Cryptocurrency roundup: Elon Musk, El Salvador and hedge funds – a busy week for bitcoin

Welcome to the first of our crypto-round ups, where we summarise what happened in the crypto world over the last week and what you need to keep an eye out for in the next week. 

It’s been a busy week in the cryptocurrency world – though it was mostly about bitcoin, with good news, bad news, and U-turns. Here are some of the top stories that caught our eye. 

El Salvador’s bitcoin ambitions suffer a bitter blow 

The World Bank on Wednesday said it would not be helping El Salvador introduce bitcoin as legal tender over concerns over the cryptocurrency’s environmental footprint. “While the government did approach us for assistance on bitcoin, this is not something the World Bank can support given the environmental and transparency shortcomings,” said a spokesman. 

The amount of electricity used in cryptocurrency mining – the process by which new cryptocurrencies are created and transactions verified and added to the blockchain – is higher than that of Sweden, says a study by the University of Cambridge. 

El Salvador said it wanted to introduce bitcoin as legal tender alongside the US dollar, a decision prompted by the fact that the economy is overly reliant on remittances from expatriates. Using cryptocurrencies could have made it easier for the local people to receive and send money. 

Bitcoin’s price hovered below the $40,000 mark following the news. 

Elon Musk backtracks over bitcoin again 

There’s never a dull moment when it comes to Tesla’s Elon Musk and his views on cryptocurrencies. In yet another U-turn last Sunday, the billionaire said that his company may accept bitcoin as a payment for cars if bitcoin mining cleans its act up.

Just last month, Musk said Tesla wouldn’t accept bitcoin as payment for its cars because of concerns over high electricity usage in cryptocurrency mining.

And before that, he had made several endorsements, including Tesla’s whopping $1.5bn bitcoin purchase he announced in February. It’s quite possible that, by the time you have finished reading this, Musk could have changed his mind again. 

Still, bitcoin rose by 10% on the news. 

Hedge funds are expected to pile into cryptocurrencies at breakneck speed 

The crypto market is set to get a boost from hedge fund titans, which are expected to significantly raise their allocations to cryptocurrencies in the next five years, according to a recent survey by global fund administrator Intertrust. 

North American hedge funds are the most adventurous: they plan an average exposure of 10.6%; UK-based and European funds say they will hold around 6.8%. But all hedge funds, irrespective of their location, expect to at least have 1% of their portfolios in crypto. That could add up to assets of around $312bn, estimates Intertrust, using data from alternative finance data provider Preqin.

Hedge funds were already becoming more active in the crypto market, and the findings suggest this will accelerate. 

The most common motivation for hedge funds for investing in digital currencies was simply “general diversification”, according to a report published by PWC earlier this year. More than half (57%) of the funds polled citing diversification as a reason to buy crypto.

Banks holding crypto could face the strictest capital requirements 

Banks who have exposure to crypto could face strict capital requirements, according to a consultation report released last week by the Basel Committee on Banking Supervision.

The Basel Committee sets global standards for the regulation of banks and is proposing to divide cryptocurrencies into two different groups. The first group proposes treating them like other financial instruments such as loans, deposits, equities and bonds. 

The second category involves subjecting cryptocurrencies such as bitcoin to a “new conservative prudential treatment”, the statement said, which would apply a 1,250% risk weighting to the banks’ exposure to digital currencies. This means that banks may have to hold a dollar of capital for every dollar held in bitcoin, so a $100 exposure to bitcoin would need to be backed by $100 of capital reserves. 

Crypto Markets Update 

Here’s what happened in the crypto market over the last seven days

• Bitcoin fell 1% in the last week to $31,234
• Ether fell 8% to $2,272
• Dogecoin fell 10% to $0.29
• Cardano fell 5.5% to $1.45 
• Binance Coin fell 5.3% to $345 

What investors need to watch out for next week 

Why it is worth paying attention to the price of ether 

Ethereum’s London update is coming in July.  It will introduce two new Ethereum Improvement Proposals (EIPs). EIP-1559 will be the biggest change, which will result in reduced supply for tokens and a significant change to transaction fees. It's possible that the price of ether could climb significantly ahead of the update. 

Any other news of central bank tightening

The US central bank, the Federal Reserve, said this week that interest rates may come in 2023, earlier than expected. Any similar moves by other central banks could make cryptocurrencies trade sideways. “All dollars come from the Fed and it will be interesting to see if other central banks follow their lead in normalising monetary policy,” says Mati Greenspan, founder and chief executive of Quantum Economics. 

We’ll have a lot more on all of these topics in upcoming issues of MoneyWeek magazine. If you’re not already a subscriber, you can get your first six issues plus a beginner’s guide to bitcoin, absolutely free here.