bitcoins last fight

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November 30, 2022

By Ulrich Bindseil and Jrgen Schaaf

Amid the widespread fallout in crypto markets following the collapse of a major crypto exchange, the ECB blog takes a look at where we stand with Bitcoin.

Bitcoin’s value peaked at $69,000 in November 2021 before dropping to $17,000 in mid-June 2022. Since then, the value has fluctuated around $20,000. For bitcoin proponents, the apparent stabilization signals a pause on the path to new highs. More likely, however, this is an artificially induced last gasp before the path of irrelevance and it was already predictable before FTX went bankrupt and sent the price of bitcoin well below $16,000. .

Bitcoin is rarely used for legal transactions

Bitcoin was created to overcome the existing monetary and financial system. In 2008, pseudonym Satoshi Nakamoto released the concept. Since then, Bitcoin has been marketed as a global decentralized digital currency. However, Bitcoin’s conceptual design and technological shortcomings make it a questionable means of payment: actual Bitcoin transactions are cumbersome, slow, and expensive. Bitcoin has never been used in any meaningful way for legal transactions in the real world.

In the mid-2010s, the hope that Bitcoin’s value would inevitably soar to new heights began to dominate the narrative. But Bitcoin is also not suitable as an investment. It does not generate cash flow (like real estate) or dividends (like stocks), cannot be used productively (like commodities), or provide social benefits (like gold). The market valuation of Bitcoin is therefore based solely on speculation.

Speculative bubbles depend on the influx of new money. Bitcoin has also repeatedly benefited from waves of new investors. Manipulation by individual exchanges or stablecoin providers, etc. during the first waves are well documented, but less the stabilizing factors after the supposed bursting of the bubble in the spring.

Big bitcoin investors have the most incentive to keep the euphoria going.

Big bitcoin investors have the most incentive to keep the euphoria going. In late 2020, isolated companies started promoting Bitcoin at company expense. Some venture capital (VC) companies are also still investing heavily. Despite the ongoing “crypto winter,” venture capital investments in the crypto and blockchain industry stood at $17.9 billion as of mid-July.

The settlement may be misinterpreted as an endorsement

Big investors also fund lobbyists who take their case to lawmakers and regulators. In the US alone, the number of crypto lobbyists has nearly tripled, from 115 in 2018 to 320 in 2021. Their names sometimes read like a who’s who of US regulators.

But lobbying activities need a sounding board to have an impact. Indeed, lawmakers have sometimes facilitated the influx of funds by supporting the supposed merits of Bitcoin and proposing regulations that make crypto-assets seem like just another asset class. Yet, the risks of crypto assets are undisputed among regulators. In July, the Financial Stability Board (FSB) called for crypto-assets and markets to be subject to effective regulation and oversight commensurate with the risks they pose – under the “same risk, same regulation” doctrine. .

However, crypto-asset legislation has sometimes been slow to ratify in recent years – and implementation often lags behind. Moreover, the different jurisdictions are not advancing at the same pace and with the same ambition. While the EU has agreed on a comprehensive regulatory package with the Markets in Crypto-Assets Regulation (MICA), Congress and US federal authorities have not yet been able to agree on consistent rules.

The belief that space must be given to innovation at all costs persists stubbornly.

Current cryptocurrency regulation is partly shaped by misconceptions. The belief that space must be given to innovation at all costs persists stubbornly. Since Bitcoin is based on a new technology – DLT/Blockchain – it is said to have high transformation potential. First, these technologies have so far created only limited value for society, regardless of expectations for the future. Secondly, the use of a promising technology is not a sufficient condition for the added value of a product based on it.

The supposed regulatory sanction has also tempted the mainstream financial sector to make it easier for customers to access bitcoin. This concerns asset managers and payment service providers as well as insurers and banks. The entry of financial institutions suggests to small investors that investments in Bitcoin are solid.

It should also be noted that the Bitcoin system is an unprecedented polluter. First, it consumes energy across entire economies. Bitcoin mining is estimated to consume electricity per year comparable to Austria. Second, it produces mountains of material waste. A Bitcoin transaction consumes hardware comparable to the hardware of two smartphones. The whole Bitcoin system generates as much electronic waste as the whole of the Netherlands. This inefficiency of the system is not a defect but a characteristic. This is one of the particularities of guaranteeing the integrity of the totally decentralized system.

Promoting Bitcoin carries reputational risk for banks

Since bitcoin appears to be suitable neither as a payment system nor as a form of investment, it should be treated as neither in regulatory terms and therefore should not be legitimized. Similarly, the financial sector should be wary of the long-term damage of promoting Bitcoin investments – despite the short-term profits they might make (even without their skins in the game). The negative impact on customer relationships and reputational damage to the entire industry could be enormous once Bitcoin investors suffer further losses.

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This ECB blog post appeared as an opinion piece in the 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.

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