Bitcoin’s last stand
30 November 2022
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.
The value of bitcoin peaked at USD 69,000 in November 2021 before falling to USD 17,000 in mid-June 2022. Since then, its value has fluctuated around USD 20,000. For bitcoin followers, the apparent stabilization signals a respite on the way to new heights. More likely, however, it is an artificially induced last gasp before the road to irrelevance – and this was already predictable before FTX broke and sent the bitcoin price well below USD16,000.
Bitcoin is rarely used for legal transactions
Bitcoin was created to overcome the existing monetary and financial system. In 2008, the pseudonymous Satoshi Nakamoto published the concept. Since then, Bitcoin has been marketed as a global decentralized digital currency. However, Bitcoin’s conceptual design and technological shortcomings make it questionable as a means of payment: real Bitcoin transactions are cumbersome, slow and expensive. Bitcoin has never been used to any significant extent for legitimate transactions in the real world.
By the mid-2010s, the hope that Bitcoin’s value would inevitably rise to ever-new heights began to dominate the narrative. But Bitcoin is not suitable as an investment either. It does not generate cash flow (like property) 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 new money flowing in. Bitcoin has also repeatedly benefited from waves of new investors. The manipulations from individual exchanges or stablecoin providers etc. during the first waves are well documented, but to a lesser extent the stabilizing factors after the presumed bursting of the bubble in the spring.
Big Bitcoin investors have the strongest incentives to keep the euphoria going.
Big Bitcoin investors have the strongest incentives to keep the euphoria going. In late 2020, isolated companies began promoting Bitcoin at the company’s expense. Some venture capital (VC) firms are also still investing heavily. Despite the ongoing “crypto winter,” VC investments in the crypto and blockchain industry were $17.9 billion as of mid-July.
Regulation can be misunderstood as approval
Big investors also fund lobbyists who make their case with lawmakers and regulators. In the US alone, the number of crypto lobbyists has almost tripled from 115 in 2018 to 320 in 2021. Their names can sometimes read like a who’s who of US regulators.
But lobbying needs a sounding board to gain traction. In fact, lawmakers have sometimes facilitated the influx of funds by supporting the supposed benefits of Bitcoin and offering regulations that gave the impression that cryptoassets are just another asset class. Nevertheless, the risks of cryptoassets are undisputed among regulators. In July, the Financial Stability Board (FSB) called for cryptoassets and markets to be subject to effective regulation and supervision commensurate with the risks they pose – along with 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 do not move forward at the same pace and with the same ambition. While the EU has agreed on a comprehensive regulatory package with the Markets in Crypto-Asset Regulation (MICA), Congress and the federal government in the United States have yet to agree on coherent rules.
The belief that there must be room for innovation at any cost persists stubbornly.
Today’s regulation of cryptocurrencies is partly shaped by misconceptions. The belief that there must be room for innovation at any cost persists stubbornly. Since Bitcoin is based on a new technology – DLT / Blockchain – it will have a high transformational potential. Firstly, these technologies have so far created limited value for society – no matter how great the expectations for the future. Secondly, the use of a promising technology is not a sufficient condition for an added value of a product based on it.
The perceived sanction of regulation has also tempted the conventional financial industry to make it easier for customers to access bitcoin. This applies to asset managers and payment service providers as well as insurance companies and banks. The entry of financial institutions suggests to small investors that investments in Bitcoin make sense.
It is also worth noting that the Bitcoin system is a polluter like no other. First, it uses energy on the scale of entire economies. Bitcoin mining is estimated to consume electricity per year compared to Austria. Second, it produces mountains of hardware waste. A Bitcoin transaction uses hardware comparable to the hardware of two smartphones. The entire Bitcoin system generates as much e-waste as the entire Netherlands. This inefficiency of the system is not a bug but a feature. It is one of the peculiarities to guarantee the integrity of the fully decentralized system.
Marketing Bitcoin has a reputational risk for the banks
Since Bitcoin appears to be neither suitable 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 industry should be wary of the long-term damage of promoting Bitcoin investments – despite the short-term profits they may make (even without their skin in the game). The negative impact on customer relations and the reputational damage to the entire industry can be enormous when Bitcoin investors have made further losses.
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This ECB blog post appeared as an opinion piece in Handelsblatt. The views expressed in each blog post are those of the author(s) and do not necessarily represent the views of the European Central Bank and the Eurosystem.
