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    November 2021

    A grain 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 in my opinion been growing louder. Last month brought us a previously mentioned a spectacular 30% 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. While the price of Bitcoin was in freefall, the European Central Bank (ECB) lobbed a grenade at the crypto crowd. In its Financial Stability Review, it compared the massive rally in crypto prices in recent months the “tulip maria” and the South Sea Bubble in the 1600 and 1700. 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 regions financial institutions have “little exposure” to them, “financial stability risks appear limited at present”. The message in my opinion 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 Saint Louis fed.

    Earlier last month, Bank of England governor Andrew Bailey said he would be “blunt” about this issue. Cryptocurrencies “have no intensive 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 version of their existing currencies – a development that could render moot some supposed benefits of cryptocurrencies, including the speed of transfers. U.S. stocks authorities are tightening up as well. 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 until Musk tweeted his support for the token, of which his company ‘Tesla’ owns a stock worth of at least 1.5 billion USD. The adage in market is: don’t fight the central banks, in particular don’t fight the Fed. For now, however, it is clear that in a straight battle for Bitcoin supremacy, Musk wins. He influences the price. But this in my opinion 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 non-regulated cryptocurrencies (which means almost currently all of them) and leave some holders with substantial losses. But on the other hand, you also can’t benefit from opportunities you don’t try to take advantage of.

    But in the meanwhile, there are already many cryptocurrencies that are operating at a proof-of-stake, which use very little if any electricity. And that is a direction that a lot of crypto is headed in. A proof-of-stake setup allows users with significant equity positions to verify transactions, such as those used in Bitcoin mining, where users have to complete complex mathematical problems to access a coin, consuming much greater volumes of electricity. Therefore, environmental spotlight may apply to bitcoin, but not to all cryptocurrencies.