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Monday, Jan 24, 2022

Bitcoin could become ‘worthless’, Bank of England warns

Bitcoin could become ‘worthless’, Bank of England warns

The Bank of England has said that bitcoin could be “worthless” and people investing in the digital currency should be prepared to lose everything.
In a warning over the potential risks for investors, the central bank questioned whether there was any inherent worth in the most prominent digital currency, which has soared in value this year to close to $50,000 (£37,786) a piece.

The cryptocurrency peaked above $67,000 in early November, but suffered a sell-off after news first broke of the Omicron variant of coronavirus, before stabilising around its current level in the past week.

The deputy governor, Sir Jon Cunliffe, said the Bank had to be ready for risks linked to the rise of the crypto asset following rapid growth in its popularity. “Their price can vary quite considerably and [bitcoins] could theoretically or practically drop to zero,” he said.

The market capitalisation of crypto assets has grown tenfold since early 2020 to about $2.6tn, representing about 1% of global financial assets. About 0.1% of UK households’ wealth is in bitcoin and similar crypto assets, such as ethereum and Binance coin. As many as 2.3 million people hold crypto assets, at an average amount of about £300 each.

The Bank’s financial policy committee, set up in the wake of the 2008 financial crisis to monitor risks, said on Monday there was little direct threat to the stability of the UK financial system from crypto assets. However, it warned that, at the current rapid pace of growth, such assets could become more interconnected with traditional financial services and were likely to pose a number of risks.

Publishing its regular health check on the financial system, the Bank said major institutions should take a cautious approach to adopting crypto assets and that it would pay close attention to developments in the market.

“Enhanced regulatory and law enforcement frameworks, both domestically and at a global level, are needed to influence developments in these fast-growing markets in order to manage risks, encourage sustainable innovation and maintain broader trust and integrity in the financial system,” it said.

In a separate blogpost published on its website on Tuesday, a member of the Bank’s staff said bitcoin failed to fulfil many of the features required of a currency and that it risked being inherently volatile.

Thomas Belsham, who works in the Bank’s stakeholder and media engagement division, wrote: “The problem is that, unlike traditional forms of money, Bitcoin isn’t used to price things other than itself. As Bitcoiners themselves are fond of saying, ‘one Bitcoin = one Bitcoin’. But a tautology does not a currency make.”

He said scarcity of the crypto asset – which is limited to 21m bitcoin – is among the key reasons for its attraction for investors, but this feature embedded into its design “may even, ultimately, render Bitcoin worthless”.

About 19m bitcoin is currently in circulation, with new coins added when “miners” validate changes to the blockchain ledger underpinning the cryptocurrency. While the ultimate number of bitcoin in circulation is not expected to be reached until February 2140, it would become harder to sustain this system over time, Belsham said.

“Simple game theory tells us that a process of backward induction should, really, at some point, induce the smart money to get out. And were that to happen, investors really should be prepared to lose everything. Eventually.”
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