Crypto winter highlights gold’s warming qualities

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LONDON, Nov 25 (Reuters Break­ingviews) — The cryp­to win­ter is bit­ter­ly cold. The frost set in ear­li­er this year with the col­lapse of Ter­ra, a dig­i­tal token sup­pos­ed­ly pegged to the U.S. dol­lar. The recent fail­ure of Sam Bankman-Fried’s FTX exchange has fur­ther low­ered the tem­per­a­ture. The aggre­gate mar­ket cap­i­tal­i­sa­tion of cryp­tocur­ren­cies has shrunk by more than $2 tril­lion, a fall of some 70% from the peak, accord­ing to CoinMarketCap.com. As insti­tu­tion­al investors run for the hills, finan­cial reg­u­la­tors are clos­ing in. The inevitable ques­tion aris­es: do cryp­tocur­ren­cies have a future? To which the answer is: not under any­thing resem­bling nor­mal circumstances.

True believ­ers haven’t lost faith. They point out that cryp­tocur­ren­cies were orig­i­nal­ly intend­ed to pro­vide a decen­tralised alter­na­tive to gov­ern­ment-issued fiat mon­ey, which didn’t require users to place their trust in inter­me­di­aries such as banks. Instead, trans­ac­tions would be record­ed on a dis­trib­uted ledger. In fact, most deal­ing in cryp­tocur­ren­cies end­ed up on cen­tralised exchanges such as FTX. The opac­i­ty, lever­age, illiq­uid­i­ty and shady deal­ings in this new finan­cial world resem­bled the very worst of Wall Street.

The believ­ers argue that cryp­to must return to its roots. That’s eas­i­er said than done, though. Hold­ing bit­coin or com­pet­ing tokens in offline dig­i­tal wal­lets is fraught with risks. If the own­er los­es their encryp­tion key or sends coins to the wrong address, they have no recourse. Fur­ther­more, cryp­tocur­ren­cies are too volatile to serve as mon­ey. That’s why cryp­to pio­neers devel­oped sta­ble­coins, which peg their mar­ket price to old-fash­ioned fiat cur­ren­cies. But, as Terra’s col­lapse demon­strates, sta­ble­coins haven’t lived up to their name.

Bankman-Fried appeared aware of crypto’s inher­ent flaws. The FTX founder agreed that dig­i­tal tokens were impos­si­ble to val­ue since they gen­er­at­ed no cash flow. He also point­ed out the imprac­ti­cal­ly slow speed of trans­ac­tions over the Ethereum net­work. In this respect, bit­coin is lit­tle bet­ter. There’s anoth­er prob­lem. Most cryp­tocur­ren­cies require a so-called “proof of stake” where large hold­ers ver­i­fy trans­ac­tions. But it’s the­o­ret­i­cal­ly pos­si­ble for these “whales”, as they are known, to take con­trol of a coin, depriv­ing the plank­ton of their stake.

Bit­coin has a dif­fer­ent design, based on “proof of work” for ver­i­fy­ing trans­ac­tions. But this process con­sumes vast amounts of ener­gy, which is prob­lem­at­ic at a time of high oil and gas prices. As Hyun Song Shin of the Bank for Inter­na­tion­al Set­tle­ments points out, the rewards for ver­i­fy­ing trans­ac­tions rise and fall with mar­ket turnover. “Cryp­to only real­ly works when coin prices are going up and there are inflows of new buy­ers,” he con­cludes. In oth­er words, the entire cryp­to world has the mechan­ics of a Ponzi scheme.

Then, there’s the reg­u­la­to­ry blow­back. Pub­lic offi­cials com­plain that the only prac­ti­cal use for cryp­tocur­ren­cies is laun­der­ing mon­ey or demand­ing ran­som pay­ments. In August, the U.S. Trea­sury sanc­tioned Tor­na­do Cash, a firm whose soft­ware pro­vid­ed anonymi­ty for cryp­to users. This could be a big­ger deal than poten­tial reg­u­la­tions spurred by the col­lapse of FTX. Dylan Grice of Calder­wood Cap­i­tal sug­gests that crypto’s foun­da­tion­al dream is dead: “Cryp­to is now de fac­to per­mis­sioned, high­ly cen­tralised and lack­ing in pri­va­cy,” he writes.

To cap it all, cen­tral bankers are respond­ing to the threat cryp­to pos­es to their mon­e­tary monop­oly. Chi­na is tri­alling a dig­i­tal yuan. More than 50 mil­lion Brazil­ians use the low-cost Pix pay­ments sys­tem, run by the country’s cen­tral bank.

It’s con­ceiv­able, how­ev­er, that cen­tral bank dig­i­tal cur­ren­cies (CBD­Cs) will turn out to be crypto’s sal­va­tion. If mon­ey, as Fyo­dor Dos­to­evsky said, is “coined lib­er­ty”, then CBD­Cs have the poten­tial to cre­ate a dig­i­tal panop­ti­con where the cen­tral author­i­ties sur­veil every trans­ac­tion. In the wrong hands, a CBDC could be used to sanc­tion obdu­rate indi­vid­u­als, deter­mine which trans­ac­tions are per­mis­si­ble or freeze finan­cial assets with­out due process. No total­i­tar­i­an has ever wield­ed such absolute power.

In such a night­mare sce­nario, access to a decen­tralised, anonymised type of dig­i­tal mon­ey could prove indis­pens­able. That’s the mes­sage of “The Net­work State”, a recent book by the entre­pre­neur Bal­a­ji Srini­vasan. He envis­ages a world in which the Unit­ed States erupts in civ­il war and China’s dig­i­tal yuan is used to track peo­ple glob­al­ly. In this world bit­coin serves as the lifeboat for civil­i­sa­tion, offer­ing pro­tec­tion against both anar­chy and the sur­veil­lance state.

Read­ers must judge for them­selves whether this dystopi­an vision is cred­i­ble. The Covid-19 pan­dem­ic taught us how quick­ly long-estab­lished soci­etal norms can be upend­ed. In Chi­na, fin­tech apps were adapt­ed to facil­i­tate lock­downs and issue indi­vid­u­als with stay-at-home orders. In the West, Pay­Pal (PYPL.O) recent­ly froze accounts of those deemed to have vio­lat­ed the online pay­ments firm’s “accept­able use pol­i­cy”. After Russia’s inva­sion of Ukraine, the West­ern gov­ern­ments froze Pres­i­dent Vladimir Putin’s access to the country’s for­eign exchange reserves and restrict­ed Russ­ian access to the SWIFT glob­al pay­ments system.

Under less dra­mat­ic sce­nar­ios, it’s hard to see a future for cryp­tocur­ren­cies, except per­haps as tokens for the online gam­ing com­mu­ni­ty. In recent years, their prime func­tion has been to pro­vide access to a vast online casi­no. Near-zero inter­est rates and quan­ti­ta­tive eas­ing unleashed cryp­to enthu­si­asm. The dig­i­tal tokens have pro­vid­ed the most hyper­re­al form of wealth – what the French philoso­pher Jean Bau­drillard called a sim­u­lacrum, defined as some­thing that has mere­ly the form or appear­ance of a thing, with­out pos­sess­ing its sub­stance or prop­er qualities.

Back on plan­et Earth, investors need a store of wealth that pro­vides pro­tec­tion against infla­tion and eco­nom­ic cat­a­stro­phe. They’re best off reject­ing “dig­i­tal gold”, as bit­coin is some­times dubbed, and embrac­ing the real thing. Like bit­coin, gold is ener­gy-inten­sive to pro­duce and lim­it­ed in sup­ply. Like bit­coin, it’s pret­ty hard to val­ue. Lore has it that an ounce of gold should pur­chase around 15 bar­rels of oil or 350 loaves of bread. The gold-oil price ratio is in line with its long-term aver­age. A 650-gram sour­dough loaf at the British super­mar­ket Wait­rose costs 4.11 pounds ($4.98). Mul­ti­plied 350 times that’s also close to gold’s cur­rent mar­ket price of around $1,750 per ounce .

Fol­low @Breakingviews on Twitter

CONTEXT NEWS

Edward Chan­cel­lor is the author of “The Price of Time: The Real Sto­ry of Interest”.

Edit­ing by Peter Thal Larsen, Streisand Neto and Oliv­er Taslic

Our Stan­dards: The Thom­son Reuters Trust Principles.

Opin­ions expressed are those of the author. They do not reflect the views of Reuters News, which, under the Trust Prin­ci­ples, is com­mit­ted to integri­ty, inde­pen­dence, and free­dom from bias.

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