Housing and Crypto: What do they have in common?
The market for cryptocurrencies just keeps growing. Every 10% drop seems to be followed by a 20% uptick. While it may seem like everything is going to go up forever the current level of growth isn’t sustainable. It’s becoming more and more difficult to make informed decisions with all the noise coming from the volatile marketplace. When currencies like Bitcoin Cash are magically created out of thin air with a multi billion dollar network value, the market seems to be irrational at best. It raises the questions is BCH valued highly only because supply is capped by the large number of people who hold their BCH keys in wallets that don’t support BCH? The BCH network value is determined based on all the tokens in the network, but if all the tokens in the network cannot be accessed what does that do to the network value? Are we in an irrational market? It’s hard to say and I’ll be the first person to admit I don’t have the answers. The only thing I can do is try to filter the noise.
Comparing the current market to past economic markets can be a helpful tool, but it’s a slippery slope. One comparison I’ve seen cryptocurrency and the housing bubble. By investigating the comparison farther it became evident that cryptocurrencies should not be be compared to the housing bubble. There’s not much to learn from the comparison, the only thing they have in common is both went through a phase where people made incredible sums of money.
To understand the housing bubble you have to understand why it happened. It starts with the dotcom bubble. The dotcom bubble was the culmination of a 20 year bull market that got out of hand. After the crash, when the NASDAQ fell from ~$5000 all the way to as low at $1,108.49. The Federal Reserve was looking for a way to bring the economy back from the dead. So, the Fed released a statement promising to keep interest rate low for a period of time. Lowering interests rates worked as intended and the banks started to rampantly borrow money, spurring the economic recovery. With increased borrowing banks began to offer more mortgages.
It quickly became a social issue and americans continued to latch on to the idea that owning a home was part of the american dream. Banks “out of pure altruism” pushed for programs to offer mortgages to historically underserved minority and low-income communities. Some politicians had the foresight to see that things were starting to get out of hand. New regulation was even proposed to enforce more strict mortgage credit checks. That’s when Fannie Mae and Freddie Mac, the nation’s largest mortgage provider, went on the offensive. Fannie Mae and Freddie Mac aired a tv commercial of a hispanic couple. The man complained that congress was planning on passing new regulation for Fannie Mae. The woman stated that the regulation wouldn’t allow them to receive a lower interests rate. Then both lamented that they wouldn’t be able to afford a new home. That was enough to paint the government as the bad guys.
The public suddenly felt attacked and home ownership became a major selling point for politicians going up for reelection. Troves of “pro-mortgage” voters came to the ballots and any politician who was a proponent of new regulation risked not being re-elected.The nation’s hands were tied. Politicians couldn’t do anything if people felt they were trying to steal their right to homeownership. Everything was going too well. Banks were making money and average Americans were obtaining homes they previously couldn’t afford. Everyone was happy. Think about it; who wants to be the party-pooper in that situation? So, regulation was never passed and the rest is history.
The issue of the housing bubble was a regulatory issue and a greed one. Banks behaved fraudulently and knowingly propped up the economy on bad mortgages. The housing market was controlled by large banks and established money. The SEC had no issue calling the DAO a security. Calling the DAO a security will set them up to make an example out of someone or some entity. It seems unlikely that the government will be handcuffed in the same way as they were in 2004.
As useless as this conclusion may seem, it’s a building block. By developing these minor conclusion about the cryptocurrency market hopefully we can filter out the excess noise and begin to understand what an overnight $10 billion evaluation means. Cryptocurrency is unique. It isn’t the second anything; it’s the first of it’s kind and it should be viewed through those lenses.
