The crypto crash is in full swing. Falls of 80–90% from the peak have already happened. What does this mean?

The economist Scott Sumner says “never reason from a price change”. The fact that a price changed is unarguable, but we need to know why it changed in order to understand what to do about it. As Scott says:

My suggestion is that people should never reason from a price change, but always start one step earlier — what caused the price to change. If oil prices fall because Saudi Arabia increases production, then that is bullish news. If oil prices fall because of falling AD in Europe, that might be expansionary for the US. But if oil prices are falling because the euro crisis is increasing the demand for dollars and lowering AD worldwide; confirmed by falls in commodity prices, US equity prices, and TIPS spreads, then that is bearish news.

With this in mind, let’s ask: why are crypto prices falling?

Technical Analysis — image from https://www.tradingview.com/ideas/btc-usd/

The answer is pretty simple: demand is lower than it was previously. We can draw up many complex charts, but they all tell the same story. Fewer people want to buy Bitcoin, Ether, or other cryptocurrencies and tokens, at their current prices. The fall may continue until an equilibrium is reached, and opinions differ on where that equilibrium point is. Prices are unlikely to rise until potential buyers are persuaded that a higher price is justifiable.

Of course, “lower than it was previously” means we’re making a comparison to the peak of the market. Prices could fall a lot further than still be higher than they were at, say, the beginning of 2017.

The bubble of late 2017/early 2018 represented an enormous infusion of capital into blockchain projects. We know that many of these projects were turkeys in a tornado, with not much value beyond having the words ‘block’, ‘chain’, or ‘blockchain’ somewhere in their names. Some were outright scams. Some raised funding illegally. A substantial fraction of the market is therefore dead, and ought to be assigned a value of near zero. People who bought these tokens in order to HODL them will lose, big-time.

What about the rest? Once we have discounted the scams, the pump-n-dumps, the over-hyped and under-designed, and those that assumed that blockchain was miracle potion for otherwise mediocre business ideas, we’re left with a few fundamental facts:

There is some genuine technical innovation in applying cryptography to distributed databases; cryptography is generally under-applied in the real world and the potential value from applying it more broadly is real.

The major public blockchains have demonstrated stability and security despite using novel mechanisms for consensus and predictability.

The core application of managing scarce resources using distributed databases appears to work well for Bitcoin.

Managing a much larger fraction of the world’s scarce resources using current blockchain technology is not feasible without relaxing the requirement for true decentralisation.

So, we have some genuine technical innovations, a reasonable belief that more such innovations can be found, and a decent grasp on the problems of scalability and cost. A global network of stateful, distributed and consensus-forming databases, capable of modelling scarce, long-lived resources and multi-party relationships to those resources sounds genuinely useful.

This sounds bullish. Why, then, is everyone depressed?