Cryptocurrency bubble risks exposed by Bitcoin’s recent slide

They seem to be almost everywhere. Cool looking hipsters living the dream after amassing a fortune in the world of cryptocurrencies.

Social networking sites are full of them. Even old-school fashion magazines, which barely cling to life, have told grand and not-so-true stories about the fabulous riches to be won in the ether.

There is no doubt that they exist. Those who entered early or built financial structures that facilitate exchanges that, no one likes to admit, replicate the old banks and brokerages, have accumulated unimaginable riches.

But what about the hoi polloi? How many newcomer crypto traders, just for example, lost their life savings last weekend, when bitcoin and the crypto universe crashed?

Like slot junkies and track goers, wins are talked about while losses are often forgotten.

The charm can be the same; the chance to get rich, big time. But unlike ordinary gamers, many devotees of cryptocurrencies have embraced what they believe to be the future of finance with a kind of religious fanaticism that isolates them from reality.

Launched in 2009, Bitcoin was supposed to free ordinary citizens from the chains of government and the nation; an alternative, independent and truly global financial system.

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Bitcoin Explained: Everything You Need To Know About The Cryptocurrency Craze(David chau)

Yet more than a decade later, and the faithful cannot, or refuse to acknowledge, the ultimate irony. Rather than overthrowing traditional currencies, bitcoin and its 10,000 or so copycats still have a price tag on them.

Devotees, even the famous and fabulously rich, measure their wealth not in BTC but in greenbacks, yen, pounds, euros, and Australian dollars.

Money, money, baby

We all want it. All we need. But very few know how it really works.

Money, even good old-fashioned bills and coins, is a complex and little understood phenomenon that is based on faith; that it is backed by real wealth and that it will be redeemed. Even then, there are competing theories about how it works, how it is created, and how it is controlled and manipulated.

In its most basic form, it is a medium of exchange. And it is usually backed, either by the implicit promise of a government or by some other store of wealth, such as gold.

Bitcoin was supposed to provide an alternative; an island of stability in a sea of ​​national fiat currencies that governments have degraded and diluted, a system ripped apart by regular financial crises.

Instead, bitcoin has become almost useless as a medium of exchange, given that it is expensive and time-consuming to transact.

But it is the extreme volatility that has made it truly unusable. A car dealership that accepted Bitcoin at $ 68,000 a fortnight ago would have ended up suffering a huge loss last week.

And if there is one thing that the pandemic has proven, it has become a purely speculative and high-risk toy.

Rather than being a safe haven, which should appreciate in times of crisis, cryptocurrencies accentuate the economic wave.

Bitcoin bubble

Chart showing the price of Bitcoin in US dollars.
The price of bitcoin has been incredibly volatile compared to many other assets.(Supplied: CoinMarketCap)

They fly in good times and collapse at the slightest hint of trouble. In the past year, that volatility hit steroids, transforming cryptocurrencies into an unstable and potentially lethal investment.

As the price chart above shows, the global stock and real estate markets, which have ballooned as interest rates have dropped to zero, have been relatively subdued in comparison.

That attracts footwear and footwear. Wall Street thrives on volatility, and last year investment banks and global fund managers began to venture into the world of cryptocurrencies. Even retail banks like Commonwealth Bank have opened the door for customers to take a gamble.

But when banks of computers and algorithms enter the business equation, the chance that small-time gamers can negotiate their way to glory rapidly diminishes.

How Central Banks Are About To Eat The Cryptocurrency Lunch

The Governor of the Reserve Bank of Australia, Phil Lowe, is as far removed as possible from the world of grunge cryptocurrencies.

RBA Governor Philip Lowe speaking at a conference
RBA Governor Philip Lowe says the bank may start issuing digital tokens similar to cryptocurrencies.(AAP)

For years, a critic of cryptocurrencies, the RBA, like many major central banks, has been exploring ways to apply the blockchain technology behind cryptocurrencies for use in their own operations.

Millions of Australians now regularly use digital wallets on their smartphones and, in a speech last Wednesday, Dr Lowe outlined several possible scenarios in which the RBA can issue and support digital ‘tokens’ similar to Bitcoin and other cryptocurrencies, from the same way it emits. bank notes. But even that was a long shot, given our “efficient, fast and convenient electronic payment system.”

That was not all. He then threw a bazooka at the cryptocurrency team when he blurted out that the bank was open to the idea of ​​allowing private players to issue an electronic dollar pegged to the Australian dollar for retail users.

But if that happened, it would have to be backed by high-quality assets like a bond.

“So if privately issued stablecoins are ultimately the way things are going, it will be crucial that they meet very high standards,” he said.

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The technology behind Bitcoin, Crypto and Defi shaking the world(David chau)

Therein lies the biggest threat to the crypto crew. Having failed to take control of global finance, cryptocurrencies as they are now may become obsolete as the world’s largest central banks turn the tables and launch their own digital currencies.

Digital currencies may be the “unavoidable future of money,” as one large crypto investor puts it, but they are most likely run by the same central bank overlords who run global finance now.

Any privately managed coin or token will be heavily regulated and forced to play within the rules.

Dangers of the crypto bubble

For the second time in as many months, an Australia-based crypto exchange MyCryptoWallet crashed last week, leaving 20,000 investors stranded and likely losing everything. BlockChainGlobal sank in October due to $ 23 million.

Almost totally deregulated, investors use these exchanges to trade cryptocurrencies and typically leave their investment on the exchange for safekeeping. The alternative is to save it yourself to a hard drive or some other form of technology that may fail, be lost, or be forgotten.

The total value of cryptocurrencies has now exceeded $ 3 trillion.

That doesn’t include the nefarious world of NFTs, non-fungible tokens, in anything from art to imaginary real estate to livestock. You can even put your imaginary paddocks to imaginary horses for a decent profit!

If everything falls apart, the losses will be anything but imaginary.

It is not surprising that central banks and governments are nervous and belatedly trying to control the whole phenomenon. More than 20 countries, including China, have banned bitcoin and many others, including Australia, seek to impose regulations.

In the event of a serious collapse in the value of these markets, there could be serious economic consequences in the real world. But, since they move freely outside the system, there is no security mechanism or potential for a ransom.

With the specter of rising interest rates sending a chill through the subprime asset markets, a jolt in these overvalued, overvalued and overweight markets seems almost certain.

And the repercussions could be far more serious than anyone anticipates.


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