HAMISH MCRAE: Those of us who believe Bitcoin could have zero value have so far been proved wrong – but is its appeal being stripped away?
It has been a bumpy couple of weeks for Bitcoin and the other cryptocurrencies. Expect much bigger bumps to come. On Friday two weeks ago, Bitcoin was trading at about $58,000. On Friday, it was trading at $36,000.
That is a pretty meaty decline, but the real story was one of mad, raging volatility, for last Wednesday it dipped below $33,000.
This is not a currency. It fulfils none of the three classic requirements of money. It is not a price denominator because its value moves around so much. It is not a medium of exchange, with one of its cheer-leaders, Elon Musk, now not letting you buy a Tesla with it. And anyone who bought a couple of weeks ago will acknowledge it has not been a great store of value.
Fool’s Gold?: Bitcoin is not a currency – it fulfils none of the three classic requirements of money
So it is an asset class, just like shares, bonds, gold, works of art and so on. It is an asset class that has been stunningly successful in attracting buyers, and it has many believers who hold that it will continue to be successful. The fact that governments and central bankers hate it, is for many an argument in its favour. It takes the power to create money away from them and if you distrust governments and banks that is just fine.
Those of us, like myself, who believe that Bitcoin could have zero value have so far been proved wrong. But in the past few days two things have happened that have stripped away its appeal.
One is that the governments of two of the most important countries in the world, the US and China, have started to bare their teeth. On Tuesday, China banned financial institutions and payment companies from providing services for cryptocurrency transactions. It also warned investors against speculative cryptocurrency trading. Then on Thursday the US Treasury set out plans for all cryptocurrency transactions of more than $10,000 to be reported to the Internal Revenue Service. So not only would any legitimate gains be taxed just like everything else, but funds that were the result of illegal activities would come into the authorities’ sights.
The other development was a sudden focus on the environmental costs of running cryptocurrencies, and particularly the amount of electricity needed to power the computers that create or ‘mine’ these digital assets. This is something that central bankers and finance ministers have been pointing out for years, but their objections have been largely ignored, I suspect because they are seen as establishment figures.
What changed things was Elon Musk. He drew attention to this when he said that Tesla would halt the purchase of vehicles with Bitcoin due to concerns over the ‘rapidly increasing use of fossil fuels for Bitcoin mining’.
So how much power? The Judge Business School at Cambridge University does a running tally. It gives a wide estimate range, with the current mid-point a bit below the energy consumed by Sweden. At the bottom end it is about the same as Portugal, while at the top, it could be using more electricity than the UK.
Where are these Bitcoins being ‘mined’ and therefore using all this power? The answer is that two-thirds of them are coming from computers in China. Since China generates about 58 per cent of its electricity from coal, anyone buying or holding Bitcoin is adding to air pollution in China and global carbon emissions.
Up to now the environmental movement has directed its activities at softer targets. It is much easier to stage a demo outside the offices of an oil company or a bank than to challenge an amorphous but fashionable entity such as Bitcoin. But it is pretty clear cryptocurrencies will be caught in a pincer movement between national authorities on the one hand and everyone who cares about the environment on the other. While they were a fringe activity they were under the radar. Now the big guns are being trained on them.
So what will happen? Well, I don’t think one should exclude the possibility that Bitcoin will recover. Some US supporters, such as Scott Minerd of Guggenheim Investments, think it will reach $400,000. The US hedge fund pioneer Paul Tudor Jones likens cryptocurrencies to investing in high-tech before the sector took off. Cathie Wood, of Ark Investment Management, said last week she thought Bitcoin would go to $500,000.
But, equally, cryptocurrencies may be totally worthless. Andrew Bailey, Governor of the Bank of England, warned this month: ‘I’m going to say this very bluntly again: buy them only if you’re prepared to lose all your money.’
I would march with the Governor on this one.