Bitcoin Bubble Is About to Burst: Central Banks Could Be the Reason

Bitcoin prices have seen incredible volatility in the last few weeks, but they struggled to go above $14,300 on Wednesday as prices fell nearly 6%. Bitcoin was trading above $17,000 last week but fell below $14,300 on Wednesday. To put things in perspective, the bitcoin market capitalization has plunged from $294 billion on January 7 to roughly $240 billion on Wednesday. The falling prices might be reflecting more than just risk and volatility. The bitcoin bubble might be about to burst.

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China, South Korea’s Moves Worry Bitcoin Miners

JPMorgan CEO Jamie Dimon says he regrets calling bitcoin a “fraud.” Kodak has also announced that it would install bitcoin mining systems in Rochester, and would launch its own version of bitcoin called KODAKcoin. While almost everyone seems to be going crazy for cryptocurrencies, central bankers might be secretly plotting to burst the bitcoin bubble. And the threat seems real because they have already been dropping hints.

We have to understand that bitcoin, Ripple, Ethereum, and other cryptocurrencies are digital currencies. But investors have been treating them as an investment rather than a currency. They are betting on or against cryptocurrencies to make quick bucks. They are jumping in and out of the market as market sentiments change. Bitcoin would gain momentum if more and more people use it as a monetary tool rather than as an investment.

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South Korean regulators have said they would now more closely monitor the cryptocurrency market. The primary reason bitcoin and other cryptocurrencies became so popular are that they are unregulated by governments. People could use them anonymously. But the South Korean government is planning to ban the anonymous cryptocurrency accounts and even provide measures to shut down exchanges if needed.

China is also tightening the grip on bitcoin miners. The world’s most populous country mines nearly 75% of the world’s bitcoins. According to the Financial Times, a multi-agency task force has asked provincial governments in the country to get the bitcoin miners to “exit the cryptocurrency mining industry.” Officials cited the excessive electricity consumption and financial risk as reasons China wants to “eradicate” its bitcoin mining industry.

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That’s quite surprising because China has devised favorable policies and made huge investments to become a global leader in key technology sectors such as robotics and artificial intelligence. The decision to eradicate the bitcoin mining industry indicates that the country doesn’t see cryptocurrencies as a strategic industry. Instead of shutting down the bitcoin mining operations directly, Beijing will “squeeze them out” by enforcing policies on land use, tax collection, electricity consumption, and others, says the Financial Times.

Why Central Bankers Would Burst the Bitcoin Bubble

If there is anyone who is going to burst the bitcoin bubble, it would be the central bankers. Last month, the US Federal Reserve chair Janet Yellen said cryptocurrencies were a “highly speculative asset” and they were “not a stable store of value,” which means they don’t constitute a legal tender. Bank of Canada governor Stephen Poloz said last month buying bitcoin was more like gambling than investing.

Bank of England governor Mark Carney, who is also the head of G20’s Financial Stability Board, has said that tightening the regulations around bitcoin was “necessary.” Central banks have enjoyed full control over issuing money for a long time. They won’t be able to digest the existence of new forms of currency that they have no control over.

As the Australian Financial Review points out, central bankers believe digital currencies do not offer any major advantages over traditional currencies such as the dollar, pound, euro, and yen. Currency is something that acts as a means of payment and a store of value. But bitcoin doesn’t meet these requirements. The huge fluctuations in cryptocurrency prices make them unsuitable for a store of value or a unit of account.

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Nowadays bitcoin transactions are taking longer than before because the bitcoin network is capable of handling only limited transactions per second. As the traffic increases, so do the transaction times and fees. One of the biggest reasons central bankers would target the bitcoin bubble is that they fear retail investors would put all their money into different forms of cryptocurrencies hoping to reap the same financial rewards that others have enjoyed.

If central bankers decide to crack down on the bitcoin bubble, they would most likely target the cross-border payments in cryptocurrencies. They could also target the flow of money between individuals and exchanges because you have to first transfer money from your bank account to a bitcoin exchange to carry out a bitcoin transaction. Since last month, many bitcoin investors in Australia have complained that almost all the large banks in the country were freezing their accounts and preventing them from transferring money to bitcoin exchanges.

No central bank would want to give away all the monetary power to bitcoin or another technological ingenuity. As and when they start cracking down on cryptocurrencies, the prices will fall dramatically. Bitcoin prices might already have peaked as many early adopters have started selling their holdings. Many others are in the panic selling mode. Recently, Litecoin founder Charlie Lee sold all his Litecoin holdings. When the creator of a cryptocurrency sells all his shares, it’s a signal that things aren’t going great.

By Vikas Shukla

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