What is the economic impact of cryptocurrencies?


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Although the cryptocurrency market seems to be growing in a positive reaction, this does not mean that (un)expected events may not affect the trajectory of the ecosystem as a whole.

Although blockchain and cryptocurrencies are essentially intended as ‘trustless’ technologies, trust remains key where people interact with each other. The cryptocurrency market is not only affected by the wider economy, but it can also generate profound effects on its own. Indeed, the Terra case shows that any entity — be it a single company, a venture capital firm or a project issuing an algorithmic stablecoin — can potentially set in motion or contribute to a “boom” or “bust” of the cryptocurrency markets.

The impact of such crypto-native events with systemic impact mirroring traditional financial domino effects, and the consequential downfalls of Celsius and Three Arrows Capital, all indicate that the crypto economy is not immune to failures. Indeed, while traditional finance has institutions that are too big to fail, the crypto sector does not.

Hindsight is always easy, but the Terra project was fundamentally flawed and unsustainable over time. However, its fall had a systemic effect as many projects, venture capital and permanent companies were exposed and heavily affected. It indicates that investing in cryptocurrencies is about thinking about risks and potential rewards.

The fall and domino effect across the board indicates the lack of maturity of the sector itself.

Since innovation and prices are fundamentally linked and the early stage development of the crypto economy offers a lot of untapped potential, the aforementioned economy may continue to see events that temporarily undermine growth.

However, many working in the sector have a “faithless” conviction that strong projects will continue during temporary corrections and that the cryptocurrency winter will clear the way for a cycle of limitless, new disruptive innovation.

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