Since last week, bitcoin’s price dropped over 25 percent, from a high over $58k to around $44k, as I write this post. This is its worst drop in a week, in nearly a year, since March 2020. Janet Yellen ripped into bitcoin, calling it highly speculative and inefficient: “Bitcoin is an extremely inefficient way of conducting transactions and the amount of energy that’s consumed in processing those transactions is staggering”. The European Central Bank (ECB) issued a stark warning about bitcoin and Christine Lagarde, ECB’s President said bitcoin is not a currency and cryptocurrencies are not money. Central banks are getting closer to issuing their own digital currencies. Earlier this year, the Bank of International Settlements published its latest survey showing that 86% of the 65 central banks it spoke to are doing some form of work on central bank digital currencies (CBDCs), be it research, proofs of concept or pilot development. Almost 15% are moving toward actual research for pilots. The future of money might be a digital version of the cash that’s already in people’s wallets, potentially upending the currency system that the world has known for many decades. Such a future, is not the future that many libertarians and tech-savvy entrepreneurs and investors envision, who are pinning their hopes on bitcoin and decentralized cryptocurrencies.
Ilias Louis Hatzis is the founder and CEO at Kryptonio, a “keyless” non-custodial bitcoin and cryptocurrency wallet. Kryptonio eliminates all the shortcomings of centralized crypto exchanges and problems with managing private keys and seed phrases. Sign up for our and be the first to get the safest cryptocurrency wallet.
There’s a big tug of war going on with bitcoin.
On one hand, you have the private sector that’s adopting bitcoin, led by companies like Tesla, MicroStrategy, Square and Paypal, and using it as an asset and as a payment method. A few weeks go, Tesla’s announcement was remarkable. Tesla invested $1.5 billion into bitcoin and said that it would start to accept bitcoin as a form of payment. Basically what Tesla and rest are telling us is that bitcoin is money. When you think about it, the two basic characteristics of money is that you can buy things with it and use it to store value.
There is no question about it, something is going on.
When BNY Mellon, the oldest bank in the U.S. says that it plans to hold, transfer, and issue bitcoin and other cryptocurrencies on behalf of its clients, you know something is going on. When MassMutual, the 169 year-old insurer, invests $100 million in bitcoin you know something is going on. When Mastercard brings crypto onto its network, and lets consumers transact in crypto on its network, you know something is going on. When JPMorgan and Citibank predict that bitcoin’s price is going to dwarf its current pricing levels, you know something’s is going on.
On the other hand, there’s a growing concern in the public sector. Janet Yellen, US Treasury Secretary, was very critical of bitcoin a few of days ago. Yellen’s comments are the latest salvo against cryptocurrencies, by a high-ranking government official. Before that, there were warnings from the Bank of England and the European Central Bank.
Yellen’s said that bitcoin was inefficient, and added that it was time for the US to study the merits of a digital dollar. Yellen said that a digital dollar based on a blockchain, could result in faster, safer and cheaper transactions.
Recently, ECB’s chief, Christine Lagarde, blasted against cryptocurrencies: “For those who had assumed that it might turn into a currency, terribly sorry, but this is an asset and it’s a highly speculative asset which has conducted some funny business and some interesting and totally reprehensible money-laundering activity.” Despite being skeptical of cryptocurrencies, Lagarde noted that the coronavirus pandemic has pushed economies toward faster digital adoption, and the digital euro may be ready within four years.
The introduction of a digital euro is still an open issue. In October 2020, the ECB published its first report on a digital euro. This report served as the foundation for a public consultation process, which generated a lot of interest. There are also important technical aspects that still need to be clarified.
Central banks understand full well that they risk losing the digital currency race if bitcoin becomes too entrenched in the market. So, they’re scrambling trying to figure it out.
More than 80% of the world’s central banks are exploring CBDCs in some capacity, according to the Bank for International Settlements. However, few are as far advanced in their research as the People’s Bank of China, which conducted a trial in November last year, in Shenzhen, China. While the trial was successful in purely technical terms, the results showed that participants weren’t particularly impressed by the digital yuan.
The public trust in a digital currency will be determined by the public trust in the central bank that issues it. The shock from COVID put the central banks in a dicey position and forced them to provide monetary stimulus in order to stabilize the markets. The US passed a $2.2 trillion stimulus package. The rest of the world also printed massive amounts, for example Europe approved a €750 billion program.
So why would we trust a fiat currency, just because it’s digital? Why would we trust a digital dollar or euro or yuan more than bitcoin or any other cryptocurrency, when we can trade it without interference or intermediaries?
The problem that central banks face is not whether to go digital or not. There is already digital money in many other forms that consumers around the world use to conduct transactions without physical currency, using credit cards or mobile phones to pay.
Perhaps most significantly, in a world of competing government issued digital currencies, we will see a new kind of fiat cannibalism. Everyone competing with everyone, and clearing the path for bitcoin.
In 2019, I posted Bitcoin could be America’s greatest weapon. Bitcoin is the “next Internet” an open, transparent microcosm of how a new decentralized, and automated financial system should work. The country that adopts bitcoin could attain the leadership position in the global financial system, just like the US did in the 90’s with the Internet.
Long ago, Muhammad Ali said that “the fight is won or lost far away from witnesses – behind the lines, in the gym, and out there on the road, long before I dance under those lights.” After 12 years bitcoin is still around and thriving for one and only reason: with bitcoin the benefits lie with the user, and not with the one that issues the money. While the detachment of bitcoin from monetary policy is a negative for governments who want to control such economic indicators as interest rates and inflation, it’s usually a positive for those who hold it and other cryptocurrencies. Government issued crypto will never offer what today’s “immature” bitcoin offers: protection against inflation, self-custody, and privacy.
That is why bitcoin is going to win every day and on Sundays!
In the meantime, if you’re thinking about bitcoin’s price, top guns in crypto are saying that by the end of the year it will break $100k, some say $146k and others $300k. As for what I think, I asked twitter to tell me. The survey will be running until tomorrow, so make sure to get your vote in.
What will be the price of #BTC (#bitcoin) on January 1, 2022?
— Ilias Louis Hatzis (@iliashatzis) February 28, 2021
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