Cryptocurrencies: money of the future or just another bubble?

One of the first recorded financial bubbles of the modern world was the "Tulip Mania" in the Netherlands during the early 17th century Dutch Golden Era. Tulips, newly introduced to Europe from the Ottoman Empire, became highly coveted and quickly became a luxury item due to their rarity, beauty, and the difficulty of cultivating certain varieties.

?The market for tulips grew as wealthy Dutch citizens became fascinated by their rarity and beauty, seeing them as status symbols. At the height of the mania, people were trading vast sums for single tulip bulbs, with prices soaring to extremes.Eventually, the bubble burst in 1637 when demand abruptly declined, leaving many investors with worthless bulbs and heavy losses.?

Less than a hundred years later, The South Sea Bubble of 1720 happened. The South Sea Company was founded in 1711, primarily as a public-private enterprise with deep ties to the British government. The government granted it a monopoly on British trade with Spanish-controlled South America as part of the Treaty of Utrecht, which ended the War of the Spanish Succession. The company’s primary revenue source was not trade but government debt. The British government, deeply in debt from the war, allowed the South Sea Company to assume a large portion of this debt, which it would then sell to investors in the form of shares. In exchange, the company would receive a fixed interest payment from the government.

As the South Sea Company’s stock price skyrocketed, other speculative ventures sprang up across London. Known as “bubble companies,” these were often dubious, with some promising improbable returns, like ventures to extract sunlight from cucumbers or to trade in mythical lands. Speculation fever gripped the public, and people mortgaged properties, sold businesses, and poured life savings into South Sea shares or similar investments.

Among those investors was Sir Isaac Newton, who initially bought South Sea shares early in the year, sold them for a profit, and then, seeing prices continue to climb, reinvested heavily at a later, much higher price.Newton reportedly lost about ￡20,000—a fortune at the time—and allegedly remarked,

“I can calculate the motions of the heavenly bodies, but not the madness of people.”

Cryptocurrencies have consistently gained momentum in response to financial instability. From Bitcoin's launch during the 2008 crisis to its surge during the pandemic, digital assets continue to represent both a financial alternative and a new technological frontier. However, their volatile nature and regulatory challenges remain points of contention. Today, cryptocurrencies represent a unique intersection of financial and technological innovation, pushing the world toward new forms of money, finance, and governance, while challenging established systems with obvious risks and also opportunities.

Brief History of Cryptocurrencies

?Cryptocurrencies, particularly Bitcoin, emerged directly in response to the housing and banking financial crisis. The crisis revealed the risks and limitations of traditional financial institutions, with central banks and governments intervening to rescue failing banks and stimulate the economy. Many people lost faith in the financial system, as the crisis exposed problems of excessive risk-taking, lack of transparency, and the concentration of power in a few financial institutions.

In 2008, a person or group under the pseudonym Satoshi Nakamoto published the Bitcoin whitepaper, titled "Bitcoin: A Peer-to-Peer Electronic Cash System." It outlined a new form of currency that would not be controlled by any central authority but instead by a decentralized network of users. This vision appealed to those frustrated by traditional finance, particularly due to its promise of independence from banks and central authorities.

After Bitcoin’s launch, early adopters, mostly tech enthusiasts and libertarians, began mining and using Bitcoin. Over time, as its price grew, it drew attention as both an asset and a potential alternative currency.

Bitcoin introduced blockchain technology, inspiring other developers to create alternative cryptocurrencies, known as "altcoins." By the mid-2010s, projects like Ethereum added programmable "smart contracts" to blockchain technology, expanding the scope of what decentralized platforms could do. Ethereum opened the door to decentralized finance (DeFi) applications, allowing people to create financial services that operate independently of traditional banks.

?By 2017, the cryptocurrency market experienced its first significant boom. Bitcoin and other crypto assets like Ethereum saw explosive price increases, leading to a massive influx of retail investors. Many speculated on price rather than the technology’s fundamentals, leading to a bubble that eventually burst in 2018, causing widespread financial losses but leaving behind a much more mature ecosystem.

The pandemic caused an economic crisis in early 2020, prompting governments to take unprecedented measures. Central banks around the world lowered interest rates and injected trillions of dollars into the economy through quantitative easing. These moves were intended to prevent economic collapse, but they also raised concerns about potential inflation and currency devaluation.

As traditional assets became more volatile and government stimulus intensified, many investors looked to Bitcoin as a potential hedge against inflation. Bitcoin was now seen by some as "digital gold," a store of value independent of central banks. The price of Bitcoin surged from around $5,000 in March 2020 to over $60,000 by early 2021, largely driven by institutional investors.

In response to the popularity of digital assets, many central banks began exploring their own digital currencies, known as Central Bank Digital Currencies (CBDCs). CBDCs would combine the convenience of digital currencies with the stability of state-backed assets, offering a way for central banks to modernize payment systems while maintaining control.

Where do we stand?

In the wake of Donald Trump's recent presidential election victory, cryptocurrencies and crypto-related assets saw significant boosts. Trump's pro-crypto stance was made clear during his campaign, with pledges to make the United States the "crypto capital of the planet" and a commitment to establishing a "strategic reserve" of Bitcoin.

Following his win, Bitcoin surged nearly 8%, reaching a new record high above $75,000. This rally extended beyond Bitcoin, as other major cryptocurrencies also gained traction. Ethereum (ether), the second-largest cryptocurrency, experienced a significant price rise, while dogecoin—known for its association with billionaire Elon Musk, a vocal Trump supporter—soared by as much as 18%.

The rally wasn't limited to cryptocurrencies alone. Crypto-related stocks outperformed the broader market, reflecting investor confidence in Trump’s pro-crypto policies. Coinbase, a leading cryptocurrency exchange, saw its shares jump 17%. Robinhood Markets, a popular trading app that offers crypto, rose 12%, and MicroStrategy, known as the largest corporate holder of Bitcoin, gained 10%.

Today, cryptocurrency has become a prominent asset class in the global market, with growing institutional and retail adoption despite ongoing volatility and regulatory challenges. Bitcoin and Ethereum remain dominant, while newer blockchain networks like Solana and Binance Smart Chain compete by offering faster, more scalable solutions.?

Countries are increasingly responding to crypto’s impact: some, like El Salvador, have adopted Bitcoin as legal tender, while others, such as China, have banned crypto trading altogether. Meanwhile, regulatory frameworks are tightening in major economies like the U.S. and the EU, where governments seek to balance innovation with investor protection.

This is because the current model is centered around Central banking, a centuries-old system. Beginning with early institutions like Sweden’s Riksbank (1668) and the Bank of England (1694), central banks initially focused on managing government debt and issuing currency. In the 20th century, their roles expanded, with the establishment of the Federal Reserve in the U.S. and a shift from the gold standard to fiat currency, giving central banks more control over monetary policy.

Today, central banks are powerful economic players, managing inflation and interest rates to influence growth. However, their policies are increasingly criticized for exacerbating economic cycles, contributing to inequality, and encouraging unsustainable debt. Low interest rates, for instance, can lead to asset bubbles, as seen in the 2008 financial crisis, while policies like quantitative easing (QE) disproportionately benefit asset owners, widening wealth gaps. Central banks' independence, intended to shield them from political influence, also raises questions about accountability, with unelected officials holding significant sway over economies.

In a recent interview, Federal Reserve Chair Jerome Powell firmly stated, "No," when asked if he would resign if requested by President-elect Donald Trump, adding that the president lacks legal authority to demote him or any other Fed governors at will.

The Arguments for Crypto

The surge in cryptocurrency interest reflects widespread distrust in traditional financial institutions and fiat currencies, as well as frustration over limited access to banking services for millions worldwide. This sentiment is driven by several key factors:

• Decentralization and Control: Cryptocurrencies operate on decentralized networks, such as blockchain, which reduces dependence on central banks and governments. This decentralized structure allows individuals greater autonomy over their finances, often seen as a safeguard against economic instability, corruption, and devaluation in regions with untrustworthy financial systems. Unlike traditional banking, where institutions control transactions, users of cryptocurrencies hold direct ownership of their assets, empowering them to manage and transfer wealth without intermediaries.

• Financial Inclusion: Cryptocurrencies offer financial access to the billions who are unbanked or underbanked, especially in developing nations where traditional banking infrastructure is limited or unreliable. With only an internet connection, individuals can participate in the crypto economy, accessing services like loans, savings, and transfers without needing to qualify for traditional bank accounts. This can be life-changing in regions where banking discrimination, high fees, or logistical challenges prevent many from using financial services.

• Protection Against Inflation and Currency Instability: In countries with high inflation or economic crises, local fiat currencies often lose value rapidly. Cryptocurrencies, particularly those with limited supplies like Bitcoin, are seen by many as a hedge against inflation, providing an alternative to currencies that are constantly devalued. This appeal extends beyond struggling economies to developed nations, where quantitative easing and large-scale government interventions have led some to seek alternatives to fiat currencies.

• Transparency and Trust: Blockchain technology provides a transparent and secure ledger of transactions that cannot be easily altered. This transparency contrasts with traditional banking systems, where operations can be opaque, leading to mistrust among consumers. Scandals, financial crises, and government interventions have left many questioning the reliability of banks and fiat currency, making the open and public nature of blockchain technology an attractive alternative.

The Problem with Crypto

1. Lack of Tangible Services or Products Being Exchanged: ?One of the main criticisms of cryptocurrencies is that they often do not represent any underlying product or service. Unlike traditional investments or assets that are tied to tangible goods, services, or businesses, cryptocurrencies like Bitcoin and Ethereum are primarily speculative in nature. The value of these digital assets is largely driven by demand, speculation, and the promise of future returns, rather than being linked to the creation or exchange of real-world goods or services. This disconnect raises concerns about their long-term viability and sustainability as legitimate economic drivers.

2. Energy Consumption: Cryptocurrencies, particularly those that rely on proof-of-work (PoW) algorithms like Bitcoin, consume massive amounts of energy to mine and verify transactions. The mining process requires vast amounts of computational power, which in turn demands significant electricity consumption.?

As of 2023, Bitcoin's annual electricity consumption was estimated to be around 95 terawatt-hours (TWh). This is more than the annual energy consumption of countries like Argentina (approximately 122 TWh annually) and Norway (approximately 124 TWh annually). In fact, Bitcoin's energy usage is significantly larger than Visa and Mastercard plus the whole current financial system, further exacerbating the causes of climate change.

3. Get-Rich-Quick Mentality: The rapid rise in cryptocurrency values has fostered a speculative, get-rich-quick fever. Many people are drawn into crypto trading with the hope of striking it rich, often without understanding the risks involved. This mentality has led to a volatile market, where prices can swing wildly in short periods. New investors may be lured by stories of massive returns, only to experience sharp losses when market conditions change. This speculative behavior has contributed to financial instability, as the market is driven more by hype and the desire for quick profits than by any intrinsic value or stability. As a result, cryptocurrencies have become a high-risk gamble rather than a reliable financial tool.

MMT: An Interesting Alternative

Modern Monetary Theory (MMT) is an economic framework that challenges traditional views on government spending, taxation, and national debt. It offers a new perspective on how economies function, particularly in terms of government fiscal policy and the role of currency issuance.?

MMT argues that countries that issue their own currency, like the U.S. with the dollar, are not financially constrained in the same way that households or businesses are. Such governments can never run out of money in their own currency because they have the power to create it at will. This is in contrast to conventional thinking, which suggests that governments need to raise taxes or borrow money before spending.

According to MMT, the government can finance its spending by creating more money (through central bank actions), without the need to rely on borrowing or taxing. This contrasts with the traditional view that a government needs to "balance the budget" by matching spending with revenue. In this model, Taxes are not primarily used to fund government spending but are seen as a way to manage inflation by reducing the amount of money in circulation. Similarly, the issuance of bonds is seen as a tool to control interest rates, rather than a necessity for financing spending.

One of the central tenets of MMT is that the government can, and should, ensure full employment by acting as an "employer of last resort." This means the government should fund projects or programs to hire unemployed people, particularly during economic downturns, to ensure that there are always jobs available for those willing to work. MMT advocates believe that there is often untapped productive capacity in an economy, and government spending can mobilize this underutilized labor and resources without causing inflation, as long as the economy has room for growth.

Government debt is viewed not as a burden but as a way for the government to manage the economy's money supply. When a government borrows, it’s essentially issuing bonds that are a form of saving for the private sector. MMT proponents argue that deficits are not inherently harmful and do not need to be balanced by raising taxes or cutting spending. They suggest that rather than focusing on the size of the budget deficit, the focus should be on ensuring that inflation is kept under control and that the economy operates at full capacity.

THE TEDCAP APPROACH

The lessons from historical financial bubbles, such as the Tulip Mania and the South Sea Bubble, offer valuable insights when considering the evolving landscape of cryptocurrencies, particularly in the context of Latin America. These events serve as stark reminders of the dangers of unchecked speculation and the volatile nature of financial markets driven by irrational exuberance rather than underlying value.?

In addressing the risks and opportunities of the current financial reality in the region, it is essential to take a community-centered approach that considers the diverse needs and potential vulnerabilities of the region. Latin America faces significant socioeconomic challenges, including high levels of poverty, inequality, and unstable economic conditions, and these frameworks can offer both promise and peril.?

MMT, for instance, offers the opportunity to fund much-needed infrastructure and social programs, but it requires careful management to avoid inflation and ensure that spending benefits all communities, particularly the most vulnerable. Similarly, while cryptocurrencies could offer greater financial inclusion and protection against currency devaluation, their volatility and regulatory uncertainty highlight the need for protective measures to safeguard individuals from market manipulation and fraud.?

Central banking, on the other hand, provides a more stable foundation for economic growth, yet political interference and the risk of exacerbating wealth inequality remain significant concerns. Ultimately, a balanced approach that integrates these strategies—carefully managing MMT’s potential, regulating cryptocurrencies, and strengthening central bank independence—could help foster a more equitable and resilient economy for all in the region.