BTC has fallen 76% since its peak in November last year. Before the bankruptcy of FTX, the price of the asset had stabilised at $20,000, now at $17,000. For many, this is an indicator that recession will soon be replaced by an upturn, but the ECB thinks otherwise.
Yesterday, 30 November, an article titled “The Last Frontier of Bitcoin” appeared on the organisation’s blog. In it Ulrich Bindsail and Jürgen Schaaf outline a pessimistic scenario, which is based on one thesis – BTC is losing its relevance.
Bitcoin has never found its application in legal transactions
Since its creation, the asset has been positioned as a publicly available and decentralized means of payment. But the specifics of bitcoin, its underlying weaknesses and characteristics make the “coin” of little use for transactions between counterparties.
Such transfers are expensive and slow. In addition, they require additional intermediaries in the form of service providers. Therefore, according to ECB experts, BTC has never been used for large legal transactions and never will be.
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Since 2010, the asset has become overtly speculative in nature. Large “whales”, such as Michael Saylor of MicroStrategy, have positioned it as a hedge investment. But BTC is a risky asset that is not suitable as an investment for most capital holders.
It does not pay a certain dividend (shares) or cash flow (real estate rents). Also, bitcoin is not used in production (goods or products) and does not generate certain social benefits (gold).
Any capital gains from BTC depend on an increase in the value of the asset, which is inherent in speculative instruments. And the growth of this bubble is dictated solely by the inflow of new funds.
In the early stages of the asset’s formation and development, manipulation by big players was more visible. Bitcoin promoters used various tricks to expand their audience reach, leading, in some cases, to “explosive” growth. Such actions now take place covertly from the audience.
One of the most powerful levers of influence on potential customers is large corporations. So far, despite the crypto-winter, some venture capital funds have continued to invest in bitcoin. Three Arrows Capital is a prime example of how such a strategy can be mindless.
Regulation does not mean the approval of the authorities
In the US alone, the number of crypto-lobbyists has tripled from 2018 to 2021, from 115 to 320. Some of them are behind the most vocal crypto-laws in individual states.
As an example, let’s take Bankman-Fried as an example. Amid his fall, rumours swirled that the former FTX CEO had “run his hands” not only to Congress, but also to the SEC. This was later denied, but such gossip does not come out of thin air.
But the actions of lobbyists require a certain return for them to have an effect. Indeed, sometimes lawmakers have facilitated the influx of capital by promoting high-profile projects that have created a clear view that “bitcoin is just another asset class.”
But regulators are not blind. They are aware of the risks from integrating cryptocurrency. That’s why calls for increased regulatory pressure in the industry have been growing louder in the wake of the FTX bankruptcy.
In addition, the transformation of the regulatory landscape has been extremely slow. And while the EU has achieved a major package (MICA), in the US the field remains unploughed.
Innovative nature does not add to bitcoin’s preference
BTC is based on the blockchain. And the nature of the technology has created the misconception that bitcoin, as an innovation, requires legal protection.It is true that blockchain presents some potential, but that value is limited.
Nor is the promise of the technology a reason to add value to the product in practice. Therefore, bitcoin has no ‘shield’ from regulatory oversight, and it will not appear in the future.
Moreover, the threat of regulatory pressure has prompted service providers to simplify access to BTC for retail customers. The emergence of ‘shell firms’ and the dilution of the institution of services in practice only means that the asset has become unreliable.
Added to this is the fact that the Bitcoin ecosystem is a huge polluter to the environment. In one year, the BTC mining industry consumes as much energy as the entire Austrian economy. And that’s without taking into account mountains of hardware waste.
And this is not an indication of the inefficiency of the system, this is a feature of it. It is one of the guarantors of the integrity and decentralized nature of the ecosystem.
With all this in mind, the chance of BTC getting patronage from the authorities is extremely low. Consequently, further regulatory development in this area will only be aimed at limiting and mitigating risks for investors.
Reputational risks have not been eliminated
In their article, ECB experts conclude that bitcoin is neither suitable for investment nor for payment for goods or services. This serves as a prerequisite that effectively “puts an end” to the legitimisation of the asset.
This, as well as the potential reputational damage from promoting investments in BTC, serves as a barrier to large financial counterparties. The threat of additional losses does not outweigh the short-term gains from rate fluctuations on the rise of the market.
In fact, the authors of the article conclude that bitcoin has outlived its usefulness. Its current stage of development is the maximum the asset is capable of in this form. Consequently, the current stabilisation of the exchange rate is a fiction, a “respite” on the way to a prolonged peak rather than an upturn.