Bitcoin’s Troubles Go Far Beyond Elon Musk | The New Yorker
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All speculative market manias produce signature characters. From the Yale economist Irving Fisher, who, in October, 1929, pronounced that stock prices had reached “what looks like a permanently high plateau,” to Charles Prince, the chief executive of Citigroup, who, in July, 2007, remarked, “As long as the music is playing, you’ve got to get up and dance,” these individuals are forever tied to the bubbles they got caught up in. When the story of bitcoin is written, there will be many crypto boosters to choose from, such as the Winklevoss twins; the hedge-fund manager Paul Tudor Jones; and Cathie Wood, a pioneer of funds devoted to investing in disruptive companies. Right now, though, the individual most clearly associated with bitcoin’s travails is Elon Musk, the C.E.O. of Tesla and SpaceX.
It makes an entertaining narrative to focus on Musk, but the issues facing the crypto market go well beyond one individual. Briefly stated, the bitcoin boom faces two existential threats: a tightening of monetary policy by the Federal Reserve, and a legal crackdown by the Chinese and other governments intent on protecting their own currencies. The prospect of a Fed shift could cause the price of bitcoin to fall a lot farther. The spectre of concerted government action to restrict the trading and use of bitcoin is potentially even more perilous: it brings into question the long-term viability of the digital currency.
Since it doesn’t yield any cash flows, bitcoin’s value as an investment asset is essentially arbitrary. Like a work of art, it is worth what people believe it’s worth—a fact that Marion Laboure, an analyst at Deutsche Bank, highlighted in a March, 2021, research report. She called this “the Tinkerbell Effect.”
To be sure, some bitcoin boosters claim that the currency is the new gold: an asset that, although of limited intrinsic utility, does provide a valuable hedge against a fall in the stock market and other financial assets. Recently, however, bitcoin acted more like a risky meme stock, falling sharply as bond yields rose and investors fretted about a change in Fed policy to head off the threat of inflation. Last week’s rout coincided with the news that some Fed policymakers want to start discussing a plan for tightening the central bank’s money spigot, which has remained fully open even as the economy has rebounded. As bitcoin plunged last week, the price of actual gold rose.
Given the nature of speculative markets and the widespread interest in the blockchain technology that underpins bitcoin and other digital currencies, it’s unwise to make firm predictions. But, on top of dealing with the possibility of a reversal in U.S. monetary policy, crypto bulls are facing the possibility of other countries following China’s lead and cracking down on bitcoin—the rise of which could present a competitive threat to government-issued currencies—such as the renminbi, the euro, and even the dollar—which are also called fiat currencies. If bitcoin or another peer-to-peer digital currency did achieve widespread acceptance as a means of payment, this would be a profound global economic development. Commercial banks could be circumvented. Financial regulations could be evaded. Governments could lose control over monetary policy and the ability to track money transfers for tax and crime-fighting purposes.
The United States and other Western countries haven’t yet gone as far as China has, but their governments aren’t standing idle, either. Earlier this year, Janet Yellen, the Treasury Secretary, described bitcoin (correctly) as an “extremely inefficient way of conducting transactions,” and pointed out (equally correctly) that it is used “often for illicit finance.” (A couple of weeks ago, when Colonial Pipeline, the company that runs a main fuel-supply line on the Eastern Seaboard, agreed to pay hackers a ransom of $4.4 million, it paid in bitcoin.)