Bitcoin has had a rough week.
This in itself is not surprising. It’s a volatile asset. This is what happens. Maybe this is another of its big bear markets. Maybe it’s a temporary pause.
My colleague Dominic had a look at the technicals during the crash, and I have to say, the levels he identified seem to have been borne out by events already.
Subscribe to MoneyWeek
Subscribe to MoneyWeek today and get your first six magazine issues absolutely FREE
But there’s a longer-term threat to bitcoin and any other aspiring forms of independent currency out there.
Being an incumbent is a disadvantage when new technology storms a sector
Bitcoin is an asset that a lot of people feel very strongly about. As I’ve said before, it reminds me of gold in the 2000s.
On one side, you have its fans saying that it’s the cure for virtually every ill that ails us. On the other side, the bears argue that it’s a fad, it’s completely faith-based (as though everything else isn’t), and get wildly excited every time it falls by 10%, even although that’s a calm day by crypto standards.
My own view is somewhere in the middle (yes, that’s unusual for me). I think bitcoin pretty clearly has a value based on something more than blind hope. It’s an asset that is extremely easy to move across borders. That at the very least makes it worth something.
But I think bitcoin itself clearly faces a lot of formidable obstacles to being adopted more widely. User-friendliness is one. The sheer obtuseness and ropey nature of the surrounding infrastructure is very off-putting (eg, anyone who might have wanted to sell their cryptos during the crash this week might have struggled with their exchange).
A much bigger issue, though, is the government. Some bitcoin bears might just point and laugh at cryptocurrencies. But the authorities are taking it all rather more seriously.
The recent turmoil appears to have triggered some urgency from the Federal Reserve, for example. Fed boss Jerome Powell put out what the FT describes as “a rare video statement” talking about a “central bank digital currencies”. In short, the Fed appears to be accelerating its work on a digital dollar.
Given that China’s digital yuan already exists, it may seem odd that the US is apparently so far behind on this. But when it comes to today’s monetary system, the US dollar is the global reserve currency. In other words, the US is the incumbent.
If you look at what tends to happen in the business world, the incumbents are usually the last to react to any technological revolution. They squander their apparent advantages on ignoring or ridiculing the new advance.
There is a good reason for this. They have the most to lose. A big company or industry spends a great deal of time and financial and political capital on shoring up its moat via regulation, or brand building, or expensive infrastructure. The status quo represents a massive sunk cost for the incumbent.
The idea that new technology can simply render that moat irrelevant, or far smaller than it once was, is both terrifying and exhausting. So they prefer to attack the idea rather than accept the painful and risky strategy shifts that arise from its implications.
As a result, it’s only when the threat refuses to go away and threatens to become existential, that they belatedly play catch up.
Just look at the reaction of most big retailers to the internet and to Amazon. The winners are the ones who moved most rapidly to adapt (eg Next in the UK high street – and to be fair, Next had a head start because it already had a huge mail order business). The losers are those who didn’t (eg Marks & Spencer).
The authorities aren’t going to give up their monopoly on currency issuance
Anyway - they’re waking up now. What’s particularly interesting is that the Fed wasn’t really getting at bitcoin. The crypto sector that it really singled out was “stable coins”. These are crypto coins whose value is pegged to the dollar (or another currency).
I suppose you could view these as “shadow currencies”, in the same way that “shadow banks” offer services traditionally associated with banks (most importantly, lending money) but don’t fall under the same regulatory or monitoring structure.
As a result, you can get financial imbalances building up out of sight, and you only really find out about it when things go pear-shaped (shadow banking had a fair bit of involvement with the 2008 crash).
But of course the other reason the Fed might not like “stable coins” is that, unlike bitcoin, these actually have a fighting chance of becoming a medium of exchange to rival mainstream currencies.
And it’s not just the Fed that’s getting itchy about crypto. The Chinese government stuck its oar in earlier this week and is now telling citizens that they’ll be rewarded for shopping any suspected cryptocurrency miners to the authorities.
Meanwhile, back in the US, the government now wants crypto transfers worth more than $10,000 to be reported to the tax office.
And hanging over all this is the blanket cause of ESG (environmental social and governance) – whereby bitcoin is presented as a massive waste of energy and a “dirty” currency. The truth of all this probably depends a bit on your perspective (the same computer chips used for mining bitcoin are also used to play Call of Duty online – which is the waste of energy? And I say that as someone who’s partial to a video computer game).
Anyway – the point is, the authorities have monopoly over currency issuance and there is no way they’re going to let a challenger walk in and take that from them. So whatever else happens in the crypto space on a day-to-day basis, this is the long-term threat to be aware of.
As for what it means for your portfolio – well, I still think it’s a good idea to familiarise yourself with bitcoin. But I do think it’s more important to hold a bit of gold in your portfolio. Apart from anything else, if the central banks are busy worrying about crypto, it’ll take them a lot longer to get round to banning precious metals.
For more on all these topics, subscribe to MoneyWeek magazine and get your first six issues free.
John is the executive editor of MoneyWeek and writes our daily investment email, Money Morning. John graduated from Strathclyde University with a degree in psychology in 1996 and has always been fascinated by the gap between the way the market works in theory and the way it works in practice, and by how our deep-rooted instincts work against our best interests as investors.
He started out in journalism by writing articles about the specific business challenges facing family firms. In 2003, he took a job on the finance desk of Teletext, where he spent two years covering the markets and breaking financial news. John joined MoneyWeek in 2005.
His work has been published in Families in Business, Shares magazine, Spear's Magazine, The Sunday Times, and The Spectator among others. He has also appeared as an expert commentator on BBC Radio 4's Today programme, BBC Radio Scotland, Newsnight, Daily Politics and Bloomberg. His first book, on contrarian investing, The Sceptical Investor, was released in March 2019. You can follow John on Twitter at @john_stepek.
King Charles banknotes to enter circulation in June
New banknotes featuring the King will enter circulation on 5 June – here’s what they will look like and what you need to know about your old notes.
By Katie Williams Published
Metro Bank to slash 5.22% savings rate for current customers- what’s the next best alternative?
Metro Bank is set to cut the rate on its best buy instant access saver for existing customers. Is there an alternative on the market and should you switch now?
By Vaishali Varu Published
Halifax: House price slump continues as prices slide for the sixth consecutive month
UK house prices fell again in September as buyers returned, but the slowdown was not as fast as anticipated, latest Halifax data shows. Where are house prices falling the most?
By Kalpana Fitzpatrick Published
Rents hit a record high - but is the opportunity for buy-to-let investors still strong?
UK rent prices have hit a record high with the average hitting over £1,200 a month says Rightmove. Are there still opportunities in buy-to-let?
By Marc Shoffman Published
Pension savers turn to gold investments
Investors are racing to buy gold to protect their pensions from a stock market correction and high inflation, experts say
By Ruth Emery Published
Where to find the best returns from student accommodation
Student accommodation can be a lucrative investment if you know where to look.
By Marc Shoffman Published
Best investing apps
We round up the best investing apps. Looking for an easy-to-use app to help you start investing, keep track of your portfolio or make trades on the go?
By Ruth Emery Last updated
The top funds to invest in
Tips Tech-focused funds are continuing to attract private investors and Scottish Mortgage falls back into favour - we look at the top fund, trusts and stocks investors are pumping their money into in the last month
By Vaishali Varu Last updated
The world’s best bargain stocks
Searching for bargain stocks with Alec Cutler of the Orbis Global Balanced Fund, who tells Andrew Van Sickle which sectors are being overlooked.
By Andrew Van Sickle Published
Revealed: the cheapest cities to own a home in Britain
New research reveals the cheapest cities to own a home, taking account of mortgage payments, utility bills and council tax
By Ruth Emery Published