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The success of crypto-currencies causes their own downfall. As soon as the popularity of crypto-currencies threatens the stability of the financial system, this speculative party is spoiled by regulation.

The Chinese central bank warns financial institutions not to accept cryptocurrencies as a means of payment. Now, the attraction of crypto-currencies lies precisely in the fact that the crypto market is unregulated. The market is still dominated by bitcoin. This digital currency is intended as a solution to the government monopoly on money but without the drawbacks. No debt problems, no nationalisations, no defaults, and no taxes. Bitcoin is digital gold and therefore better than analog gold. Just try to flee the country with millions in gold. With bitcoin, it takes a split second. No authorisation is required. Exactly the reason why Beijing does not want this. As long as it is all harmless entertainment, governments can exercise restraint. As soon as the crypto market grows strongly and institutional investors, companies, and banks start participating with large amounts of money, this poses a risk to those same banks and thus to the stability of the financial system. 

Rationally speaking, a cryptocurrency is still a solution in search of a problem. The transaction costs of bitcoin have increased even more than the value of bitcoin itself. This does not include the negative externalities due to the high consumption of fossil fuels. Transactions are slow and at the slightest bit, there are failures. Many bitcoin-adepts see the rising value as proof that the technology works and that the means of payment is more widely accepted. If this were true, we would still be paying with tulip bulbs. Something that increases in value does not therefore immediately acquire the function of money. That makes it an investment at best. It is not, because bitcoin only has value if it is an alternative to money. Another catch 22.  

The Chinese ban on using bitcoin as a means of payment suggests that Beijing fears that it could be used for this purpose. If so, it is strange that bitcoin is falling on such notice. If it were a real threat, such a ban would be more of a confirmation that bitcoin works. After all, the idea was that governments had no say in the crypto market. The price reaction suggests that cryptocurrencies are little more than pure speculation. This also explains the high volatility. In an uncontrolled and chaotic universe, prices can rise and fall rapidly. Not exactly a stable and safe investment, more like a virtual casino. The ECB is not worried, for the time being. Eurozone banks have little exposure to crypto-related financial instruments. According to the ECB, the crypto market is not a risk to the stability of the financial system. Nevertheless, timely intervention and regulation of the crypto market is an example of obvious prudence. The moment the ECB is forced to intervene, it will be proof of bitcoin’s success. This success will be a Pyrrhic victory because it means the end of the crypto fairy tale. 

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