Bitcoin: An investor’s new friend or a threat to financial stability? Lynn Strongin Dodds takes a look.
Last year, crypto-currencies were all the rage but February’s sharp stock market selloff showed that it was not the safe haven many proponents had hoped for. Instead of taking cover, bitcoin investors fled and prices plummeted, reinforcing their speculative nature.
As a result, more mainstream institutions are likely to remain on the sidelines. Prices had been gyrating before turbulence hit the equity markets and overall they lost around 60% to 70% of their value in the first five weeks of 2018. Prices slid to $6,268 from a nadir of $19,666 in mid-December 2017, according to Reuters’ data tracking pricing on the Bitstamp exchange.
Although bitcoin grabs most of the headlines, there are roughly 100 crypto-currencies listed on exchanges with ripple and ethereum among the most popular.
According to Levi Meade of Columbus Capital, they may be lumped together but they are different and are not necessarily in direct competition with one another. For example, bitcoin cash was created on the basis of becoming a global currency, with it only more recently seeming to be a potential safe haven asset or store of wealth, while ethereum is often referred to as a smart contract.
Agustín Carstens, the new head of the Bank for International Settlement, in a speech given at Goethe University described bitcoin as “a combination of a bubble, a Ponzi scheme and an environmental disaster”. He called for central banks to clamp down on bitcoin and stop such crypto-currencies “piggybacking” on mainstream institutions and becoming a “threat to financial stability”.
Carstens added: “that to date, many judge that, given crypto-currencies’ small size and limited interconnectedness, concerns about them do not rise to a systemic level.”
However, he continued to say: “if authorities do not act pre-emptively, crypto-currencies could become more interconnected with the main financial system and become a threat to financial stability.”
Further fuel was added to the firestorm by JPMorgan boss Jamie Dimon who recently labelled bitcoin a fraud, and said its astronomic rise in value is a text-book financial bubble comparable to the Dutch “tulip mania” of the 17th century, which saw speculators push up the price of one bulb to ten times the annual salary of a skilled worker – before quickly losing almost all of that value.
