Cryptocurrencies: Three Parameters Threaten Potential

The recent turmoil of Bitcoin and other cryptocurrencies has sparked another debate on their potential. This time, it is the appearance of new parameters that may alter momentum for cryptocurrencies.

The increased volatility of cryptocurrencies in recent months can itself be a destructive element, eroding their value as investments and transactions.

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Another formidable obstacle that has recently emerged is their high carbon footprint that could also dissuade investors. Most importantly, a catalytic threat comes from major central banks that have recently intensified their efforts on exploring the issuance of their own digital currencies.

Crypto volatility is greater than ever

Cryptocurrencies’ volatility is not new, neither baseless given that their value is completely based on the expectation of them increasingly becoming accepted as transaction means.

However, the volatility experienced over the last few weeks is unprecedented; bitcoin gains of 100% since from the beginning of the year until mid-April were evaporated within the last two weeks. While daily fluctuations of up to 10 to 20% have become the norm.

Cryptocurrencies lost 20% to 25% of their value within one day, following news that the Chinese government warned its financial institutions and citizens against facilitating cryptocurrency transactions.

For bitcoin, those losses were offset within the next two days, before dipping to its lowest point since January. A tweet from Elon Musk over suspending car purchases with bitcoin amid environmental concerns arising from mining, had already wiped off more than 20% of its value within the second week of May.

All these undermine faith in cryptocurrencies as a form of investment like gold amid lack of stability. Meanwhile, it is that volatility that deters people to treat cryptocurrencies as a transaction means, which is their only tangible value; no one would really prefer to spend bitcoin whether it goes up or down, based on the expectation of making long-term gains.

Cryptocurrencies do not have future as carbon currencies

Elon Musk’s tweet on the environmental sustainability of Bitcoin, has brought to the surface the issue of the carbon footprint of cryptocurrency-mining that has been largely overlooked, potentially demoralising investors.

Cryptocurrency mining is an energy-intensive process as a bulk of high-powered computers is required to generate it. The energy of cryptocurrency mining was estimated at 0.54% of global electricity consumption as of 2020, according to a study by Cambridge University on the environmental footprint of Bitcoin.

This amount of energy consumed is even higher than what countries like Argentina or Sweden consume, a waste of energy compared with standard currencies which have minimal environmental footprint.

Central bank bitcoins, a game-changer

China’s decision to curb cryptocurrencies’ acceptance is no coincidence after the release of its own cryptocurrency, a digital form of the Chinese yuan, for which it has ambitious plans to take over the world as a monetary reserve.

Interestingly, the central banks of the US, UK and the EU, are exploring the issuance of a Central Bank Digital Currency (CBDC). FED and the Bank of England have recently released statements on their action plan of creating their digital currencies, which are to be centralized and “stable”, potentially pegged with their standard currencies.

That again confirms one of the biggest critiques against cryptocurrencies; governments would never be willing to give away their monopoly over currency issuance, seeing cryptocurrencies as a potential threat for the monetary system.

This was written by GlobalData Associate Analyst Theo Delimaris.