Why Falling Crypto Prices May Actually Benefit the General Economy

After a record-breaking year for cryptocurrencies that saw Bitcoin reach heights of $120,000 in October, the market has experienced a significant downturn, with Bitcoin now trading around $88,000—approximately 12% lower than a year ago. While crypto investors may lament these losses, economist Dean Baker suggests this decline could actually benefit the broader economy.

The Counterfeit Currency Analogy

Baker, co-director of the Center for Economic and Policy Research, draws a compelling parallel between cryptocurrencies and counterfeit money in his recent blog post. He argues that crypto, which lacks intrinsic value, functions similarly to fake currency that allows certain groups to purchase scarce resources like housing and event tickets, driving up prices for everyone else.

When crypto prices fall, Baker suggests it’s comparable to removing counterfeit bills from circulation—it reduces artificial demand in the economy and can help reverse price increases in various sectors. This ultimately benefits those who don’t participate in the crypto market.

Quantifiable Economic Impact

The economic implications of crypto’s decline aren’t merely theoretical. According to Baker’s analysis, major cryptocurrencies like Bitcoin and Ethereum have lost over $1.2 trillion in market capitalization during the recent downturn. To put this in perspective, that amount could theoretically provide every U.S. household with a $10,000 check.

This substantial reduction in crypto market value potentially eases pressure on real economic resources, making them more accessible to the general public. Baker suggests that when crypto’s share of the economy shrinks, it creates more availability for everyone else.