Cryptocurrencies Are Starting to Affect The Real Economy

Cryptocurrencies Are Starting to Affect The Real Economy


Until now, the surge in cryptocurrency markets has been a sideshow to the financial markets or the real economy. Prices have gone up a lot for bitcoin and other cryptocurrencies, and it's fun to joke about things with names like Cardano and Monero going up a lot in value, but if it were to all go up in smoke tomorrow, it shouldn't have any meaningful impact on ordinary people.

But companies with publicly traded stocks are starting to make decisions to show that they stand to benefit from cryptocurrencies, and markets are beginning to reward them in a big way for those decisions. Should this continue, people not involved in cryptocurrencies will suffer when there's a crypto bust. And there will be a crypto bust.

The new symbol of this movement might be Longfin Corp., whose stock rallied over 2,000 percent in a week after announcing it bought a "blockchain-empowered global micro-lending solutions provider." When stocks surge based on press releases like this, it's important not to get too caught up in the details of the announcement or what it means for the business; the hype itself is what causes such distortions in markets.

Perhaps this evolution in the cryptocurrency mania should've been obvious after the surge in some of the "lesser coins" last week. The website shows a list of the top cryptocurrencies, and the story last week was some of the coins that started the week under $1 going up in value by 100 percent or more. One theory for the move was that with bitcoin priced over $15,000, new participants in crypto markets who deposit a few thousand dollars are able to afford only a fraction of a bitcoin. There's something unsatisfying psychologically about owning a fraction of something. But that same small deposit can buy hundreds or thousands of cheaper coins, fueling rallies in those.

Seeing previously unknown or undiscovered coins rally like bitcoin creates a new psychological element for participants who are now hoping to find "the next bitcoin." And if coins other than bitcoin can double or triple in price in a week, why not the stocks of companies that tout their links to the trend?

This is all sensible from the standpoint of cryptocurrency participants, but should start to worry those who hoped real markets and the economy would stay insulated from the crypto Wild West. The Longfin mania shows that markets want more supply of companies with ties to cryptocurrencies. And if there's one thing Wall Street is good at, it's meeting investor demand with new supply. Whether via acquisitions, press releases or business model pivots, we're going to see more companies with publicly traded stocks pivot towards cryptos for as long as the mania continues.

And these companies with newly bid-up valuations are unlikely to be good users of capital and other resources. They're going to be hiring people, renting office space, purchasing equipment, and spending money on advertising to chase the crypto boom. That money is going to flow to real companies servicing those speculative crypto companies, increasing the exposure of the real economy to the crypto one. This means a temporary boost to economic growth, but of questionable quality.

Until now, it's been easy to scoff at the cryptocurrency boom, or ignore it if you weren't interested. But as the rally has spread from bitcoin to other coins, from those other coins to companies touting links to cryptocurrencies, and potentially soon those companies bidding for resources in the real economy, we're going to see cryptocurrencies impact the real economy. It's time to take notice, and to be afraid.

This column does not necessarily reflect the opinion of the editorial board or Bloomberg LP and its owners.