Until now, the growth in the cryptocurrency markets has been a sideshow to the financial markets, the real economy. The prices of cryptocurrencies, like bitcoin, have increased a lot. However, if it were all to come crashing down, then it should not have any significant impact on regular people.
There are companies with publicly traded stocks beginning to make decisions that indicate that they stand to benefit from cryptocurrencies. The markets are starting to reward them for those decisions. If this were to continue, those who aren’t involved in cryptocurrencies would suffer when there is a cryptocurrency bust.
And there’ll be one.
Longfin Corp. could be a new symbol of this movement. Their stock rallied more than 2,000% in just a week following its announcement that they bought a “blockchain-empowered global micro-lending solutions provider”. When the stocks climb based on press releases like this, it is essential that you don’t get too caught up in the aspects of the announcement or what it implies for the business. The hype itself is what leads to these types of distortions in markets.
Surge of “lesser coins”
Perhaps the cryptocurrency mania evolution should have been apparent following the surge in several of the “lesser coins” last week. Last week, a number of the coins began the week at under $1, and their value went up by 100% or more. Another theory for the movement was that with the price of Bitcoin more than $15,000, new participants in cryptocurrency markets who deposit a few thousand dollars could afford just a fraction of a bitcoin. There is something unsatisfying psychologically when it comes to owning even only a fraction of something. However, that same small deposit can purchase hundreds or thousands of a cheaper coin, fueling rallies in those.
Seeing the previously undiscovered or unknown coins rally like Bitcoin creates a new psychological element for participants who’re now hoping that they can find “the next Bitcoin”. And if the coins other than Bitcoin can double or even triple in price in just a week, then why not also the stocks of companies that promote their links to the trend?
All this is sensible from the standpoint of cryptocurrency participants. However, it should worry those who hoped that the real markets and the economy would remain insulated from the frenzied cryptocurrency world. The Longin craze indicates that the markets want more supply of companies that have links to cryptocurrencies. If there is one thing that Wall Street is good at, it is meeting the investor demand with new supply. Whether it is via acquisitions, business model pivots, or press releases, we will see even more companies that have publicly traded stock turn towards cryptocurrencies for as long as the craze continues.
Also, it is unlikely that these companies with newly bid-up valuations will be suitable users of capital and other resources. They will be hiring people, opening new offices, purchasing equipment, and investing in advertising to pursue the cryptocurrency boom. That money will start to flow to the real companies which service those speculative cryptocurrency companies. This increases the display of the real economy to the cryptocurrency one. It means a temporary but questionable boost to economic growth.
Until now, it has been easy to belittle the cryptocurrency boom or to ignore it if you were not interested. However, the rally has expanded from bitcoin to other coins, from those other coins to companies which brag about links to cryptocurrencies, potentially soon those companies which are bidding for resources in the real economy, we are going to see that cryptocurrencies will impact the real economy. It is time to take notice of it and to be cautious.