“Regulators are clearly still sceptical about cryptocurrencies, but they refuse to go away. Bitcoin is trading back above $11,000, helped by the apparent endorsement of Twitter-founder Jack Dorsey’s payments company Square and the ongoing growth of dedicated investment vehicles such as America’s Greyscale Bitcoin Trust,” says Russ Mould, AJ Bell Investment Director. “This means the battle lines are still drawn between true believers and ‘no coiners,’ even as the Financial Conduct Authority bas the sale of derivatives and exchange-traded note (ETN) trackers related to Bitcoin to retail investors, citing in particular what it calls ‘the inherent nature of the underlying assets, which means they have no reliable basis for valuation.’”
Source: Refinitiv data
“That will look pretty damning to those who see cryptocurrencies as the latest investment craze primed for an accident but it is unlikely to deter fans, especially as the debate over cryptos and whether they are truly ‘money’ or an ‘investable asset class’ continues to widen.
• In September, the Federal Reserve Bank of Cleveland’s Loretta Mester last month raised the prospect of Americans having an account with the Fed, into which the central bank could directly pump digital dollars, thus bypassing the banks as the main mechanism for QE (which currently relies on those banks making fresh, cheap loans to boost demand and economic activity).
• The European Central Bank has reportedly filed to trademark the term ‘digital euro’ as it assesses the pros and cons of digital currencies.
• The Bank of Japan is openly discussing what it calls central bank digital currency (CBDC), with work beginning in spring 2021 on issues such as resilience, ahead of trials with a limited number of households – although to prevent a public panic the BoJ continues to stress CBDCs will be used to complement, not supplement, paper money.
“Supporters of such experiments will argue they offer another potentially useful tool in the central banker’s kitbox, as the existing policy suite of zero rates, QE, inflation targeting and so on struggles to deliver the growth and inflation the monetary (and political) authorities crave, to help them escape from their debt burdens.
“Sceptics will wonder where this will lead next, with rampant money creation, to fund government debts, interest payments and spending plans, and inflation both possible consequences, unintentional or otherwise. These doubters may be in the camp that warms to gold in such circumstances - or perhaps to cryptocurrencies.
Source: FRED – St. Louis Federal Reserve database
“Bitcoin may still be trading well below its 2017 all-time high near $19,000 but it is making plenty of ground. According to www.coinmarketcap.com, Bitcoin’s total value is $210 billion, a fraction below its high for the calendar year. That figure is also pretty much double the value of the FTSE 100’s largest stock by market cap, AstraZeneca (AZN). The total crypto universe, which now comes to over 3,600 different counters, is currently valued at nearly $360 billion according to the same website.
“Some may view this as another reason to view financial markets in the round as worryingly frothy, as a plentiful supply of liquidity from central banks hopes for fiscal stimulus from Governments keep them bubbly. Others will argue that cryptocurrencies’ return to favour supports the view that central bank policies are debasing existing currencies and merely one step down the path toward a reset of how fiat money works, with CBDC experiments the next logical development.
“And no matter how sceptical many financial market watchdogs or participants may be, it can still be argued that if someone, somewhere thinks that cryptocurrencies have a value, then a value is what they have.
“Granted, such an argument will have left more than one Dutch tulip trader in trouble around 400 years ago. Questions over the cost of the Bitcoin mining process, the level of mining and transaction fees and efficiency of cryptocurrencies as a payment system relative to cash, or existing credit and debit networks, will also deter many from using Bitcoin, let alone treating it as an investable asset class.
“Yet the cap on the supply of Bitcoin to 21 million will continue to appeal to some investors as they see Government deficits balloon and central banks draw up plans for digital currencies and seek out a place to preserve (or even hide) wealth. Gold bugs may argue that Bitcoin has no physical backing or practical use but critics of the precious metal will assert the ‘barbarous relic’ is an inert element that generates no yield and is not exactly in frequent use when investors pay for their weekly groceries, either.
“Libertarians may also jump in at this point, citing how central bank-backed digital currencies could be the ultimate surveillance tool in any civilised country, let alone despotic, corrupt ones.
“The ability to pay tax in cryptocurrency (or even buy groceries) would be a tectonic shift but that looks a long way away. For the moment, the Bitcoin believers having a better year of it than ‘no coiners’ and the forced shift from cash to cashless payment during the current pandemic is unlikely to do the cause of digital currencies any harm, as more and more people become used to using their card or mobile device to make a payment in person, let alone online.”
