Bitcoin is a ship of fools with no captain

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For true believers in the “liberating” qualities of cryptocurrencies – freedom, supposedly, from government and central bank devaluation of their money – last week marked a turning point in their still youthful life, bringing news of the first two US-based bitcoin exchange traded funds – the ProShares bitcoin Strategy Fund and the appropriately named Valkyrie bitcoin Strategy Fund.

Meanwhile, the Houston Firefighters’ Relief and Retirement Fund and the Ontario Teachers’ Pension Plan have poured further petrol on the flames by announcing they are vesting some of their members’ money into cryptos. Trustees deserve to be taken out and shot, though to be fair, the latter of the two is investing in a crypto exchange, FTX Trading, not in the coins themselves. Remember, the wealth generated by America’s various gold rushes was not so much from the gold itself, but selling picks, shovels and services to hopeful but all-too-often disappointed prospectors. So maybe the Ontario teachers’ fund is on to something.

Try as I have, and philosophically drawn as I might be to the idea of a privately constructed currency which is not the subject of seemingly perpetual manipulation by the governing central bank, it’s hard to see the point of bitcoin or any of its clones. It’s too volatile to be useful as a reliable means either of exchange or store of value. Unlike gold, moreover, its gyrations bear no relation to what’s happening in the economy or in the price of other asset classes. I’ve heard it said that this is precisely what makes it attractive as a hedge, but frankly if that’s the objective you might as well put your money on the roulette wheel.

US Fed chairman Jerome Powell . Central banks around the world are accelerating efforts to create digital currencies.

US Fed chairman Jerome Powell . Central banks around the world are accelerating efforts to create digital currencies.Credit:Bloomberg

Worse, the business of mining these currencies uses up huge amounts of energy. Banning cryptos didn’t save China from its current wave of power cuts, but they might have been a great deal worse had bitcoin mining been allowed to continue. As it is, the business migrated to the US, where it is widely thought to have contributed to the spike in electricity prices in towns where miners have settled.

How institutional buyers reconcile this uncomfortable fact with their holier-than-thou “environment, social and governance” (ESG) agendas is an interesting question, but then hypocrisy was never much of a barrier to investment decision-making.

In any case, the craze is causing growing concern among central banks, deposit takers, and financial regulators – and not just because it provides fertile ground for fraudsters, crooks, and financial loss. Cryptos also pose a threat to their own monopoly of money. As long as cryptos remain just another form of gambling, then they perhaps don’t have too much to worry about. Despite the burgeoning size of these markets, they would not appear on the face of it to pose a systemic threat.

But the advent of so-called stable coins, which aim to remove the volatility of plain vanilla cryptos by pegging them to fiat money, is a different matter. The likes of Facebook’s mooted Libra might have real potential as an alternative payments system. Lose control of that, and the central bank’s ability to influence monetary matters is undermined accordingly. I don’t want to join in the current cacophony of Facebook bashing, but whatever one’s quarrel might be with the US Federal Reserve or the Bank of England, they are surely preferable to Mark Zuckerberg.

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China’s and Nigeria’s response to the craze for cryptos has been to ban them outright and launch their own “central bank digital currencies” (CBDCs). The Bank of England and US Federal Reserve are chasing hard, but worry about the potential for e-cash to create financial instability through bank runs and the implications for credit allocation. Amusingly, that’s not expected to be a problem in Nigeria, which this week formally launched its eNaira, since Nigerians mistrust the central bank even more than the commercial banking system, and are not therefore expected to be in any rush to convert their deposits into electronic central bank reserves.

Physical cash is nonetheless dying on its feet almost everywhere, so it is incumbent on national authorities to provide some kind of digital alternative.

If they don’t, then maybe the cryptos are in with a chance after all.

Telegraph, London

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