Bitcoin is dead!
Well, I didn’t say so, but if bitcoin obituaries are anything to go by, bitcoin has died 416 times since its first launch. And there have been several prophecies about the death of bitcoin in the last decade. In January 2015, Matt O’Brien wrote that “if Bitcoin were a currency, it’d be the worst-performing one in the world, worse even than the Russian ruble.” He also noted that “Bitcoin isn’t a currency. [But] … a Ponzi scheme for redistributing wealth from one libertarian to another …” Conversation.com reported that “even if the price of Bitcoin doesn’t go to zero, the chances [of] the Bitcoin community convincing the wider public, governments, and industry that Bitcoin really represents the future of the world’s digital economy will become extremely unlikely.” [1]
In 2017, Peter Schiff, the Economist, best known for predicting the 2008 Financial Crash, was quoted to have said that bitcoin and other “[crypto]currencies are going to trade to zero or pretty close to it when the bubble pops,” and that “the only reason why people are buying bitcoin is because the price is going up. When it turns around, they are not going to sell it for the same reason.”
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How deep is the dip?
The crypto market recently experienced a plunge in prices of major cryptocurrencies including bitcoin dipping to as much as 50% in value. On Wednesday 12 May 2021, bitcoin price crashed from $58 thousand to as low as $36 thousand by Wednesday 19 May 2021, although it seems to be rebouncing towards $40 thousand presently. In all of these, bitcoin has proven to be the proverbial cat with nine lives.
By the way, it is important to note that although bitcoin price has fallen, the price is relatively high when compared to the fall in price of previous years. Also, at the current price, bitcoin still remains a big gain for investors or adopters who bought earlier, even as recent as January 2021, before Tesla’s (brief) romance with bitcoin in the Valentine’s Day month of the year
Reasons for the crash in bitcoin price
A major hit was China reinforcing its ban of financial institutions, including banks and online payment channels from providing services related to cryptocurrency transactions. China also introduced e-yuan, its proposed central bank digital currency and effectively a replacement for cryptocurrencies in the country. If you look at it closely, the effect of China’s ban on bitcoin and other cryptocurrencies may not be unconnected with the fact that more than half of bitcoin mining farms are located inside China villages.
CNBC even reports that “China’s Inner Mongolia region has proposed punishments for companies and individuals involved in digital currency mining as it looks to further crack down on the practice.”[2] This is coming after it announced its ban on all cryptocurrency activity having become necessary to “crack down on Bitcoin mining and trading behavior” [and] to prevent the “transmission of individual risks to the social field.”[3]
The second reason for the fall in price of bitcoin is connected to Elon Musk—who apparently has become bitcoin’s single biggest influencer—after tweeting that Tesla would no longer accept bitcoin payment for its electric vehicles. According to the Wall Street Journal, “bitcoin’s value against the dollar fell more than 5% after Mr. Musk’s tweet.”
Bitcoin’s Bigger Issues
Though considered to be one of the largest bull market drawbacks in the crypto industry since 2013, the tipping point for bitcoin is the mass adoption of it by institutional investors with Elon Musk making the dailies, daily. Experts in some quarters believe that institutional investors would be best at holding bitcoin. A number of these institutional investors have concerns though—concerns which are arguably historically valid. They range from environmental concerns to illicit activity and cybersecurity risks to speculative investment concerns. Let’s take a look, briefly, at these major concerns.
- Environmental Footprint
Bitcoin consumes energy to secure its network through a process called mining. The mining process requires lots of energy. And so do other assets in the world anyways. As mining activity increases, institutional investors, particularly those who must be seen to be supporting government’s clean-energy policies, are increasingly concerned about the corresponding carbon footprint, on one hand, and investing in cryptocurrency while sustaining a green environment, on the other hand. However suspicious Elon Musk’s moves may be—such as possible crypto market manipulation—he appears to be the face of this new movement.
Bitcoin drives a green environment.
Bitcoin faithfuls are not silent on this. They are pushing a different narrative. They hold that mining activity also increases as the value of gold rises which itself has a negative environmental impact. So many are asking why cryptocurrency is treated as the black sheep in the fold when other assets, such as gold, use twice the energy consumption of bitcoin. “To slander crypto-mining as an inherently dirty business appears intellectually dishonest.”[4]
- Bitcoin being used for illicit activity
The story about bitcoin being used to facilitate criminal activity is not new. Nigeria’s Central Bank re-emphasized this fact in its directive earlier this year noting that “cryptocurrencies have become wellsuited for conducting many illegal activities including money laundering, terrorism financing, purchase of small arms and light weapons, and tax evasion.” In his work on the risks and threats of the use of cryptocurrencies in Nigeria for illegal activities, Senator Ihenyen, says that “one thing is clear: Nigeria’s increasing cryptocurrency adoption is presently not only one of the highest in the world but also one of the safest.” And that “[t]he biggest use cases for cryptocurrency in the country remain speculative investment and peer-to-peer remittances or cross-border transactions.” It is reported that there is less illicit activity on the Bitcoin system than the traditional banking system..
- Cybersecurity risks
The Bitcoin technology which technically runs on the blockchain is arguably considered the technology nearly impossible to hack. To break through or hack the blockchain technology, a 51% quorum must be reached—what is known as the 51% attack. The Bitcoin blockchain for example has an incentive system where miners are rewarded for mining. It is important that core developers consider “adopting a governance framework that safeguards the collective interests of the protocol. Whether through proof of work (eg, as adopted by Bitcoin and Ethereum) or proof of stake (eg, as adopted by EOS), a strong incentive system helps to minimise the risk of 51% attacks on the blockchain.”[5]
- Bitcoin as a speculative investment
It is true that today a number of cryptocurrencies including bitcoins are mainly used as speculative investments and not as alternative currencies or medium of exchange. But adopters are not necessarily a “conglomeration of desperate, disparate, and unregulated actors” as they were described by the CBN in its recent response following its cryptocurrency directive. Several regulatory authorities around the world have classified bitcoin and similar virtual assets as commodities, making them tradable. In fact, Nigeria’s Securities and Exchange Commission (SEC) took the same position in its September 2020 statement on digital assets in Nigeria. As one of the key stakeholders mentioned in the proposed National Blockchain Adoption Strategy by the National Information Technology Development Agency (NITDA), CBN can help to significantly improve the intergovernmental coordination that appears to be currently missing in digital-assets regulation in the country. I have written more on this here.
Conclusion
Bitcoin seems to be currently battling for dear life. This battle becomes bigger with the renewed debate on the environmental impact of bitcoin and other similar cryptocurrencies on climate change. Also, increasingly, more central banks or reserve banks are considering introducing their own central bank digital currencies (CBDCs). China continues to resist crypto adoption in its financial system. And lastly, crypto volatility which is a major concern to both regulators and investors remains one of crypto’s biggest battles. Whether bitcoin will shake these off like it has in other times and return to its all-time high (ATH) or even exceed the numbers remains to be seen. So will this episode be the final death of bitcoin or will it be yet again another obituary with an empty grave? Time will tell.
[1] Note that bitcoin operates both as a currency and a technology—the blockchain technology. When referred to as a technology, it is spelt with the first letter ‘B’ in capital. But when it is used as a currency, it is spelt with a small letter ‘b’. Its usage in the quoted texts and other places are deliberate in order to maintain editorial integrity and comply with rules of grammar where applicable.
[2] Arjun Kharpal, ‘Major Bitcoin Mining Region in China Sets Tough Penalties for Cryptocurrency Activities’, CNBC, May 2021
[3] ibid
[4] Lawrence Wintermeyer ‘Bitcoin Energy’s Consumption is a Highly Charged Debate’, Forbes.com, March 2021
[5] Senator Ihenyen, ‘The Comparative Guide to Blockchain 2020 (Nigeria)’, Mondaq.com, May 2020