Recent moves by China to crack down on cryptocurrencies have been damaging to those who jumped on the bitcoin freight train this spring after a new buying frenzy had sent the digital units soaring to record highs.
Meanwhile, a report out Wednesday from the Bank for International Settlements (BIS), a Switzerland-based financial institution often described as “the central bankers’ central bank,” may mean the worries of digital coin holders are not yet over.
Owned by the Bank of Canada, the Federal Reserve and the rest, the internationally respected financial institution hinted it may launch a renewed challenge, declaring that crypto is not in the public interest.
Long-time crypto holders are looking good, and those who sold near the top of the market will be delighted. But in markets, for every sale, there has to be a buyer and on Tuesday, those who backed BTC — as bitcoin is known to traders — near its $63,000 U.S. peak lost more than half their investments as it fell below $30,000 U.S.
Owners of others, such as Dogecoin, the cryptocurrency that started as a joke, suffered even more in percentage terms.
The damage was worse for those who bought on margin, the process where investors borrow from their broker to invest, but are required by lenders to pay back part of what they owe if the value of their stake falls below a certain level. Such investors are forced to sell into a falling market unless they can cover their loans with new money.
Margin calls have also accentuated volatility in the unregulated global crypto market where some Asian traders were borrowing at ratios of 100 to 1, the business news service CNBC reported.
That means for every dollar of your own money you invest, you can buy $100 worth of securities. That kind of leverage is hugely rewarding when markets are going up, but in the recent plunge, margin traders lost everything.
Despite its latest reverses, crypto, and especially the most famous example, bitcoin, has shown that it may be down but not out, bouncing back above $34,000 U.S. after grazing $29,000 on Tuesday.
Bitcoin also has had some successes. Earlier this month, El Salvador, which already uses the U.S. dollar as its currency, was also the first country to declare the cryptocurrency as legal tender.
But this week’s report from the BIS, Central bank digital currencies: an opportunity for the monetary system, poses what appears to be a new threat. It suggests not only that central banks can and will begin to issue their own digital coins in direct competition with bitcoin and its ilk, but they may take action to discourage crypto’s use.
“Innovations such as cryptocurrencies, stablecoins and the walled garden ecosystems of big techs all tend to work against the public good element that underpins the payment system,” declared the BIS report in its conclusions.
Central bank-issued digital money, called CBDCs for short — an area where China has become a world leader — was first seriously mooted after Facebook proposed its own stablecoin, Libra, in 2019. Unlike cryptocurrencies, which can rise and fall unpredictably, the value of CBDCs are known. And unlike stablecoins, they can be spent anywhere as legal tender.
As described Wednesday by BIS research director and Korean economist Hyun Song Shin, central bank-issued digital coins would have many of the advantages of crypto without the disadvantages.
They also would eliminate the role of an intermediary when you transfer money.
Of course some of the people who trade or use bitcoin and other cryptocurrencies might not see those things as advantages. Since the digital tokens don’t produce anything of value, making money in crypto speculation depends not on a stable price but on the idea that the sky’s the limit and that bitcoin and its ilk will keep rising to future mountain tops.
Bitcoin trading, like the Gamestop phenomenon, has become part of a kind of rebel financial movement powered by Reddit. Market traditionalists have scoffed, but just this week the rebels had another win as GameStop, a company expected by conventional traders to go bankrupt, managed to launch a billion-dollar IPO
The BIS report suggests going after crypto for its wasteful energy use. Last month, global banking regulators also proposed putting restrictions on holding things like bitcoin as capital, discouraging their use in banking.
But if central banks want to maintain their exclusive power over money, they may have to do something a little harsher than what is contained in this week’s report.
By CEO Staff
