The Fall of Bitcoin
Bitcoin, a type of cryptocurrency, was welcomed into the world in 2009. Ahead of its time, Bitcoin did not gain any significant value until late 2017, when it shot up to almost $20,000. The cryptocurrency’s growing notoriety paired with its elusive decentralization aided this surge. This notoriety has continued to grow, with the price moving in parallel. Today, it is valued at over $63,000.
I am not here to tell you that Bitcoin is a bad idea, nor that Bitcoin is destined to fail. Rather, I am here to prove to you that Bitcoin is about to run into the greatest challenge the cryptocurrency will ever face. The challenge on Bitcoin’s horizon will be countries’ economic policies and regulations; if policies are too strict, Bitcoin will not survive.
A country’s number one goal is to secure its sovereignty. This is accomplished through a powerful militaristic presence, properly functioning government, and a strong economy. In America, the government commonly states it is their “responsibility to the people” to protect this sovereignty. The Federal Reserve is able to control our economy (through monetary policy), allowing us to keep it healthy. Levels within the market are used to both spur the market during periods of inflation and stimulate the economy when it is stagnant. For years, the Fed had 100% access and control over the US Dollar and its money supply. Bitcoin (and other cryptocurrencies) are a main opposition to this power dynamic.
Right now, Bitcoin is just a marginal threat for the US Government. As it continues to gain more value, it will move higher up on our government’s watch list. Although the US Government has refrained from directly speaking on recent cryptocurrency development, CNBC panelist and investment bank consultant Dan Nathan infers that “the U.S. Treasury and the U.S. government [won’t] let this thing get out of hand where literally corporates are starting to replace dollars” (Kuhn 2021). There is not enough room in America for a cryptocurrency as dominant as Bitcoin. Bitcoin’s existence is paradoxical: the faster it grows, the more likely it is to become regulated (dropping its value). This paradox is further exacerbated our war of currencies with China.
As America continues a war of currencies with China, the government must do anything they can to ensure the success of the Dollar. Removing Bitcoin, a direct competitor to the USD, would help them significantly in this war. After World War 2, the great industrial powers declined, and the USD became the gold standard and medium exchange—everything became dollarized. American markets became the plea of safety and the last market of resort. We held the global markets in our palm...until recently. China’s manifestation has presented the US with substitutive competition, causing the focus to shift from a war on trade to a war of currencies. Although the USD has dominated the past century, the Yuan is officially attacking the dollar. Our economic markets and value of the USD is constantly threatened, which has only been worsened by Bitcoin’s increasing popularity. The truth is, China is not playing fair in the realm of currencies. They are intentionally undervaluing the Yuan in order to gain a fabricated competitive advantage in trade (Picardo 2019). This intentional undervaluing, in turn, alters demand for Chinese exports (Amadeo 2020). In order to keep up with China’s alleged immoral currency manipulation, the United States Government has to do anything it can to boost the domestic economy. As the government looks to stimulate the economy, the first action they will take is to remove any internal competition. Bitcoin will become severely regulated.
Bitcoin’s decentralization leads to the common misconception that it is immune to federal regulation. If the government cannot dissect the transaction, they cannot impose regulations on it… right? Wrong.
Sorry to burst the bubble of crypto-fanatics, but Bitcoin is not immune to the tactics of the all-powerful US Government or any other government for that fact. Supporters of Bitcoin argue that since the currency is extranational in nature, it would require a collaboration of many countries to create regulations with any chance of creating a significant impact. However, gathering members for collaboration will not be difficult. In fact, there need not be true collaboration but rather parallel, independent bans on private currencies. Governments can “regulate the price of assets, such as fiat currencies, through buying and selling actions in international markets” (Sharma 2019). The government can also increase regulations related to the cost of doing business (increasing exchange transaction fees) with Bitcoin. By increasing the cost associated, it will lower demand for the cryptocurrency. In fact, this approach is currently being considered across many states. Thirdly, the government can create import restrictions on Bitcoin, making the asset scarce in the American market (Sharma 2019).
While debating theoreticals is fun, there are some real policies that have been enacted recently that have already impacted the cryptocurrency market. China was the first country to use legislature to deter Bitcoin use, starting in 2013 with their laws making it illegal for financial institutions to own or trade Bitcoin (Global Coin Research Team 2020). They continued with stringent policies: refusing to declare Bitcoin as legal tender, making ICOs (initial coin offerings) illegal, and prohibiting Bitcoin mining. Just this year, China has even created their own centralized, digital coin in an attempt to completely replace Bitcoin (Seth 2019). The United Kingdom has aided this movement by banning Bitcoin derivatives (Akhtar 2021). This ban on Bitcoin derivatives was put in place to damage the sale and popularity of Bitcoin. India is looking to follow suit, as government officials have just given citizens a tentative 6 month period to liquidate their Bitcoin assets before the country completely bans digital money and fines both trading and possession (Ahmed and Anand 2021). Although they are banning private crypto-assets, the government is focusing on keeping the blockchain in order to support a national digital currency similar to China’s. Countries are doing whatever they can in order to prevent Bitcoin from competing with their national currency. America is one of the only remaining global powers to not ban these threatening currencies. Once America does, which states are already considering, other global powers like Japan and the European Union will likely follow suit. These parallel regulations will erase Bitcoin’s value.
As regulations begin to develop, we will see the Bitcoin fad start to die. The dollar is backed by faith in the US economy, while Bitcoin has no true value to back it.
The trend of Bitcoin is similar to the recent trend of Gamestop—it is manufactured. Like Gamestop, the only backing of Bitcoin is the people’s love for it. The hype around Gamestop and Bitcoin resulted in everyone wanting to participate. However, the general population did not suspect the looming threat of institutional regulations to have the value-erasing effects that later occured. This will happen with Bitcoin too; the US government will impose regulations that cause the coin to lower in value. Another similarity is that the rise of Gamestop was meant to undermine the power of top hedge funds just as Bitcoin’s rise is meant to undermine centralized currencies. As soon as trading institutions like Robinhood and TD Ameritrade had their company’s life at risk (bulk purchases of volatile stock had left the companies outside of their regulatory capital requirements), they began to restrict trade, and the stock’s value plummeted. The unstoppable hype train came to a halt, regardless of the actions or wants of its supporters. The same will happen to Bitcoin once governments impose regulations.
Supporters of Bitcoin argue that the currency will hold value regardless of trading regulations, comparing its properties as a “safe haven asset” to that of gold. Before discussing the flaws of this comparison, it is important to highlight that countries are beginning to ban the possession of cryptocurrency, removing the ability to hold onto the asset (e.g. India). Even ignoring the imposing bans on possession, comparing Bitcoin to gold is a shallow claim without much of a foundation. On the surface, the comparison is not a stretch, as both assets are divisible, portable, durable, and scarce. Unfortunately, these prerequisites are not enough to cement the soundness of non-fiat currency (Huang 2021). The ultimate difference between the two is that gold has history while Bitcoin does not. Gold’s value has been present since the age of emperors, embedding its concept so deeply into the culture of the world that it has maintained the status as a universal store of value for thousands of years. As a result, the price of gold has yet to encounter major fluctuations. On the other hand, Bitcoin has only been around for twelve years. In these twelve years, we have witnessed the extreme unpredictability of Bitcoin. It has both quadrupled in price and halved in value over the span of months. The lack of history—of cultural embedding—along with the enormous volatility leaves Bitcoin as a risky asset to hedge inflation with. With the lack of history also comes an immature infrastructure. While Gold is legal tender and supported by physical transactions/the world’s banks, Bitcoin’s blockchain is highly inefficient and has glaring vulnerabilities that restrict it from scaling to support higher volumes of trade and higher values of Bitcoin (Beck 2021). In sum, Bitcoin is not a reliable store of value for long-term investors. This unreliability will aid Bitcoin’s fall in price as regulations increase.
Bitcoin will never completely die, as there will still be demand for the currency in illegal markets, such as terrorism. Due to the popularity of Bitcoin in these illegal markets, we must keep a constant eye on it to prevent it from getting out of hand. While this demand will keep the value from ever reaching zero, it is not large enough to save the coin from its regulation-based plummet. The undermining of Bitcoin will be a bitter-sweet affair. While decentralized currency is inspiring in concept, it is quite unrealistic in application. The governments of our world will never relinquish their power and holds, leaving decentralized currencies to be nothing but a topic mentioned only in dystopian-utopian novels.
Sources
Ahmed, Aftab and Anand, Nupur. 2021. “India to Propose Cryptocurrency Ban, Penalizing Miners, Traders.” Reuters. Last modified March 14, 2021. https://tinyurl.com/yt3baw5f.
Akhtar, Tanzeel. 2021. “UK’s Ban on Crypto Derivatives Goes into Effect Today.” Coindesk. Last modified January 6, 2021. https://www.coindesk.com/uks-ban-on-crypto-derivatives-goes-into-effect-today.
Amadeo, Kimberly. 2020. “China’s Currency, the Yuan, and How it Affects You.” The Balance. Last modified November 22, 2020. https://www.thebalance.com/china-currency-the-yuan-or-renminbi-3305906.
Beck, Jonathan. 2021. “Crypto Won’t Replace Gold.” Builtin. Last modified March 17, 2021.https://builtin.com/finance/crypto-wont-replace-gold.
Global Coin Research Team. 2020. “A Timeline of Bitcoin in China.” Global Coin Research. Last modified January 23, 2020. https://globalcoinresearch.com/2020/01/23/a-timeline-of-bitcoin-in-china/.
Huang, Roger. 2020. “Bitcoin is Not Like Gold.” Forbes. Last modified March 16, 2020. https://tinyurl.com/eupy38uv.
Kuhn, Daniel. 2021. “Blockchain Bites: The U.S. vs. Bitcoin?” Coindesk. Last modified February 10, 2021. https://www.coindesk.com/blockchain-bites-the-us-vs-bitcoin.
Picardo, Elvis. “Why China’s Currency Tangos with the USD.” Investopedia. Last modified August 5, 2019. https://www.investopedia.com/articles/forex/09/chinas-peg-to-the-dollar.asp.
Seth, Shobhit. 2019. “Is Bitcoin Banned in China?” Investopedia. Last modified June 25, 2019. https://tinyurl.com/4sfrnzmk.
Sharma, Rakesh. 2019. “ Can Government Regulation Affect Bitcoin Prices?” Investopedia. Last modified June 25, 2019. https://www.investopedia.com/news/can-government-regulation-affect-bitcoin-prices/.