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Take it from someone frequently on the receiving end of their tweets and emails: cryptocurrency fanatics are often of a passionate and paranoid persuasion.
Some people have jumped into this asset class, or currency, or whatever you want to call it, just for fun. For others, it is a moonshot to make some money, often successfully. It is a hobby, a side-hustle. But for the true believers, crypto is a way of life.
They deeply love these digital tokens, bitcoin chief among them, in part because of their anarchic nature — their isolation from big government, big banking and big monetary policy. In real life, these people walk among us. Online you can spot them with laser eyes in their Twitter bios.
The crypto community is exactly that — a community, resilient and bound by an asset with at least some real value, based on mutual trust. As in any community, its members fight. Internecine warfare has broken out since crypto supremo Elon Musk publicly accepted that the energy-intensive way that computers “mine” these coins is a threat to the environment.
To some, this is heresy. But the real divide is Us vs Them. Coiners vs No-coiners. Academics studying this space and even some professionals working inside it refer to a “tribal” unwillingness to deal with criticism or challenge.
It is not hard to see where this sense of disenfranchisement comes from. The great financial crisis of 2008 left many with a feeling that the system does not work for them. In crypto, they have found a way to potentially get rich (fair enough) and even perhaps to replace money and payments as we know them.
Central banks, the believers say, cannot be trusted. They are debasing fiat currencies like the dollar with their money printing. Regulators want to trap ordinary people inside the existing financial hierarchy. Both they and governments are watching closely, poised to destroy an alternative financial system they cannot control.
A grain of truth lurks inside this way of thinking. The net really does seem to be tightening around a thriving but largely unregulated market.
Lately the drumbeat has been growing louder. This week brought a spectacular 30 per cent crash and equally eye-popping recovery in the price of bitcoin and related crypto assets after China’s central bank warned financial institutions about accepting crypto for payments. They are “not real currency”, the People’s Bank of China said. Days later, a Chinese province asked residents to blow the whistle on crypto miners through a telephone hotline.
Also on Wednesday, while the price of bitcoin was in freefall, the European Central Bank lobbed a grenade at the crypto crowd. In its Financial Stability Review, it compared the massive rally in crypto prices in recent months to “tulip mania” and the South Sea Bubble in the 1600s and 1700s. Bitcoin is “risky and speculative”, it said. It has an “exorbitant carbon footprint” and a possible connection to “illicit” activity.
Perhaps most stinging of all, however, the ECB said that because crypto assets are not widely used for payments and because the region’s financial institutions have “little exposure” to them, “financial stability risks appear limited at present”.
The message here is: if this market falls over, we see no reason to step in and prop it back up. Cryptocurrency buyers are on their own.
The very same day, two Federal Reserve officials also said they saw no reason why a drop in cryptocurrencies would upset the broader financial system. “We are all quite aware that crypto can be very volatile,” said James Bullard, president of the St Louis Fed.
Raphael Bostic, his Atlanta colleague, observed that crypto lacked “reach” into the economy. Fed chair Jay Powell said this week that some types of crypto technology “carry potential risks” and spoke about raising oversight.
Earlier this month, Bank of England governor Andrew Bailey said he would be “blunt” about this issue. Cryptocurrencies “have no intrinsic value”, he said. “Buy them only if you’re prepared to lose all your money.”
Several central banks, including the Fed, are working on their own digital versions of their existing currencies — a development that could render moot some supposed benefits of cryptocurrencies, including the speed of transfers. US tax authorities are tightening up. And as the comments from the ECB about bitcoin’s enormous energy consumption make clear, the carbon question is rattling up the agenda. Bitcoin mining does, after all, consume more electricity globally than Pakistan.
It was telling that the pain for the bitcoin price did not end on Wednesday until Musk tweeted his support for the token, of which his company owns a stack worth at least $1.5bn. The adage in markets is: don’t fight the central banks and, in particular, don’t fight the Fed. For now, however, it is clear that in a straight battle for bitcoin supremacy, Musk wins. He dictates the price. Don’t fight him. But this is unlikely to remain the case forever.
If and when central banks and regulators do assume control, it will probably bite a chunk out of the value of cryptocurrencies and leave some holders with substantial losses. But anyone left out of pocket will not be able to complain that they were not warned.
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