What does the way forward for cryptocurrencies appear to be? – Geopolitical information providers AG

As the most popular cryptocurrency, bitcoin, falls in value, its proponents are discouraged. But crypto is here to stay while regulation and taxation are likely to come.

A sign for a Chivo Bitcoin ATM to mark the one-year anniversary of Bitcoin’s adoption in San Salvador, El Salvador, September 7, 2022. A year after El Salvador made Bitcoin legal tender and more than 2,000 bitcoins purchased, the government nearly peaked , the nation has so far lost more than half the value of its cryptocurrency purchases. ©Getty Images×

In short

  • Cryptocurrency is perceived as a speculative investment and a store of wealth
  • As a means of payment for ordinary transactions, it is not gaining popularity
  • Ignore, ban or regulate? Governments are likely to choose the third option

Cryptocurrencies have taken a hard hit over the past few months. For example, the US Dollar/Bitcoin exchange rate fell from almost $70,000 in early November 2021 to below $20,000 in late June, and despite ups and downs fell to $19,733 on September 15.

Historically, bitcoin — by far the most popular form of cryptocurrency — has been a success story for those who bought it: the exchange rate against the dollar was below $3,000 five years ago. Still, many Bitcoin proponents have been disappointed on two counts. This cryptocurrency has failed to become a widely used means of payment and has proven to be a weak protector of purchasing power in times of uncertainty and inflation. That’s surprising. Bitcoin supply is limited to 21 million units. With more than 19 million units, or 90 percent, already issued (“mined”), most people expected that the cap would have resulted in a steady increase in the dollar-denominated price.

what is the future

In order to predict future scenarios for cryptocurrencies, it can be helpful to look at what has happened in the past and clarify some key points. First, the world of blockchain consists of cryptocurrencies and crypto derivatives. For example, Bitcoin is a cryptocurrency while the stablecoins Tether and TerraUSD are crypto derivatives. These are “derived” from cryptocurrencies and/or are pegged to a widely accepted and centralized currency like the dollar. Put simply, a financial investor spends dollars on a company and receives a derivative in return. The company converts the dollars into cryptocurrencies and lends them to global borrowers. At the same time, the company promises the financial investor to exchange the derivatives for a fixed amount of a given cryptocurrency, if necessary linked to the dollar or backed with dollars.

The result is that if you bought bitcoins or other cryptocurrencies, you will gain/lose according to the exchange rate of the cryptocurrency in your portfolio. However, once you’ve bought a derivative, you may find that it’s not really backed by a sufficient amount of cryptocurrency, or that the dollar convertibility guarantee is porous, to say the least. If so, the derivative turns out to be worthless. This has happened to several crypto derivatives in recent months. Companies issuing such products are very active in the market and contribute to the underlying assets becoming volatile, especially when they promise excellent returns that fuel demand for cryptocurrencies and crypto derivatives. If the derivative products are poorly secured, investors will be put off in bad times.

The 2022 crypto market crash has hit the derivatives world and potentially eliminated a key source of volatility.

A second important point is that cryptocurrencies are currently seen as both a speculative tool and a store of wealth, rather than a means of payment for ordinary transactions. For example, more than 60 percent of the total bitcoins in circulation are in accounts (“wallets”) with more than 100 bitcoins each and are rarely traded on the market, except for portfolio adjustments: At the end of July 2022, only about 250,000 bitcoins were traded daily and it is likely that commercial transactions accounted for only a small proportion. Additionally, cryptocurrency holders seem to have a long-term perspective. For example, both “shrimp” and “whales” (accounts with less than 1 and over 1,000 bitcoins, respectively) have used the recent sell-off to buy the dip in bulk.

Three tentative conclusions follow: (1) the typical cryptocurrency holder’s long-term approach suggests that the cryptocurrency project is not an easy kill and will survive dramatic volatility; (2) volatility was driven by crypto derivatives, activity of which was boosted by the relatively small amount of cryptocurrencies traded in the market; (3) The crypto market crash of 2022 hit the derivatives world and potentially eliminated a key source of volatility, killing some market movers, hitting short-term speculators and presenting opportunities to long-term crypto investors.

×

facts

Bitcoin value falls


Bitcoin graphicAt its peak, a bitcoin was worth nearly $70,000 in November 2021, but the value fell below $20,000 on September 15, with less than two million bitcoins remaining to be created before the 21 million unit cap was reached became.

Based on “nothing” but worth something

Of course, cryptocurrencies are not like stocks and bonds, backed by promises of future streams of income, generated sometimes by a company’s successful market development and sometimes by the government’s obligation to squeeze taxpayers. Instead, cryptocurrencies are units of money that are not backed by anything, and their value depends on their credibility as a future means of payment for purchasing goods, services, and other means of payment.

In the end, regulation seems to be the safest strategy.

Central bankers and policymakers in general never miss an opportunity to warn the public that cryptocurrencies are a scam. European Central Bank President Christine Lagarde recently stated that cryptocurrencies are “based on nothing” (true) and “worth nothing” (false) and that regulation is needed to prevent inexperienced investors from losing all that money , which they invest in cryptos (false).

Ironically, central bankers offer digital currencies, which President Lagarde says are “quite different” from cryptocurrencies. Central bankers’ digital currencies are certainly different from blockchain-based cryptocurrencies, but not for the reason Ms. Lagarde probably has in mind. The main problem is that decentralized currencies with a supply cap would eliminate the very notion of monetary policy and turn central bankers into an agency that regulates commercial banking and compiles statistics. Understandably, the central banking world is not happy with this prospect.

In other words, central bankers are not hostile to cryptocurrencies because they are allegedly fraudulent. If fraud means “based on nothing” then all central bankers should be taken to court. Rather, their hostility stems from the fact that widespread adoption of cryptocurrencies will eventually undermine central bank privileges, with implications for example for the financing of public debt.

×

scenarios

Politicians and central bankers have three choices.

To ignore

You can ignore, ban or regulate cryptocurrencies. The first approach is the simplest. Why should central bankers bother? After all, the world of cryptos is highly competitive and some currencies will disappear. In addition, today they are not a real threat to the money. Switching from dollars or euros to one or more cryptocurrencies is not easy: the cost of each transaction is still relatively high. In fact, as long as governments accept centralized currencies like dollars and euros as the only means of payment, switching to cryptos would be tantamount to switching to a cumbersome dual-currency regime that many people would not like. These regimes existed in the past, but only for short periods of time.

To forbid

A ban on cryptocurrencies would make little sense unless authorities fear that large transactions involving cryptos could destabilize fiat currency exchange rates. Also, banning cryptocurrency must necessarily be a global move. It would lose credibility if some countries refused to comply. The fundamental problem with this approach is that the existence of cryptocurrencies and crypto derivatives is not a crime and it is by no means obvious that those who buy them are acting against the public interest.

Regulate

In the end, regulation seems to be the safest strategy. Without a realistic short-term threat to fiat money as a means of payment or evidence of its use for money laundering, the authorities’ only real concern is taxation. This is the only point on which the regulator is likely to focus. It has little to do with the decentralized nature of cryptos, rather the tax collector has no way of finding out how much wealth the taxpayer has saved and it would be very difficult to know if an individual has an account. Future regulatory efforts will go in the direction of enforcing more transparency in tracking and taxing this form of wealth.

In early July, the European Parliament approved the market-in-crypto-assets proposal. In a global implementation, crypto asset providers must not operate without authorization. This approval will undoubtedly come with conditions – in theory to protect investors from fraud, in practice to force them to make their accounts visible. Unless technology eliminates the need for authorized dealers, this is just the beginning.


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