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Runs on crypto, no surprise there

Runs on financial institutions are one of the most fascinating and chilling stories in economics.

The bankruptcy of Jay Cooke and Company in 1873 was disastrous for the economy. The failure in 1930 of the fourth largest bank in New York City – the Bank of the United States – helped push the economy into a depression.

The liquidity crisis at Bailey Building & Loan in “It’s a Wonderful Life” nearly ruined the town. (OK, it’s from a fictional story you might watch over the holidays.)

Financial failures throughout much of history have often damaged the broader financial system and economy.

Reminiscent of a bank run, the crypto empire of Sam Bankman-Fried filed for bankruptcy after investors ran for the exits. The latest collapse of the crypto business follows on the heels of another crash in the spring. Financiers estimate that trillions have disappeared. Still, there hasn’t been a “Lehman moment” with crypto failures, at least so far. The failure of Lehman Brothers in 2008 deeply damaged the global financial system.

Crypto is not that important to the financial system or economy despite the constant hype about digital currencies. Crypto is still looking for a reason to exist other than another opportunity to gamble. The dream among libertarian digital evangelists that crypto would transform the economy has been repeatedly dashed.

Remember when crypto was supposed to provide a valuable hedge against inflation? Oops. The mantra that crypto was a safe investment in times of chaos has also fallen short considering our perilous times, including Russia’s invasion of Ukraine and an energy crisis.

“I don’t see where crypto has produced much value for society, and it’s a fairly expensive industry (if only in energy consumption),” writes George Mason University economist Scott Sumner.

Crypto may finally find a mainstream reason to exist. For now, the collapse reinforces the insight that financial promises that are too good to be true should be avoided.

As I wrote in a recent column, crypto companies offering double-digit returns to get owners to deposit their crypto with them were an alarm bell when market rates were close to zero. High returns screamed high risk.

Another lesson: Even if financial institutions make it possible for employees to invest some retirement savings in crypto, you should decline the option. Finally, don’t believe the hype. Bubbles are always going to pop!

There’s nothing wrong with dabbling with some taxable entertainment money to try your luck and learn about a financial innovation. Just limit the money at risk to your entertainment budget. Caveat emptor!

Farrell is economics contributor to the Star Tribune, Minnesota Public Radio and American Public Media’s “Marketplace.”

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