I suppose to analyze this possibility, we have to think through two possible directions which each end in financial doom:
1) The value of cryptos collapses and never recovers. It becomes known as a fad of the 2020s and enters economic history as an epic bubble.
2) Crypto becomes a major asset in most investors' portfolios and a regular medium of exchange on e-commerce websites like Amazon, Walmart, and Ebay.
First let's look at #1. The total "market cap" in dollars for all cryptos is now $2.6T. If that amount of money melted down to nothing over a period of months/years, it would have an impact on crypto holders similar to the effect of The Big One on residents of California. A reallocation of wealth just like this hypothetical caused a major recession and stock market collapse between 2000 and 2003, and it was on the scale of trillions of dollars, just like a crypto collapse would be. Thus, my prediction is that a crypto collapse would have a similar effect on the economy as the dot-com bubble. Millions of young to middle aged tech-savvy white males would lose a significant chunk of their net worth, and this would lead to interesting grievance politics, particularly if the bubble was perceived to be popped by the government and this politically active demographic started demanding "reparations". If a crypto-reparations bill passed, it would be a huge economic stimulus - helicopter money to former crypto holders - although the unfairness of it all would define politics for the next several generations.
Now let's look at #2. The crisis occurs when the Federal Reserve (or any major reserve bank) is no longer able to control the velocity of money or interest rates through their normal means, because of arbitrage channels. E.g. If the Fed buys assets to increase the velocity of dollars, and those new dollars in the marketplace are simply traded for crypto to balance demand for each currency, then the QE has a fraction of the effect on anything other than crypto prices. Similarly, if the Fed raises interest rates to control inflation of the USD, and via arbitrage this also causes interest rates on crypto lending to go up, then maybe people pile out of dollars and into crypto, causing the foreign exchange rate of the USD to actually fall, and the price of imports to keep going up in USD. Soon market participants realize the Fed's multi-trillion dollar balance sheet is no longer the bulletproof inflation insurance policy they thought it was, that interest rates will have to go very, very high to extinguish any bout of future inflation, and that the Fed is similarly less able to prevent deflationary episodes with QE. If they realize this all at once, risk premia could rise and asset prices could collapse. Similarly the USD would steadily lose value, due to no longer being bulletproof. The era of falling interest rates, rising asset prices, dollar supremacy as the world's reserve currency, high Federal Reserve efficacy, etc. would all collapse at once. My prediction is that this sort of world would resemble the deep depressions, sudden booms, and volatile/uncontrolled currency conditions of the late 1800s to early 1920s. In such a future, China's early crypto bans look prescient. As the remaining empire able to completely control its currency and maintain stability, China's digital currency becomes the world's new reserve currency. The American middle class as we know it shrinks dramatically, amid political deadlock, hand wringing, and class warfare over what to do about the cryptocurrency problem without making things worse.
Let's hope for #1.
