The crash of the cryptocurrencies has happened, but does it have further to go?
Wednesday saw wild gyrations in the price of bitcoin, the largest and most widely traded of the currencies, with the price dipping close to $4,000 before recovering sharply. Unsurprisingly the bulls (yes, there are some still) saw this as solid support, a sign that this was a wonderful buying opportunity, while the bears (a rather larger band) claimed it was a typical suckers’ rally.
So what should we make of this?
First a quick point. This is that any asset that can move more than 10 per cent in a day is not a currency. There is a lot of history about money and the classic functions of a currency are that it should be a unit of account, a medium of exchange, and a store of value.
Anything that is so volatile cannot be a satisfactory unit of account. It is itself stable so you can’t measure other values against it. It can be a medium of exchange but you would have to fix the transaction price instantly, and in any case the capacity of even an established cryptocurrency to handle a mass of transactions is limited. As for store of value, well, it clearly isn’t.
So this is an asset, but an asset without obvious intrinsic attractions, like fine wines, vintage cars or gold. A member of staff at the Bank of England has just carried out an unofficial analysis of cryptocurrencies, and he is pretty negative. Mind you, this is not nearly as negative as the comments by the general manager of the Bank for International Settlements in Basel, who famously described them as “a combination of a bubble, a Ponzi scheme and an environmental disaster”.
Right now, one of two things is happening. We may be seeing a repricing of this asset class. Or we may be catching an early signal that it will completely disappear: that cryptocurrencies are worth nothing at all, zero, zilch.
To claim that something worth thousands of dollars now could be worth nothing at some stage in the future, might seem both shocking and unreal. Yet there are many instances where a prized asset becomes valueless, or almost so. Right now, there are some assets that are riding high: modern art, witness that shredded Banksy picture.
But there are others that in real terms trade at much lower prices than a generation ago: Victorian furniture, old postage stamps. In between are assets that have fashionable sectors and unfashionable ones: a 1950s Rolex wristwatch vis-à-vis an 1890s gold pocket watch. One is worth thousands, the other just the weight of gold.
It is hard to see lines of code having intrinsic value, so it is at least plausible that cryptocurrencies are worthless. But are they?
The first, the repricing argument, turns on whether they are useful. If you want to make payments below the radar of government scrutiny, then they clearly are. But whatever you buy or sell has to remain below the radar too. If someone starts driving a new Rolls-Royce but there has been no transaction on their bank account, the tax authorities might reasonably ask where the money came from. Think of the way there has been a clampdown on offshore bank accounts and how large cash transactions are becoming more closely examined.
So the argument that bitcoin will still have some value turns on whether it will still be useful as a below-the-radar medium of exchange. There is certainly a need for this (and I am not making a moral judgement, simply a practical one) as we have seen the global demand for cash, particularly dollar and euro notes, surge in recent years.
But if national governments clamp down, as they may, it will be easier to hit holders of cryptocurrencies than holders of folding dollar bills.
If you cannot spend a bitcoin, then it does indeed become useless. You cannot put it on the wall, or wear it on your wrist. Anyone who holds them will scramble for the exit, raising whatever cash they can. And there is at least an even chance that this is what is happening now.
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