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Bitcoin is seen as a potential “digital gold” in the future, but for now, analysts say it is too volatile to be seen as a safe investment. Photo: Getty

Bitcoin and cryptocurrencies face a bumpy future as governments look to exert control over a largely lawless landscape

  • With the international regulatory environment still a work in progress, bitcoin and other digital currencies remain a volatile proposition for investors
  • But Deutsche Bank’s Marion Laboure says she believes bitcoin may have a strong future as a form of ‘digital gold’

This article was part of a special supplement on private banking which was published in the South China Morning Post print edition on October 20, 2021.

The cryptocurrency landscape has been the Wild West of global finance since the first decentralised form of digital money, bitcoin, was launched in 2009.

It’s money that cannot be physically held, existing only in digital form and given life by a group of investors who have been willing to gamble on its volatility while enjoying a largely lawless field of play. Until recently.

With China banning cryptocurrency transactions and mining within its borders and the US Securities and Exchange Commission (SEC) recognising Coinbase (a platform for trading and storing cryptocurrencies), governments are starting to get involved, with the Americans using existing laws to keep tabs on the sector for now, with more specialised policies likely to be implemented in the future.

“So far, the SEC and the CFTC (Commodities Futures Trading Commission) have shared regulatory responsibilities,” said Sam Kima, senior vice-president, sales at bullion dealer First Gold in Wan Chai, Hong Kong. “They have tried to police cryptocurrencies with laws that are already on the books, even though they were really written for other traditional kinds of assets like stocks or bonds.

“I’m expecting this is likely to continue until there are new, cryptocurrency-specific regulations, meaning regulators will continue to adapt current frameworks for the virtual currency market.

“Expect continued conversations about cryptocurrency regulation. Lawmakers in Washington and across the world are trying to figure out how to establish laws and guidelines to make cryptocurrency safer for investors and less appealing to cybercriminals.

Sam Kima, senior vice-president, sales at bullion dealer First Gold in Wan Chai, Hong Kong. Photo: Handout

“The SEC appears to have decided that an upcoming offering from Coinbase, the largest cryptocurrency exchange in the United States, meets its definition of a security. And it’s showing that it will step in and regulate it accordingly – and, by extension, regulate the rest of the crypto finance industry more assertively.”

According to Mondaq, an online intelligent syndication platform, the UK, Singapore, Indonesia (after initially banning it) and Canada have regulated cryptocurrency, with more than a dozen other jurisdictions either enacting laws or actively looking into ways of exerting control.

Pakistan, Brazil and South Africa are among those studying regulatory laws while China, Bangladesh, Algeria and Ecuador are among a handful who have banned it. El Salvador, meanwhile, has approved bitcoin as legal tender.

Marion Laboure, a senior economist and market strategist at Deutsche Bank, said she does not believe bitcoin – with its existing technical capabilities – is an efficient payment tool because it often takes 10 to 20 minutes for a transaction to be processed. She does, however, have high hopes for the pioneering cryptocurrency as a future “digital gold” commodity.

“The supply of bitcoins is fixed. The maximum number of bitcoin that will ever exist is just under 21 million,” Laboure says on the DB website. “And round about 89 per cent of the total supply of bitcoin is already in circulation. In many fiat currencies, central banks control the supply and have been increasing it significantly in recent years.

Bitcoin may be accepted in many places but transaction times can take up to 10 to 20 minutes. Photo: Getty

“People have always sought assets that were not controlled by governments. Gold has had this role for centuries. And yes, I could potentially see bitcoin become the 21st century digital gold.

“Let’s not forget that gold was also volatile historically. But it is important to keep in mind that bitcoin is risky; it is too volatile to be a reliable store of value today. And I expect it to remain ultra-volatile in the foreseeable future.”

Kima, of First Gold, shares Laboure’s concern about the volatility of cryptocurrencies such as bitcoin, and is reluctant to recommend it as reliable investment, for now at least.

“Bitcoin’s price has taken a wild ride so far in 2021, from a high point of US$60,000 in April to less than US$30,000 as recently as July,” says Kima. “More recently, bitcoin has climbed back toward US$50,000. This volatility is a big part of why experts recommend keeping your crypto investments to less than 5 per cent of your portfolio to begin with.

“We can speculate on what value cryptocurrency may have for investors in the coming months and years (and many will), but the reality is it’s still a new and speculative investment, without much history on which to base predictions.

US authorities have recognised Coinbase as a platform for trading and storing cryptocurrencies. Photo: Bloomberg

“No matter what a given expert thinks or says, no one really knows. That’s why it’s important to only invest what you’re prepared to lose, and stick to more conventional investments for long-term wealth building.

“Just be cautious and don’t put all your investment money in crypto. I would say put small portion and see it either develop or lose. But at least it’s a small amount and slowly the investment can multiply in time.”

Laboure also expects a greener future for cryptocurrencies such as bitcoin, which uses up an enormous amount of electricity, especially during mining activity.

“The ecological footprint of cryptos is disastrous,” she said. “As of early 2021, Bitcoin’s annual electricity consumption puts it at the edge of being the equivalent of a top 30 country. For example, in one year, it uses around the same electricity as the entire population of Pakistan (221 million).

“The latest technical developments will allow cryptocurrencies to become greener. In terms of regulatory measures, we expect 2021 to be a game changer and that by 2022 many economies will have a strong crypto asset regulatory framework in place.”