November 30, 2022
The ECB blog examines where Bitcoin stands amid the widespread impact on the cryptocurrency market following the collapse of major cryptocurrency exchanges.
Bitcoin’s value peaked at US$69,000 in November 2021 before declining to US$17,000 by mid-June 2022. Since then, the value has fluctuated around US$20,000. For Bitcoin proponents, the seeming stability represents a breather on the road to new heights. But it is perhaps the last artificially induced gasp before the road to irrelevance – and this was already foreseen before FTX collapsed and Bitcoin price fell well below US$16,000. I got
Bitcoin is rarely used for legitimate transactions
Bitcoin was created to overcome the existing monetary and financial system. In 2008, the pseudonymous Satoshi Nakamoto presented the concept. Since then, Bitcoin has been marketed as a global decentralized digital currency. However, due to Bitcoin’s conceptual design and technical shortcomings, it has been questioned as a means of payment. Real Bitcoin transactions are cumbersome, slow, and expensive. Bitcoin has never been used for legitimate real-world transactions on a large scale.
In the mid-2010s, the hope that Bitcoin’s value would inevitably rise to new heights began to dominate the narrative. But Bitcoin is also not suitable for investment. It does not generate cash flows (like real estate) or dividends (like stock), cannot be used productively (like a commodity), or provide a social benefit (like gold). Bitcoin market valuations are therefore based purely on speculation.
Speculative bubbles depend on new money flowing in. Bitcoin has also repeatedly benefited from waves of new investors. While the operations by individual exchanges, stablecoin providers, etc. during the first wave are well documented, the stabilizing factors after the supposed burst of the bubble in the spring are less documented.
Large Bitcoin investors have the strongest incentive to stay euphoric.
Large Bitcoin investors have the strongest incentive to stay euphoric.At the end of 2020, orphaned companies began promoting Bitcoin at corporate expense. of venture capital (VC) firms are also investing heavily. Despite the ongoing “crypto winter,” VC investments in the crypto and blockchain industry totaled US$17.9 billion as of mid-July.
Regulation can be mistaken for approval
Big investors also fund lobbyists who push their case on lawmakers and regulators. In the US alone, the number of cryptocurrency lobbyists has almost tripled from 115 in 2018 to 320 in 2021.
But to influence lobbying, you need a soundboard. In fact, legislators sometimes encourage the inflow of funds by offering regulations that endorse Bitcoin’s supposed benefits and give the impression that cryptocurrencies are just another asset class. However, the risks of crypto assets are uncontroversial among regulators. In July, the Financial Stability Board (FSB) called for effective regulation and supervision commensurate with the risks posed by crypto-assets and markets, in line with the “same risk, same regulation” principle.
However, legislation on cryptoassets has been slow to ratify in recent years, and implementation has often been delayed. Moreover, different jurisdictions are not moving at the same pace or with the same ambitions. The EU has agreed a comprehensive regulatory package with the Markets in Crypto-Assets Regulation (MICA), but Congress and US federal authorities have yet to agree on consistent rules.
The belief that there must be room for innovation at all costs persists stubbornly.
Current regulation of cryptocurrencies is partly shaped by misunderstandings. The belief that there must be room for innovation at all costs persists stubbornly. Bitcoin has huge transformational potential as it is based on new technology (DLT/Blockchain). First, these technologies have so far created limited value to society – no matter how great the expectations for the future. Secondly, the use of promising technologies is not a sufficient condition for the added value of products based on them.
Supposed regulatory sanctions have also lured the traditional financial industry to make Bitcoin easily accessible to customers. This concerns not only insurance companies and banks, but also asset managers and payment service providers. The entry of financial institutions suggests that investing in bitcoin is healthy for smaller investors.
It’s also worth noting that the Bitcoin system is an unprecedented source of pollution. First, it consumes energy on the scale of the economy as a whole. Bitcoin mining is estimated to consume as much electricity per year as Austria. Second, it creates a lot of hardware waste. A single Bitcoin transaction consumes hardware equivalent to that of two smartphones. The entire Bitcoin system generates as much e-waste as the entire Netherlands. The inefficiency of this system is a feature, not a flaw. Ensuring the integrity of a fully decentralized system is one of its characteristics.
Bitcoin Promotion Takes Reputation Risk for Banks
Bitcoin appears to be neither a payment system nor a form of investment, so from a regulatory perspective it should not be treated as either and should not be legalized. Similarly, the financial industry should be aware of the long-term harms of promoting Bitcoin investment – short-term gains can be made (even if you’re not in the game). If Bitcoin investors suffer further losses, the negative impact on customer relationships and reputational damage to the industry as a whole could be significant.
This ECB blog post was published as an opinion piece by Handelsblatt. The views expressed in each blog entry are those of the authors and do not necessarily represent the views of the European Central Bank and the Eurosystem.
