A year ago, Bitcoin’s future seemed assured. Donald Trump returned as President of the United States and presented himself as the crypto industry’s greatest ally. Expectations were sky high. Bitcoin would soon pass the $200,000 mark. Digital gold would turn the financial system upside down. A new era was dawning.
Bitcoin vs. Dollar
Little has come of those beautiful stories. The Bitcoin price is now 47.5 per cent lower than its peak last October. The currency is even trading below the level of Trump’s election victory. The well-known meme coins that Trump himself launched have lost 95 per cent of their value. Meanwhile, real gold has risen by more than 60 per cent. While gold benefited from global turmoil, Bitcoin lost ground.
The investment case disappears
It started last year with the problems at MicroStrategy, the company that invested heavily in Bitcoin. Before that, it was still relatively easy to make a convincing case for Bitcoin as an investment. When Fidelity and BlackRock launched their Bitcoin ETFs, including the popular iBit, it was expected to stimulate demand. Trump’s pro-crypto policy also gave the $100,000 target an extra boost.
Now that the investment case is missing. The risks are mainly on the downside. Bitcoin remains a solution in search of a problem. The contrast with gold is painful. While Bitcoin was supposed to function as “digital gold”, it is moving in the opposite direction to real gold. This seriously damages the cryptocurrency’s image.
The debasement trade is over
Many investors bought crypto because of the so-called debasement trade. They believed that governments would dilute their currencies by printing money unchecked. Bitcoin would offer protection against that. But the new chairman of the Federal Reserve has put a stop to that. He turns out to be no Trump lapdog, but a pragmatic hawk who takes inflation seriously.
At the same time, Trump’s popularity is declining. This also affects the cryptocurrencies closely linked to him. The promised crypto revolution from the White House has not materialised. What remains is mainly volatility and disappointment.
Bitcoin is not a real currency
With recent price declines, it is increasingly clear why calling Bitcoin a currency is problematic. A real currency must meet three conditions. It must serve as a unit of account for comparing prices. It must function as a practical means of payment for everyday transactions. And it must be a stable way to store value.
Bitcoin does not meet any of these three requirements. Its extreme fluctuations make it unusable as a means of payment. No one wants to pay with something that could be worth half as much tomorrow. As a store of value, Bitcoin fails time and again in times of crisis. The currency has been around for seventeen years, but is increasingly losing its status as a safe haven. Bitcoin has disappointed in every recent crisis.
The digital euro is gaining ground
The intended new head of the ECB is remarkably emphatic about crypto. According to him, stablecoins are inferior in every way to the digital euro, which he strongly advocates. He has a point. A stablecoin is basically just a digital version of old-fashioned money. Banks digitised that decades ago with internet banking and debit cards.
The story about blockchain is also not entirely accurate. Many blockchain systems are private rather than public, as promised. They are called decentralised, but appear to be controlled by a small group of companies. Completely anonymous transactions are impossible, as this would be a gift to criminals, terrorists and money launderers. That is why the crypto industry must also comply with anti-money laundering rules.
The danger of instability
Stablecoins are a separate problem. Unlike banks, they do not have access to the central bank in case of problems. There is also no guarantee for people who invest in stablecoins. This is a recipe for instability. In a panic, everyone may want to exchange their stablecoins for real dollars simultaneously. If that money is not available, a classic bank run will occur.
We know this from history. In the nineteenth century, America had a period when everyone was allowed to issue their own money. It ended in chaos and a financial crisis. Current American legislation on stablecoins bears a striking resemblance to that failed experiment.
From innovation to reputational risk
In recent years, investing in crypto was still considered innovative. Those days are behind us. Now that the major banks are also facilitating crypto, its exclusivity has disappeared. For many financial institutions, crypto is now more of a reputational risk than an opportunity for the future.
Bitcoin does not move in line with safe investments such as gold, but with speculative shares. It offers no protection against inflation or geopolitical tensions. On the contrary, it increases the fluctuations in an investment portfolio. And there is no lower limit. In theory, the value of Bitcoin could drop to zero.
