Bitcoin: from illicit money to speculative bubble
China has clamped down on cryptocurrency trading and it is only a matter of time before US follows suit
As bitcoin ramps up in price, a new cryptocurrency is being launched every week.
Cryptocurrencies are no longer a millennials’ utopian construct. The space has become big business with all types of investors (read: speculators) and white-shoe investment banks wading in on bitcoin prospects.
The bitcoin conversation is now hitting the dinner table, with technophobes discussing how much money they could have made had they been lucky enough to invest $10,000 back in 2012. Blah-blah.
Bitcoin’s raison d’être was to be a medium of exchange with a "store of value" underpin that is not under government control and not subject to central banks printing money at will. It appears to have been modelled on gold. Hence you have "mining" as a way of creating new bitcoin, and there was initially a cap on the amount of future supply.
This cap has been circumvented through "splits"; now you have Bitcoin Core, the original, and Bitcoin Cash, the new uncapped bitcoin. Cheerleaders will tell you it is democratically done by consensus within the self-governed bitcoin community. But soon you could have a "new" new bitcoin, and where it will stop no one knows.
US POLITICIANS ARE ADVOCATING REGULATORY BILLS TO INCLUDE DIGITAL CURRENCY EXCHANGES INTO ANTI-MONEY-LAUNDERING LAWS.
For many centuries, gold was the global reserve currency and during the past century, it has been the US dollar. Dollar hegemony has been challenged by the likes of the euro and yuan, and the intention of the architects of bitcoin was no different to the intentions of the EU and China governments.
Ironically, bitcoin’s rise has been aided by passive governments and regulators. This is most perplexing, given that bitcoin is attracting huge amounts of money-laundering activities as well as circumventing countries’ exchange controls, especially in China.
However, bitcoin’s dark side is beginning to come to the fore. In July, Greek government authorities arrested a Russian man suspected of laundering $4bn of criminal funds through bitcoin exchanges since 2011.
China has stringent exchange controls, yet Chinese-domiciled trading was making up well more than 90% of the volume in bitcoin during 2015 and 2016 as the yuan started to depreciate and the government tightened exchange controls through the China central bank.
At the time, the central bank inexplicably allowed bank customers to make bitcoin purchases and enter the bitcoin parallel exchange system, because once you own bitcoin you can easily exchange it for most currencies around the world, thereby circumventing exchange controls.
This hole now seems to have been plugged since January. Yuan-denominated trading fell off a cliff from 90%, to less than 20% during 2017 because the central bank demanded early in the year that Chinese bitcoin exchanges halt withdrawals, thereby clamping down on exchange controls.
When new industries spring up, governments always seek to control and tax. Bitcoin is living in a parallel financial system on the internet. But to access this system, investors/users need to enter through the government-regulated banking system.
When the US government joins China and decides to control or stop this access, the bitcoin price should crash. The illicit or speculative flows of demand (liquidity) will dry up.
US politicians are already advocating regulatory bills to include digital currency exchanges into existing antimoney laundering laws.
It’s easy to understand why cryptocurrency speculation is on the increase. The rise of the technology-infatuated stock market provides fertile ground for speculation in this new paradigm.
It is also evident that bitcoin seems to have morphed from a system for eastern Asian illicit flows to a system for global speculation and gambling.
The predominant western intentions when buying or trading in bitcoin and other new cryptocurrencies is for making money (wealth-creation), not as a store of value (wealth preservation) and not as a medium of exchange. There has been an explosion of initial coin offerings, new cryptocurrencies created out of the ether. China recently declared them illegal. Surely, the US will follow.
Speculative frenzies are dizzying and to find perspective, we should look at the bitcoin/ crypto world again through the original lens under which it was created and ask the right questions. If bitcoin was created to be a competing medium of exchange and store of value to the dollar, the regulated banking system and, importantly, out of the control of governments, the questions below are the right ones to ask:
Would the US government really allow a competing currency to be used within US borders? No.
Is the US government able to outlaw the purchasing or redeeming of bitcoin by regulated banks? Yes.
Are bitcoin exchanges regulated? No.
Are existing financial exchanges regulated? Yes.
Is gambling in the US regulated? Yes.
Does the US allow online gambling? No.
Does trading in bitcoin look like online gambling? Yes.
Is the technology architecture (blockchain) that underpins bitcoin revolutionary and disruptive? Yes.
Is this architecture owned by a single government/corporate/ person? No.
Is the supply of cryptocurrencies unlimited? Yes.
Is the demand of cryptocurrencies as a medium of exchange/store of value a necessity? No.
Are there existing alternatives to the dollar as a medium of exchange/store of value? Yes.
Happy speculating, and remember: no one rings the bell at the top.
• Augoustatos, formerly with Goldman Sachs Wealth in London and Investec Wealth in SA, now represents Krino Capital.