Bitcoin’s problems go way beyond Elon Musk
All the speculative manias of the market produce signature characters. From Yale economist Irving Fisher, who in October 1929 said stock prices had reached “what looks like a permanently high plateau,” to Charles Prince, CEO of Citigroup, who in July 2007 , remarked, “As long as the music is playing, you have to get up and dance,” these individuals are forever tied to the bubbles they found themselves in. When Bitcoin’s history is written, there will be plenty of crypto boosters to choose from. , like the Winklevoss twins; hedge fund manager Paul Tudor Jones; and Cathie Wood, pioneer of funds dedicated to investing in disruptive companies. Right now, however, the person most clearly associated with Bitcoin’s struggles is Elon Musk, the CEO of Tesla and SpaceX.
As the the Wall Street newspaper reported over the weekend, Musk “has become Bitcoin’s biggest influencer whether we like it or not.” In January, he added “#bitcoin” to his Twitter profile; the following month, Tesla announced that it had purchased $ 1.5 billion worth of bitcoin and accepted payment for its e-vehicles in digital currency. A few weeks ago, however, Tesla reversed its decision to accept bitcoin, a move Musk attributed to concerns about its environmental impact. (By some estimates, electronically mining new bitcoin uses more power than mid-sized countries like Argentina and the Netherlands.) After peaking at nearly sixty-five thousand dollars each, in April, the value of bitcoin was already declining before Tesla’s reversal. Many crypto speculators have accused Musk of adding to the downward pressure, which at one point last week led to the sales panic. As of early Monday afternoon, bitcoin was trading at around thirty-seven thousand five hundred dollars.
It makes an entertaining tale to focus on Musk, but the issues facing the crypto market extend far beyond a single individual. In short, the bitcoin boom faces two existential threats: a tightening of monetary policy by the Federal Reserve and legal crackdown by Chinese governments and others concerned with protecting their own currency. The prospect of a Fed change could cause the price of bitcoin to fall much further. The specter of concerted government action to restrict the trade and use of bitcoin is potentially even more perilous: it calls into question the long-term viability of digital currency.
To see the impact the Fed has had on the value of bitcoin, all you need to do is look at the currency’s price chart for about a year. As of mid-March of last year, a single bitcoin was worth less than six thousand dollars. Then the Fed announced a massive stimulus to support the economy during the coronavirus pandemic. After the Fed’s move, the prices of virtually all risky financial assets began to rise, and bitcoin has been one of the biggest beneficiaries of this trend. At the start of this year, it was trading above thirty thousand dollars. Like classic bubbles, its rise has become self-sustaining, as investors – professionals and amateurs alike – have rushed to capitalize. Another factor was the abstract nature of bitcoin. Since it does not generate any cash flow, the value of bitcoin as an investment asset is essentially arbitrary. Like a work of art, it’s worth what people believe it’s worth – a fact that Deutsche Bank analyst Marion Laboure pointed out in a March 2021 research report. She called it “the effect.” Tinker Bell”.
True, some bitcoin boosters claim that currency is the new gold: an asset which, while of limited intrinsic use, provides valuable hedge against a downturn in the stock market and other financial assets. Recently, however, bitcoin has acted more like a risky stock even, falling sharply as bond yields rose and investors worried about a change in Fed policy to avoid the threat of inflation. Last week’s rout coincided with news that some Fed policymakers want to start discussing a plan to tighten the central bank’s tap, which has remained fully open even as the economy has rebounded. As bitcoin plunged last week, the price of real gold rose.
Even now, long-term bitcoin holders are sitting on big profits, and some optimists insist the value will rebound and reach new highs as more institutional investors accept crypto as a d-class. ‘legitimate assets. Last week, Wood, the bitcoin promoter who heads Ark Investment Management, reiterated an earlier claim that the price could reach five hundred thousand dollars. She also predicted that “Elon will come back and be a part of this ecosystem.” Musk, for his part, tweeted emojis of a diamond and a pair of hands, apparently indicating that Tesla has no plans to liquidate his bitcoin investments. (On social media platforms, some people use these “diamond hands” emojis to signal their intention to keep a stock.)
Given the nature of speculative markets and the widespread interest in the blockchain technology that underlies bitcoin and other digital currencies, it doesn’t make sense to make firm predictions. But, in addition to facing the possibility of a reversal in US monetary policy, crypto-bulls face the possibility that other countries will follow China’s lead and crack down on bitcoin – the rise of which could. present a competitive threat to government-issued currencies – like the renminbi, the euro, and even the dollar – also known as fiat currencies. If bitcoin or some other peer-to-peer digital currency were widely accepted as a form of payment, it would be deep global economic development. Commercial banks could be bypassed. Financial regulation could be bypassed. Governments could lose control over monetary policy and the ability to track money transfers for tax and crime-fighting purposes.
At the start of last week, three state-run Chinese financial agencies warned Chinese banks not to provide their customers with services related to bitcoin and other virtual currencies, including trading, storage or acceptance. as a means of payment. Later in the week, the State Council, the Chinese cabinet, issued a statement saying, “We should crack down on bitcoin mining and trading activities and prevent individual risks from being passed on to the public. ‘whole of society.’ Since the bitcoin mining system relies heavily on energy supplied by Chinese power plants, this was not an inactive threat. And China has accompanied its moves against bitcoin by taking steps to deploy its own digital currency, which will initially circulate alongside cash.
The United States and other Western countries have not yet gone as far as China, but their governments are not sitting idly by either. Earlier this year, Janet Yellen, the Secretary of the Treasury, described bitcoin (correctly) as “an extremely inefficient way to conduct transactions” and (equally correctly) pointed out that it is used “often at times. illicit financing purposes ”. (A few weeks ago, when Colonial Pipeline, the company that runs a main fuel supply line on the east coast, agreed to pay the hackers a ransom of $ 4.4 million, it paid in bitcoin. ) Treasury and Fed officials are examining the possibility of the US government following China’s lead and issuing its own digital currency. “Our goal is to ensure a secure and efficient payment system that offers broad benefits to American households and businesses while fostering innovation,” Fed Chairman Jerome Powell said last week.
Powell’s statement was studiously bland. It was another straw in the wind, however. In India, where investing in bitcoin has become popular, it has been reported that the government is preparing to ban people from owning digital currency. Ray Dalio, the founder of Bridgewater Associates, the world’s largest hedge fund, has suggested that under certain circumstances even the US government could ban bitcoin, to protect its monopoly on the money supply. At this stage, such a development does not seem likely. Still, the end result is uncertain – a fact Musk acknowledged over the weekend. In yet another Tweeter, he wrote: “The real battle is between fiat and crypto. Overall, I support the latter. This pledge of allegiance came as no surprise. But if investors have learned anything over the past few decades, it’s that fighting the federal government can be costly.