…in the short term as the supply of new tokens becomes restricted, and if demand stays the same. However, further regulations are more likely to take prices lower. Down the line, I would not be surprised if some tokens disappear completely.

To a certain extent, the crypto-mania now reminds me of the dotcom mania in the late 1990s. Both of them have an underlying cause that justifies their rise. In the case of dotcom it was the beginning of the digitalization of society (new ways to connect, work and entertain) and the promise of the commercial internet (new way to shop!). In the current crypto-currencies craze, the underlying cause is the scarcity of money, stemming from the rise of inequality on the back of the breakdown of the Work=Job=Income model, and the following promise of creating the new medium of exchange using a totally different framework (i.e. if we cannot get  the medium of  exchange by having a job, and it the central banks would not print the medium of exchange and  distribute it to the population at large, the population at large will create its own medium of exchange).

I know bitcoin, for example, is down 12% from the announcement of the ban on ICOs. That’s still less than the last time, in March this year, when PBOC also announced it was looking into tightening regulations on bitcoin trading. But that’s beside the point. One could say the most recent news is, actually, more important.

And it is indeed more likely that as the authorities start introducing even more regulations on crypto-currencies, their prices will become … less volatile but also settle down in a lower range. After all, without regulations, and without an underlying businesses per se, crypto-currencies currently do have an advantage over other regulated asset classes. But, strictly speaking, from a flow perspective, restricting the supply of an asset, should make its price go up, if demand is unchanged. The fact that new ICOs are not allowed should make the existing tokens more valuable.

Of course, that is only a short-term view, which does not take into account the possibility of further regulatory actions. It is surprising to me that it has taken such a long time for authorities to start looking into these ICOs and also, in general, into the spread of crypto-currencies, given that the latter are a direct threat to their own legal tender. In fact, there is confusion globally as to what indeed those crypto-currencies are. Are they an asset, a currency, or legal tender? Not only different countries have different definitions but in some countries the definitions vary depending on the regulatory authority even!

For the current crypto-mania to subside we do need to see central banks introducing their own digital legal tender accessible to everyone in society (and not just to banks and other select financial institutions as is the case now with central bank reserves). In other words, authorities need to address the underlying cause of the spread of the crypto-currencies. All other measures would most likely only temporarily slow-down their rise.

 

It should be abundantly clear by now, but let me state it here, that this blog does not constitute an investment advice. And I have no positions in any crypto-currencies/tokens.