I think crypto performed well in the Monday pseudo-crash

 [[{“value”:”Of course the crypto prices fell first, over the weekend.  I think Bitcoin fell by about 15 percent? You can think of crypto as a hedge against illiquidity, rather than against inflation, or against the decline of America, or whatever.  There are not enough liquid assets!  So sometimes solvent economies go tails up, because debtors
The post I think crypto performed well in the Monday pseudo-crash appeared first on Marginal REVOLUTION.”}]] 

Of course the crypto prices fell first, over the weekend.  I think Bitcoin fell by about 15 percent?

You can think of crypto as a hedge against illiquidity, rather than against inflation, or against the decline of America, or whatever.  There are not enough liquid assets!  So sometimes solvent economies go tails up, because debtors do not have enough liquidity to meet their obligations.

Putting another liquid asset in the mix, in this case Bitcoin, eases that liquidity constraint.  You can’t meet your margin call?  Just sell some Bitcoin!

Economies will become more resilient to liquidity squeezes, especially from surprise events, for instance the financial volatility in Japan.  And the crypto prices falling, when other asset prices fall, is a sign of this mechanism working, not of crypto failing.

Of course it is not entirely so simple.  In the longer run, the liquidity of crypto will encourage people to take out more debt.  Still, overall, an economy with more liquid assets should (usually) have superior risk-sharing properties.

I don’t see this aspect of crypto discussed very much.

The post I think crypto performed well in the Monday pseudo-crash appeared first on Marginal REVOLUTION.

 Current Affairs, Economics