Published: May 10th, 2021
The Bank of England Governor has warned cryptocurrency investors to prepare for the worst. Andrew Bailey said virtual currencies have no intrinsic value, and whoever invests in them should do so only if they are ready to lose all their money. The warnings came even as cryptocurrencies enjoy wild price increases.
On Thursday, May 6, the Bank of England (BoE) Governor Andrew Bailey said that virtual currencies lack intrinsic value, and whoever buys them should be ready to lose all their investment.
Bailey’s comments come even as virtual currencies such as Bitcoin, Ether, and Dogecoin have experienced skyrocketing price increases this year. The current surge has taken investors on a reflection path back to 2017 when the Bitcoin bubble stretched the coin’s price to almost $20,000 before diving to $3,122 only months later.
Asked at a press conference to explain the rising value of virtual currencies, Bailey said the coins have no intrinsic value. However, he was quick to say that people invest in them despite their value status, probably because they have extrinsic value. He warned people who are buying cryptocurrencies to do so only if they are comfortable losing whatever investment they are sinking in the coins.
Bailey’s comments mirror the warnings issued by the U.K.’s Financial Conduct Authority (FCA). Early this year, the FCA, the conduct regulator for U.K. financial firms and markets, warned crypto investors to get ready to lose all their money.
In January, the financial services watchdog warned that investing in virtual currencies, or lending and investments linked to these coins, involves undertaking very high risks using investors’ money. Consumers that put money into such investment products should anticipate a situation where they lose everything.
Bailey, who previously headed the FCA, is a long-standing crypto skeptic. He issued a similar warning in 2017, telling crypto investors, enthusiasts, and prospective traders to prepare to lose whatever investments they would put in virtual currencies.
Despite Bailey’s warnings, Bitcoin is up more than 90% this year, mostly influenced by the increasing interest from corporate buyers and institutional investors. Tesla bought Bitcoin worth $1.5 billion earlier this year.
The value of the electric carmaker’s holdings has surged to $2.5 billion. Virtual currency proponents, especially the individuals that back Bitcoin, consider the coin as a store of value, similar to gold.
The characteristics make sense because of Bitcoin’s scarce supply. Only 21 million Bitcoin can ever be in circulation, prompting advocates to argue that the coin can provide a hedge against inflation, especially now that central banks all over the world are printing money to relieve the effects of the coronavirus pandemic.
Despite the flashy words that proponents are throwing around to defend Bitcoin, skeptics only see it as a market bubble that would most certainly burst. Michael Hartnett, the chief investment strategist at Bank of America Securities, referred to it as the mother of all bubbles. Similarly, Stephen Isaacs, a senior executive at Alvine Capital, said the product has no fundamentals.
Even though Bitcoin has had an impressive rally, altcoins have had sustained surges as well, and in certain situations, even outstripped Bitcoin. For instance, Ether, Ethereum blockchain’s native token, has seen its value increase by more than 360% year-on-year. Meanwhile, Dogecoin, a meme-inspired coin, is up more than 12,500%.
Analysts attribute Dogecoin’s price surge to tweets from celebrity entrepreneurs such as Elon Musk and Mark Cuban. Retail investors who bought the token on the controversial free-trading app, Robinhood, have also influenced the price. David Kimberly, an analyst at Freetrade, the U.K. investing app, said Dogecoin’s price increase is the finest example of the greater fool theory at work. Referring to crypto investors as individuals buying and selling overvalued goods to other individuals willing to pay even a higher price is not new among crypto skeptics.
Meanwhile, an increasing number of central banks consider issuing their digital currencies, also called central bank digital currencies (CBDCs). In April, BoE initiated a joint task force in conjunction with the U.K.’s Treasury to explore the capabilities of CBDCs. During the launch, the bank’s representative said that such a currency would circulate alongside cash and bank deposits and not replace them.
BoE is just one of the many central banks that have expressed interest in CBDCs. China is positioning its proposed digital yuan for global use. Beijing plans to design the currency to serve while untethered to the international financial system. In the U.S., the Digital Dollar Project has launched pilot programs testing the potential of a U.S. CBCD.
Bailey’s comments about Bitcoin are not the first. Since the coin’s whitepaper was published anonymously in 2008, it has attracted criticism from many, including the high and the mighty in the financial world.
Warren Buffet, the CEO of Berkshire Hathaway and the seventh richest individual on the planet, called Bitcoin a delusion. He also likened the cryptocurrency to rat poison and vowed never to own it. Buffet argued that Bitcoin attracts charlatans and has zero value.
Gita Gopinath, an economic counsellor at the International Monetary Fund (IMF), recently said that Bitcoin is an example of a virtual currency that serves no purpose. Instead, it fits the description of a product in the speculative asset class, Gopinath added. She said that in terms of replacing the coin for money, it does not come close.
Peter Thiel, the renowned German billionaire and co-founder of PayPal, said he wonders whether it is too late for the financial world to consider Bitcoin as an aspect of the Chinese financial weapon targeting the U.S.
Another dissent came from Bill Gates. The co-founder of Microsoft Corporation said virtual currencies’ main feature is their anonymity, which he thinks is not a good thing. The business magnate added that crypto is used to buy drugs, so in more ways, the rare technology is causing deaths in fairly direct ways.