Cryptocurrencies and Bubble Wealth

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I would like to thank Rob Arnott, John Cochrane, Andrew Cornell, Shaun Cornel, Aswath Damodaran, Jason Hsu, Richard Roll, and Subra Subramanyam for helpful comments.

Americans hold over $1 trillion in cryptocurrencies. Has $1 trillion in wealth been created?

From the standpoint of economic theory, the answers is “no.” The wealth of a society consists of its real assets that produce consumable goods and services. Unless a cryptocurrency provides some type of convenience yield how could it create wealth? On the other hand, everyone who holds the currency thinks of its as wealth because it can be sold and converted into consumption.

This short note takes a step in resolving the apparent paradox by presenting a very simple numerical example of the operation of what I call Bubble Wealth.

The example begins with an “economy” that consists of three individuals: A, B, and C. At the outset in period 0, the wealth of each of them consists of 10 units of a “stock” pays out in terms of future consumption. Consequently, both the aggregate social wealth, the claims to future consumption, and the perceived social wealth, calculated by summing the perceived wealth of all the individuals, are both 30 units as shown in the exhibit below.