Picture: 123RF/KONSTANTIN SHAKLEIN
Picture: 123RF/KONSTANTIN SHAKLEIN

Until about a month ago, bitcoin had been on an upward trajectory, partly because too much money is chasing too few inflation-proof assets in the age of money printing. 

The reasons behind the month-long slide that morphed into a selling frenzy in the past week chip away at one of its most important investment cases: that its value can’t be fiddled with, especially by central banks and governments. 

Bitcoin was created at the height of the 2008/2009 financial crisis to offer an alternative to fiat currencies after central banks pumped trillions of dollars into the system, casting doubt on the stability of currencies linked to the state.  

Unlike central bank-issued money, bitcoin is produced by a network of linked but independent computers across the world racing to solve maths and puzzles, giving it immunity from government interventions. But it took China and Tesla’s SA-born boss Elon Musk, who has emerged as one of the most prominent cheerleaders of the cryptocurrency, for bitcoin’s bull run that started in 2019 to come to an abrupt end. 

China’s announcement last week barring financial institutions from accepting the virtual currency for payment or to provide services such as savings and investments using them, sparked a rout in bitcoin that extended to other digital currencies such as dogecoin and ether. Before that Musk, after months of bullish comments about bitcoin, backed away from a previous plan to accept payment for his electric cars in bitcoin, further putting the market under pressure.   

Over the past week or so, the value of the crypto market, for which bitcoin accounts for nearly half, has dropped by nearly $100bn (R1.4-trillion) to about $1.5-trillion, according to data on Tuesday from market tracker CoinMarketCap.   

The ban in China and Musk’s backpedalling are exhibit A that cryptocurrencies — or crypto assets as some central banks prefer to call them — can easily be fiddled with.  

As long as Musk or China, an undisputed world leader in bitcoin mining, can influence the market, bitcoin’s most important charms will remain under siege. 

Moreover, bitcoin is far from being an alternative medium of exchange for two simple but important reasons. To begin with, it lacks the widespread usage, like, say, the dollar, to be used for legitimate transactions, while proving worryingly effective as the global currency of crime.

About two weeks ago, Colonial Pipeline, one of America’s biggest fuel transport operators, paid hackers $5m in bitcoin to restore disabled computer networks that had forced it to shut down pipelines in part of the US, causing some residents to line up at petrol stations due to worries about shortages. 

It is security risks like this that may also undermine the investment case for cryptocurrencies as central banks, including the SA Reserve Bank and the Fed, take steps to launch their own digital coins, which will be backed by foreign reserves, meaning they have underlying assets behind them.  

Furthermore, instead of offering investors stability as a form of payment that can be used anywhere, cryptocurrencies promise wild gyrations. Those make it impossible for a retailer such as Shoprite — which has had its fair share of trouble with volatile currencies across the continent — to take them as a medium of exchange if in a matter of days the payment might be worthless. 

That said, it’s hard to argue with investors who piled into the cryptocurrency five years ago and are still holding on to it even after this past week’s sell-off . They would be sitting on gains of more than 6,000%. 

JPMorgan Chase CEO Jamie Dimon has been among the most vocal critics of bitcoin, calling it a fraud in 2017. Though he retracted that particular comment, he said earlier this month he didn’t care about bitcoin. But, as CNBC reported, he conceded that “clients are interested”. Which explains the bank’s plan to roll out a digital currency and its creation of a unit for blockchain projects.

That shows bitcoin’s potential as an influential medium in the future can’t be written off. Events in the past week clearly show the risks for those who want to embrace it.  

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