Bitcoin

Dear Ladies and Gentlemen

As many of you will know, my partners and I live the privilege of reading books, research, articles, newspapers, and magazines to build up our knowledge base continuously as part of our job.

We receive much research for free, but we also buy research from external sources and one product we buy comes from a German house and frankly speaking, I am very fond of it. These guys just published an article on Bitcoin, and today I would like to share with you one or the other of their paragraphs with some of my comments. Please be aware that this is neither a recommendation to buy cryptocurrencies nor a recommendation to sell cryptocurrencies. It is merely an informative piece of text about a possible price development of Bitcoin and other cryptocurrencies in my weekly email format, which I hope you may appreciate. Please enjoy the read:

USD 100’000

If Bitcoin reaches the USD 100’000 mark soon, then the Bitcoin law of measuring through the power of 10 would have been enforced once again within a few months. As you may know, Bitcoin was trading below USD 10’000 at the end of July 2020 and is currently trading close to USD 50’000. The runs from USD 1 to USD 10, USD 10 to USD 100, USD 100 to USD 1’000 and USD 1’000 to USD 10’000 all took place within weeks or months. Between those runs, there was a break every time. The last two breaks lasted roughly three years each. If this rule (of 10) continues, the target does not have to be USD 100’000 exactly. The price may over-or undershoot slightly and yet, looking at past price patterns, one can detect some regularity.

The exciting part of the research article on Bitcoin I am partially quoting here is what may happen over the months and years to come if Bitcoin or other cryptocurrencies continue to shoot through the roof. The analyst who produced the article has an interesting take on it.

The Role of the Central Banks

If Bitcoin and other cryptocurrencies continue to perform well, we could eventually find ourselves in a situation of a significant «crash». The main reason behind such a crash could be explained by central banks’ increasing perception of cryptocurrencies as serious competition for their own currencies. Central banks could be afraid of losing control over their monetary system. Such concerns may be fuelled even more by Tesla’s recent bitcoin purchase. The higher Bitcoin and the cryptocurrencies rise, the more likely they become victims of their success. It seems only natural that the more cryptocurrencies rise, the more central banks will want to regulate them.

Christine Lagarde

Last month Christine Lagarde expressed her views concisely regarding the regulation of cryptocurrencies. In her opinion, the regulation would have to take place within the global cooperation framework (at the G7 level, extended to the G20). The FATF (fatf-gafi.org) is an international institution against money laundering and could play a role in this. However, the fight against dubious business and money laundering connected with cryptocurrencies would probably do little to harm Bitcoin and co. Another remedy could be to ban Bitcoin mining. But I think it is difficult to imagine to get governments of lesser regulated nations to cut off the electricity of mining farms belonging at least partially to their own government members. It is straightforward, as long as there is a business to be made, there will be.

Restrictions

A sharper sword would be payment bans, capital export controls, exchange and trading restrictions. The Fed and ECB could ban Bitcoin and other cryptos as a payment method in the USD and EUR area. This could, for example, happen after having introduced their own digital money; Central Bank Digital Currency (CBDC). Central banks could also eliminate the store of value factor by setting upper limits for transfers. For example, only EUR/USD 10’000 per year and person would be transferable from crypto exchange accounts to current bank accounts. Restrictions could also be imposed on crypto exchanges. The mere build-up of a threat by G7 countries and major central banks (Fed, ECB, BoJ, POBC) alone could already hurt cryptocurrencies significantly. Cryptocurrency prices would fall because private investors could become more cautious. Why should average investors take the risk of violating money-laundering laws? Eventually, the processes described could be set in motion. Possibly initially only with increased verbal warnings by central banks and governments. Investors have been warned previously and on several occasions by central banks that their cryptocurrency investments could fall to zero.

Feasible Scenario

To me, this seems much like a bouquet of options for a feasible scenario, and to you?

Please feel free to share your ideas and thoughts with me, but please do not forget (instead of hitting the reply button) to send your messages to smk@incrementum.li.

Many thanks, indeed!

Ladies and Gentlemen, I wish you a good start into the day, a wonderful weekend, and above all, good health!

Yours truly,