Vitalik Buterin poses that question, do read his whole storm. Here are the last three tweets:

How many Venezuelans have actually been protected by us from hyperinflation?

How much actual usage of micropayment channels is there actually in reality?

The answer to all of these questions is definitely not zero, and in some cases it’s quite significant. But not enough to say it’s $0.5T levels of significant. Not enough.

Let me set aside the question of enabling grey or black market activities, and let us put aside the bubbly component of these assets, which may or may not be real.  I’d like to focus on the underlying fundamentals.

Furthermore, crypto-assets have not consumed half a trillion in social costs, though I’d like to see the electricity bill.  So mine is the concrete question: insofar as crypto-assets have served as hedges and stores of value, is that social value or just a private return at some offsetting rent-seeking-based social cost?

Stores of value

Let’s say I build a warehouse and store some furniture in it, because I am moving and I don’t want to throw out the sofa but need to keep it somewhere for a month.  The gains from storing that furniture can be captured by standard cost-benefit methods, and few would doubt that is a legitimate private and also social efficiency.  I am carrying “sitting capacity” into the future.

With crypto-assets, I am carrying wealth more generally into the future.  The person who most wants that payoff structure for the wealth carry will end up owning the crypto-asset.

Do I hold and carry forward that wealth at the expense of other people?  Is creating a crypto-asset, in welfare terms, a bit like being a counterfeiter and thus rent-transferring and wasteful?  Or is it more like storing a sofa while moving house?

Or is the crypto-asset more like an insurance contract, and thus again wealth-enhancing?  I see it as performing a mix of the store of value and insurance functions.

If the crypto-asset is rent-seeking (the electricity cost aside), exactly whose purchasing power is diminished?  Presumably the Bitcoin and Ether millionaires spend more of their money and drive prices up for others.  But it seems that is a pecuniary externality, not a real social cost of the kind that would justify a judgment of socially wasteful rent-seeking.

Maybe it makes more sense to view the crypto-assets as a new kind of insurance contract: “if some of my other assets go bust, Ether will keep me afloat.”

But who am I buying insurance from?

Dare I sneak the electricity back into the argument, and claim I am buying a form of implicit insurance from the electricity company?  In this view of the world, electricity companies, without knowing it, and in conjunction with some basic crypto facts publicized first by Satoshi, started offering new assets for sale/construction.  Some people wanted to buy those assets, and the process of doing so created these new carry-able “things,” namely crypto-assets.  In essence, a bunch of people agreed to make cryptographic skill something to be rewarded and that created some new Arrow-Hahn-Debreu securities, the value being contingent on both electricity abilities and crypto abilities.

As the purchases of electricity proceeded, and the new ADS securities fell into the market, both consumer and producer surplus went up.  In this view, the electricity costs are no more rent-seeking costs than are the bricks in the building of the insurance company.

Think of crypto-assets as assets whose value depends upon the reliability of “a particular kind of cryptography plus surrounding technologies including electricity.”  That value really does seem to vary with the market portfolio in strange, non-traditional ways, validating its use as a hedge.

Now, let’s say that quantum computing made many crypto problems much easier to crack?  Crypto-assets probably would decline in value or at least they would become riskier (given that forks and governance changes might result, exact predictions are a little tricky).

In other words, crypto-assets are bets on the future progress of crypto technologies, with a corresponding beta of the sort found in traditional finance theory.

Why have crypto-assets risen in value so sharply?  Well, at first few people realized they wanted assets with that risk profile, or even that such assets existed (they were too busy thinking of Bitcoin as an alternate form of currency).  As more people saw the potential here, the price rose rapidly.  Of course there may be bubbly components of the price too.

In the longer run, insurance-useful crypto-assets should yield sub-par returns, precisely because of their insurance and storage values.

Getting back to Buterin’s point

So what then are the major social gains from current crypto-assets?  Buterin misses a big but non-glamorous gain: by serving as efficient stores of value and by providing a new kind of insurance, they help people spend more money.  And indeed that is what so much of finance is about, namely enabling higher levels of consumption.  Is that going to account for half a trillion worth of social value?  Likely not.  Is it higher than electricity bill?  We don’t know, but so far the presumption — the bubbly part of the price aside — ought to be yes.  After all, the value of storing your sofa is higher than the electricity bill of the warehouse, otherwise the storage would not happen.

Possibly significant factors I have not considered: Benefits specific to the Ethereum platform, whether hedging itself is always socially valuable, the welfare economics of the bubbly part of an asset price.