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Go back to the 23 June 2020 Trends Journal when bitcoin was trading under $10,000 per coin. We had forecast the price would spike much higher “when it solidly breaks above the 10,000 mark.”
It did, and we have been bullish on it. However, the Trends Journal has continually warned that cryptocoins were due for a major tumble when central banks and governments took action to rein them in. And, with more central banks planning to go digital in the coming years, they would not tolerate competition. (See our 24 March 2020 article, “FROM DIRTY CASH TO DIGITAL TRASH.”)
Those warnings have become reality.
Bitcoin’s relentless slide in price over the past two weeks became a rout on 11 May, when the price barely managed to stay above $30,000 before closing the day at around $38,000… the price range where it trading as we go to press.
More than $8.6 billion in crypto holdings were liquidated in 24 hours, bybt.com, a cryptocurrency data provider, reported.
On Friday, the price slid down to just above $35,000, after Chinese vice-premier Liu He vowed the government would “crack down on Bitcoin mining and trading behavior.”
Cryptomoney “is not a real currency” and “cannot and should not be used as currency in the real market,” the People’s Bank of China, the country’s central bank, said in a separate statement.
The price of Bitcoin fell 29 percent for the week, while cousin Ether’s price dove 44 percent, Dogecoin sank by 40 percent, and related stocks, such as Coinbase, also took a beating.
Much Bitcoin is created in China, where the electricity needed to run the thousands of computers required for Bitcoin mining is cheap. However, that massive power consumption threatens to undermine the ambitious emissions reduction targets that president Xi Jinping has declared for the country.
Also, authorities there are suspicious of a product they find difficult to control; China’s banks are banned from dealing in Bitcoin.
Also, on 11 May, three Chinese industrial organizations issued a joint policy statement forbidding the nation’s financial companies and institutions from accepting digital currencies or using them to settle accounts.
The statement contributed to Bitcoin’s price plunge, undermining the standard claim that cryptocurrencies offer a hedge against the capricious actions of governments.
China First. While the European Central Bank and the U.S. Federal Reserve are progressing in their “thoughtful and deliberative” development of an electronic dollar, as we have long reported, the Chinese government had planned to issue its own digital renminbi. (See our article, “CHINA: DIGITAL CURRENCY WORLD LEADER” in our 20 October 2020 “GLOBAL ECONOMIC TRENDS” overview.)
Back then, 50,000 Chinese consumers lined up in the city of Shenzhen and each was given 200 yuan – about $30 worth – of the government’s new digital money to spend at more than 3,000 area retailers.
Users had to download an app to their smartphones and create a dedicated account for digital money with one of China’s four government-owned banks. It was the country’s largest experiment in distributing and processing the digital currency, dubbed Digital Currency Electronic Payment (DCEP), the strength and stability of which is backed by the Chinese government.
Since then, the more tests have been run, and the digital yuan is being introduced not only to defend China’s economy against outside forms of currency and digital payments, such as Bitcoin, PayPal, or the dollar but also to eventually replace physical cash entirely.
The Bitcoin Boom. The Bitcoin buying frenzy gained fuel in February when Tesla announced it had bought $1.5 billion worth of Bitcoin. Prices peaked at $64,829 in mid-April after it was touted by celebrities from Elon Musk to rapper Snoop Dogg.
Then, earlier this month, Tesla boss Elon Musk said the company would no longer accept Bitcoin in payment for its cars; Musk echoed growing concerns about the amount of energy burned in mining Bitcoin and other digital currencies.
The price plunge slowed when Musk said Tesla would maintain its current Bitcoin holdings instead of selling them.
TREND FORECAST: As we have long noted, gold prices would be above $3,000 per ounce if there was no cryptocurrency market. Now, with fears of extreme crypto volatility, institutional investors will be exiting Bitcoin and drifting back to gold/silver safe-haven assets.
TREND FORECAST: Where are the cryptocurrencies going? As we see it, they have a great potential to climb much higher and also experience sharp downturns should government competition and government regulations increase.
For an “insider’s” perspective on what the crypto future looks like, see Gregory Mannarino’s new article, “CRYPTOS: DOWN BUT NOT OUT.”
U.S To Take Tougher Stance of Cryptos. As part of a broad plan to strengthen tax collections, the U.S. Treasury will require all cryptocurrency transactions worth $10,000 or more to be reported to the Internal Revenue Service, the Treasury announced on 20 May.
“Cryptocurrency already poses a significant detection problem by facilitating illegal activity broadly, including tax evasion,” the announcement stated.
President Biden has appointed Gary Gensler as chairman of the U.S. Securities and Exchange Commission, which would oversee rule-making and regulation around digital currencies.
Gensler knows the field: he taught courses on blockchain technology and digital currencies at MIT’s Sloan School of Management.
Earlier this month, Gensler told Congress that imposing a regulatory regime on cryptocurrencies would protect investors and thwart market manipulation.
“Gensler is viewed as a potential ally for cryptocurrencies,” Ed Mills, an analyst at Raymond James, wrote in a note to clients earlier this month.
“However, [his] statements are likely to revisit debates regarding regulatory risk to cryptocurrencies and exchanges,” he noted.
Regulation likely would scare investors in the short term, causing crypto prices to fall, Mills acknowledged. Over time, though, regulation would lend greater legitimacy to digital money and make it a more stable playground for speculators, he contended.
Brokerage firm Miller Tabak took a more skeptical view, warning clients in a note from economist Paul Shea that “confirmation of Gensler [as SEC chair] and [recent] cryptocurrency volatility following rumors of tighter regulation highlight regulatory risks facing this industry.”
As cryptocurrencies’ use increases, “so must our attention to the appropriate regulatory and oversight framework” for “private-sector payments innovators who are not within the traditional regulatory arrangements,” Jerome Powell, chair of the U.S. Federal Reserve, said in a 20 May statement.
Gyrations in crypto markets and recent startling run-ups and crashes in speculative prices have made regulating digital currencies a priority among both Republicans and Democrats in Congress.
U.S. Going Digital. The U.S. Federal Reserve will release a research paper at some point this summer detailing its work so far in developing a digital currency, emphasizing risks and benefits for the U.S., and asking for public comments, the central bank announced on 20 May.
The paper “represents the beginning of what will be a thoughtful and deliberative process,” Fed chair Jerome Powell said in the video statement accompanying the announcement.
“We are in the midst of a technological revolution that is fundamentally reshaping how we purchase goods and services,” Powell acknowledged.
The Fed has “been carefully monitoring and adapting to the technological innovations now transforming the world of finance, payments, and banking,” he said.
“The effective functioning of our economy requires that people have faith and confidence not only in the dollar, but also in the payment networks, banks, and other payment service providers that allow money to flow on a daily basis,” Powell said in the video.
“Our focus is on ensuring a safe and efficient payment system that provides broad benefits to American households and businesses while also embracing innovation,” he emphasized.
The Federal Reserve Bank of Boston has partnered with the Massachusetts Institute of Technology to create a model cryptodollar; other Fed banks are pursuing their research.
In a 24 May speech, Fed governor Lael Brainard seemed to urge the Fed to pick up its pace.
Last year’s economic crash “led to an acceleration of the migration to digital payments as well as increased demand for cash,” Brainard said. “There was a pronounced shift by consumers and businesses to contactless transactions facilitated by electronic payments.”
Brainard cited several benefits of a U.S. digital currency, including:
- bringing the 20 percent of Americans who have no bank accounts into the financial system;
- making international transactions easier and more efficient;
- the safety of a digital dollar backed by the U.S. government, compared to the volatility of private digital currencies backed by nothing;
- minimizing fraud, baseless speculation, and consumer and investor abuse.
When the treasury issued stimulus checks, many people waited weeks to receive them, Brainard noted. A digital currency would have allowed the treasury to expand the number of digital payments that people would have gotten instantly, she said.
Cryptomoney has not emerged as a stable means of exchange but rather as a speculative play, the Fed has held in previous statements.
“Cryptocurrencies have not served as a convenient way to make payments, given, among other factors, their swings in value,” Powell noted in the video.
In contrast, digital money linked to national currencies, generally referred to as “stablecoins,” protects the value and the public, he has stated.
Any digital U.S. currency will complement, not replace, paper money and metal coins, Powell reiterated.
Although the Fed has emphasized the need to proceed cautiously and “get it right” in developing a government-backed digital currency, faster progress by other countries in creating a national cryptocurrency – notably China, which plans to issue a digital currency next year – is pressuring the Fed to progress at a brisker pace.
The Fed has set 2023 as the window in which it will launch its FedNow digital payment service as the first component of a digital currency system to be publicly tested.
“We’re talking about a four- to five-year journey to real availability and usage,” not only in the U.S. but in other countries as well, David Treat, a cryptocurrency expert at Accenture, told CNBC.
“A lot of learning has to happen between now and then,” he said.
TREND FORECAST: As we had forecast, world governments will go from “DIRTY CASH TO DIGITAL TRASH” and, of the major nations, China will lead the charge. China’s digital currency could move to replace the dollar as the world’s reserve currency if it appears much earlier than the U.S. version. China now leads in experience and technology around digital money, which could bolster the yuan’s claim to being a global currency.
At present, “The share of U.S. dollar reserves held by central banks fell to 59 percent—its lowest level in 25 years—during the fourth quarter of 2020,” according to the International Monetary Fund.
U.S. dollar assets held by central bank reserves declined 12 percentage points since the euro was introduced in 1999, the IMF reported, while the share of the euro has been around 20 percent and the Chinese renminbi rose to 9 percent.
Therefore, we forecast that when China overtakes the United States as the world’s largest economy, its digital yuan will vie for a larger share of those transactions.
Mongolia Sets Up Hotline for Crypto Informers. Inner Mongolia, a province of China, has established a hotline and has asked citizens to inform on neighbors they suspect of mining cryptocurrencies, so the provincial government can “comprehensively clean up and shut down” digital money miners, the Financial Times reported.
The move comes as part of the province’s pledge to reduce energy consumption to slash airborne emissions.
Mining cryptocurrencies is especially energy-intensive; Tesla recently announced it would no longer accept Bitcoin in payment for its cars for that reason.
The price of Bitcoin and other digital currencies plunged last week, due in part to the Chinese government’s statement that they “are not real currencies” and that companies, especially financial institutions, should shun them.
China is tightening control over private digital currencies both to meet president Xi Jinping’s goal of making China carbon neutral by 2060 and to ensure that cryptomoney cannot compete with the central bank’s digital renminbi, due to debut next year.
Lacking government intervention, mining cryptocurrencies would churn out 130 million metric tons of carbon dioxide by 2024, exceeding the entire annual carbon footprint of Venezuela, according to an April study by Chinese researchers.