Why bitcoin is looking more like a pyramid scheme – and central banks must act
- ETFs greatly magnify the money that bitcoin can lure – as well as the financial risks. Regulation is urgent, as is the launch of stable central bank digital currencies such as the digital yuan
Bitcoin is looking more like a pyramid scheme every day since the recent launch of a US bitcoin exchange traded fund. ETFs have the potential to lure billions of dollars into bitcoin, allowing investors and speculators who got in at the bottom to get out at the top, before the pyramid collapses.
The market value of all the bitcoin mined so far, digital or physical, is estimated at around US$1 trillion. But the amount of money that bitcoin ETFs could attract, now that the world’s biggest equity market has given it a lead, could run into multiples of that amount if cryptomania persists.
This means that – in a reversal of Gresham’s Law that bad money drives out good – good money rushing into bitcoin via ETFs could replace the bad or quasi-money represented by bitcoin, and early investors could sell out, leaving the unfortunate others holding dross.
And, since the total number of bitcoin that can ever be produced is supposedly capped at 21 million, with just over 2 million left to be mined, ETF-fed demand for the cryptocurrency could soon outstrip supply, driving prices even higher.
Gold has held its value for centuries, and is a virtually indestructible asset. Beat it, burn it or recast its form, gold retains its value as a quasi-monetary or precious asset in a way that no symbol of a digital blockchain could ever hope to do.
So why do bitcoin and other cryptocurrency assets gain credibility to the point where a bitcoin ETF has been launched on the world’s biggest equity market, allowing (as the Financial Times put it) mainstream investors to hold a listed bitcoin-linked security alongside traditional financial assets?
The US Securities and Exchange Commission allowed the ProShares Bitcoin Strategy ETF launch to go ahead ostensibly because it holds bitcoin futures contracts traded on the regulated Chicago Mercantile Exchange. But the strong lure of cryptocoins suggests that other traded investment vehicles will follow.
Bitcoin purports to be more than a cryptocurrency asset. It was created in 2009 to be an electronic peer-to-peer cash system when faith in sovereign currencies had been shaken. That was before it attracted the attention of cryptocurrency-curious investors as an asset.
It and other cryptocurrencies act as conduits for money transfers outside the banking system and, as such, they promised to avoid the high costs charged by banks. According to some analyses, however, the high fees associated with the bitcoin network make remittances impractical for most.
Where bitcoin fails, central bank digital currencies will succeed
The only real value of cryptocurrencies, therefore, derives from market transactions and not from savings made on money transfers – although monetary authorities fear that money laundering may add additional and illicit value for some cryptocurrency holders.
Anthony Rowley is a veteran journalist specialising in Asian economic and financial affairs