Crypto’s challenges unanswered, despite record-beating sprint
• Weaknesses include the speed of transactions and its reputation as playground of criminals
As I write this, bitcoin is having a stormer. On February 27 the cryptocurrency hit a two-year high, as did its pal ether, which rescaled to its 2022 zenith.
Some clear factors are driving this resurgence, including the nearing April “halving ”— but these latest successes aren’t winning over the dubious, even as early investors rub their palms.
Halving is a process in which the reward for mining is slashed (in half, as you may have guessed) at predetermined intervals, a method of slowing the release of the cryptocurrency before supply hits the 21-million coins cap.
To date about 19-million have been mined. The reduction in rate of supply typically produces the predictable upswing in demand — and record values tend to follow.
Another big driver is companies taking up hefty stakes even as the price climbs. Software firm MicroStrategy on Monday purchased a whack of tokens — that’s the definitely very scientific term for 3,000 — for $155m, meaning it now has about $10bn in the crypto.
Social media platform Reddit, which will soon list on the NYSE, also shared recently that it had reserves in bitcoin, ether and a token called matic. So the shine is definitely on right now.
Some crypto-related companies — investors, platforms and miners — are lapping up the positive sentiment overflow, such as Nasdaq-listed MicroStrategy, the shares of which climbed 16% on Monday.
Besides the big buyers and the big fraction (that aforementioned halving), crypto got off to a cracking start in 2024 due to the long-awaited approval of bitcoin-based exchange traded funds (ETFs) in the US — something many hope will give the whole category some (Wall) street cred.
Overall, Bloomberg — citing CoinGecko — says the combined value of digital assets amounts to about $2.2-trillion, not bad for a pool that had dipped to $820bn in 2022 when bears abounded and several of the big crypto platforms collapsed due to fraud, scandals and investor “runs”.
ZERO VALUE
But not everyone is on Team Crypto. The European Central Bank (ECB) has often made its stance plain. On February 22 ECB economists penned a scathing critique, now published to its website, titled “ETF approval for bitcoin — the naked emperor’s new clothes”, arguing that the approval “doesn’t change the fact that bitcoin is not suitable as means of payment or as an investment”.
It expressly disagrees with the idea that this approval means crypto is now a safe investment, writing: “The fair value of bitcoin is still zero. For society, a renewed boom-bust cycle of bitcoin is a dire perspective. And the collateral damage will be huge, including the environmental damage and the ultimate redistribution of wealth at the expense of the less sophisticated.” Not a single word minced there.
The article explores many of what the ECB believes to be fundamental challenges that the concept of crypto has failed to address, from the speed of transactions to its reputation as the preferred payment method of scam artists and criminals. The ECB calls it “financing evil”.
Crypto fans may have counters to these, but there is at least one long-touted ambition of cryptocurrencies that we can just about put to rest: mainstreaming its use for purchasing. Hear me out.
In the dawn of crypto the fairytale included the notion of replacing local fiat currencies (and cash) with a decentralised digital currency (or many), something you could take with you anywhere and transfer anywhere, circumventing exchange rates and flow controls, and all delivered with lower transaction fees.
Remember the hoo-ha when someone first used bitcoin to buy a pizza? In 2010 a developer, Laszlo Hanyecz, completed what is considered to be the first use of bitcoin in a commercial transaction, swapping 10,000 BTC for two pizzas. It is a day still marked in crypto history — May 22 bitcoin Pizza Day — though not for the watershed reasons we’d have imagined in 2010.
It was considered a seminal moment in the development of this means of payment, a glimpse of the future in which we would all be transferring bitcoin or similar — cryptowallet to crypto-wallet — in restaurants, grocery stores and presumably parking garages worldwide. But the value of those hopefully delicious dough delights now is about $550m, and shifting by the minute.
VOLATILITY
The seminal moment is also the seminal cautionary tale. Who will swap a coin for a calzone if the value of that coin is skyrocketing? And who will accept it when it is plummeting? This volatility problem is harder to overcome than crypto-wallet security.
Another interesting statistic to emerge from the coverage this week is that the gap between gold and bitcoin is the widest it has been in two years, which reminds me of the frankly hilarious assessment that “gold is bitcoin for boomers”.
It’s funny because it’s true. I couldn’t find the origin of this, but it does predate the widely shared December 2023
Bloomberg opinion piece by Marcus Ashworth, in which I first encountered it.
Gold, as Ashworth puts it, “yields nothing, costs money to store, can be stolen and has very little practical usage bar looking pretty”. Sounds familiar, right? And the same factors seem to drive both parties: fear that the existing system is failing; and belief that politically and financially powerful institutions are acting in conspiracy, rather than according to market conditions.
Proponents of both are excellent at using these records and fears to bring in late joiners when it seems the guys who are already in big stand to win most.
So no, these runs and records aren’t convincing crypto-cynics, and the cautions cannot penetrate a cryptobeliever’s armour. Like bitcoin and gold, the gap between those inside and outside the “faith” has only widened ... unlike crypto’s acceptance in the average economy.