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.
Disclaimer
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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