, the answer remains cryptic

Cryptocurrencies are not likely to affect macroeconomic growth, but its underlying blockchain technology offers a greater challenge to human ingenuity to create welfare-boosting innovation

By Adair Turner

Whatever the true quantity, the related carbon dioxide emissions are adding to global warming in return for no social benefit.

At the same time, fears that speculative bubbles in cryptocurrencies could drive macroeconomic instability appear overstated.

As Charles Kindelberger showed in his classic historical survey Manias, Panics and Crashes, speculative bubbles and subsequent crashes sometimes lead to post-crash depressions, but not always: Whereas the Wall Street boom of the 1920s ended in the Great Depression, the tulip bubble of the 1630s seems to have had little effect on the Netherlands’ medium-term growth path.

What matters is the scale of the boom and whether it is financed with debt. Booms and busts in individual equity stocks or specific commodities typically have little macro-level effect, and even huge swings in entire equity-market sectors — such as the NASDAQ boom and bust of 1998 to 2002 — might have only a mild adverse effect on overall economic growth.

By contrast, property booms and busts have historically been the most dangerous, because the total value of real-estate wealth usually dwarfs equity values, and because real-estate booms are often debt-financed.

Regulators should therefore keep a careful eye on any credit-financed cryptocurrency speculation, but with total cryptocurrency values still equal to just a minute fraction of global real-estate wealth, the overall risk remains slight. Some individual investors will certainly lose their shirts, but the effect on economic growth will most likely be close to nil.

However, the wider social challenge is to channel human ingenuity into welfare-boosting innovation rather than zero-sum gambling activities.

The distributed-ledger technology underpinning cryptocurrencies can be used to reduce transaction costs and eliminate risks across multiple financial and trading activities. That would be worth doing.

As for whether you should invest in bitcoin, I cannot say. Personally, I would rather buy a lottery ticket.

Adair Turner is chairman of the Institute for New Economic Thinking and a former chairman of the UK Financial Services Authority.

Copyright: Project Syndicate

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