TOMLINSON
the Earth, economics will bring bitcoin’s perceived value crashing down.”
The crash started just weeks later, and prices have struggled to recover.
Currencies require some authority to guarantee their value.
Since the end of the gold standard, governments and central banks have preserved value through responsible budgetary policy and limits on the amount of money in circulation.
Venezuela’s President Nicolas Maduro is supplying a master class in how to destroy a currency through government overspending and over-circulating. Venezuela’s inflation rate is expected to hit 1,000,000 percent, the International Monetary Fund said.
Cryptocurrencies use blockchain to release new digital coins into circulation predictably, but there is no authority to ramp up or cut back supply to limit price spikes, troughs and manipulations. And some traders are taking advantage by creating sophisticated high-speed trading programs to make “pump and dump,” “spoof ” and “ping-pong” trades to fool people into buying or selling bitcoin, according to the Journal.
Those trading tactics are illegal on most exchanges, but not so with bitcoin. This is why the Securities and Exchange Commission has blocked nine attempts to create funds based on cryptocurrencies.
To make the software work, though, an investor needs to hold a large amount of bitcoin. Socalled whales use these tools to protect their wealth, placing small investors at a disadvantage. The Texas State Securities Board was the first state regulator to take action against cryptocurrency fraud and has shut down 11 get-rich-quick schemes.
“It is important to note that the State Securities Board is not regulating the cryptocurrencies themselves, only the offerings that claim to use virtual currencies in an investment program,” the board warns. Con artists set up such programs for people who want big returns but don’t want the hassle or risk of owning a cryptocurrency.
Shutting down a fraudulent fund, though, can have knock-on effects.
“Shortly after the securities commissioner entered an emergency desist order against BitConnect, the value of the company’s own cryptocurrency, called BitConnect Coin, fell from $2.6 billion to nearly zero,” the board said.
That was a $2.6 billion loss for investors, or potentially, money launderers. Cryptocurrencies offer the perfect opportunity for criminals to buy a digital coin on one nation’s exchange and sell it on another. A global coalition of law enforcement agencies is trying to develop a way to pursue money launderers, but it will be tough.
Maduro has announced a cryptocurrency to finance his dictatorship called the petro, which will go on sale Nov. 5. But remember how well he managed the bolivar.
More level-headed cryptocurrency advocates recognize the need for greater government regulation to bring order and respectability to cryptocurrency trading. But for others, removing the anonymity and free-wheeling trades removes the whole reason to own cryptocurrencies.
Someday, someone will launch a well-regulated cryptocurrency. But lest anyone take seriously the claims that bitcoin and existing cryptocurrencies are about to take off again, ask yourself how you would feel if you had bought bitcoin at $19,000. Because a lot of people did, and they are sorry now. Chris Tomlinson writes commentary about business and economics. chris.tomlinson@ chron.com twitter.com/cltomlinson