The Cryptocurrency Mirage

19 May 2021

Our stance is clear – cryptocurrencies are speculative with no meaningful valuation foundation; what’s more, they are associated with criminal activities and environmental damage.


Bitcoin, the posterchild of the crypto world, was created to pay people for computer usage associated with blockchain calculations, which are per se useful activities.


However, a conventional currency is the responsibility of a government and a central bank as part of a defined economy. Cryptocurrencies, by contrast, have no framework of support and control, and these concerns are made clear by authorities such as the Bank of England and the Financial Conduct Authority.

 On 7 May, Bank of England Governor Andrew Bailey warned that cryptocurrencies ‘have no intrinsic value.’

 ‘I’m going to say this very bluntly again. Buy them only if you’re prepared to lose all your money,’ he said.

 The governor’s comments echoed a warning back in January from the UK Financial Conduct Authority: ‘The FCA is aware that some firms are offering investments in crypto-assets, or lending or investments linked to crypto-assets, that promise high returns.

 Investing in crypto-assets, or investments and lending linked to them, generally involves taking very high risks with investors’ money. If consumers invest in these types of product, they should be prepared to lose all their money.’

 Some people enjoy betting on horses for fun, and others hope to make money. Whilst it is widely acknowledged that gambling on horses is a high-risk activity, it still appears less speculative than bitcoin; knowledge of form and odds could, in theory, allow a skilled and systematic operator to profit from the turf. Bitcoin, however, is more like pass-the-parcel, where a higher price is only secured for the holder seeking to sell if someone emerges to buy who’s prepared to pay up.

 This leads us to consider factors that may affect future demand.

 We can identify two main drivers of current demand for bitcoin:

·       a speculation masquerading as a store of value and a medium of exchange; and

·       a more sinister side associated with cyber and other crimes.

 In terms of overall issues regarding acceptance, proponents of bitcoin hoped it would become a universal currency. But on 13 May, Elon Musk tweeted that Tesla will stop accepting bitcoin as payment for its cars, after doing so since February.

 Apparently, he recently learned that bitcoin mining consumes an enormous amount of electricity, much of which is generated in China by burning fossil fuels. Mr Musk said on Twitter ‘We are concerned about rapid increasing use of fossil fuels for bitcoin mining and transactions, especially coal, which has the worst emissions of any fuel’.

 This is not new, however. A 2019 study by researchers at the Technical University of Munich and the Massachusetts Institute of Technology concluded that, in late 2018, the entire bitcoin network was responsible for up to 22.9mn tons of CO2 per year—similar to a large Western city or an entire developing country like Sri Lanka.

 A broader problem lies within cryptocurrencies’ role in facilitating crime.

 During her congressional nomination hearing on 19 January, US Treasury Secretary Janet Yellen suggested that lawmakers ‘curtail’ the use of cryptocurrencies such as bitcoin. Her concern is that they are mainly used for illegal activities, including ‘terrorist financing … and… money-laundering.’

 Ms Yellen is good friends with European Central Bank President Christine Lagarde, who said the same on 13 January – bitcoin was not a currency but a ‘highly speculative asset which has conducted some funny business and some interesting and totally reprehensible-money laundering activity.’ Criminal investigations have proven this to be true, she said.

 Ms Lagarde called for coordinated global regulation of cryptocurrencies.

 More recently, on 6 May, the Federal Reserve’s Financial Stability Report (FSR) identified cryptocurrencies as the ninth-greatest risk to US financial stability. This was determined by a survey of wide-ranging viewpoints, and ranked behind vaccine-resistant variants, a sharp rise in real interest rates, an inflation surge, US–China tensions, risky asset valuations/correction, Treasury General Account drawdown/debt ceiling, cyberattacks, and reach for yield/leverage, that is, investors’ drive to buy riskier assets to achieve higher yields.

 Interestingly, cryptocurrencies and cyberattacks are linked in part. Some cyberattacks are a form of state warfare, others are linked to extortion.

 For example, Colonial Pipeline paid nearly $5 million to Eastern European hackers on 7 May, contradicting reports earlier this week that it had no intention of paying an extortion fee to help restore the US’ largest fuel pipeline.

 The company paid the hefty ransom in untraceable cryptocurrency and we know that since 9-11 conventional banking operations have made it impossible for crime that involves money transfers to go untracked and untraced.

 As a result, some governments have already taken action. Thus, the central bank of Turkey has banned cryptocurrency payments citing a lack of regulation and central authority for the coins.

 They consider this a risk to investors who can’t recover their losses. In India, a draft bill proposing the ban on private cryptocurrencies will soon go before parliament, and one of the reasons is because it the government believes cryptocurrencies fund illegal activities. Other countries that have moved in the same direction are Nigeria, Bolivia, Ecuador, Algeria, Nepal, South Korea, Qatar, Egypt, and Bangladesh.

 I believe that all governments are considering the future of digital currencies, and the framework of controls required to limit risk for the public, and to deny cybercriminals easy pay-offs.

 Some may regard cryptocurrencies as ‘digital tulips,’ reminiscent of the 17th century tulip mania in Amsterdam that drove up tulip prices beyond reason. But at least then, although fortunes were lost and made, and the corrosive influence on the Dutch economy was severe, it wasn’t an activity that was regarded by lawmakers as deeply dangerous.

 Today, cryptocurrencies are speculative, environmentally harmful and associated with criminal activity. If a tide of legislation and regulation wipes all value from cryptocurrencies, they will be exposed just like the emperor’s new clothes.

 Responsible investors should ask themselves why on earth they might want to hold such assets. Moreover, what sort of investment managers might be prepared to bet their clients’ hard-earned capital in such a dangerous way – risking total loss, fuelling environmental damage and facilitating global organised crime.



This document is issued for information purposes only. It does not constitute the provision of financial, investment or other professional advice. The market review, analysis, and any projections contained in this document are the opinion of the author only and should not be relied upon to form the basis of any investment decisions. CCLA strongly recommends you seek independent professional advice prior to investing.


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