The Bank of england has said that bitcoin could be "useless" and people who invest in the digital currency should be prepared to lose it all.
In a warning about potential risks to investors, the central bank questioned whether there was any inherent value in the more prominent digital currency, whose value has soared this year to around $ 50,000 (£ 37,786) a piece.
Cryptocurrency peaked above $ 67,000 at the beginning of November, but suffered a liquidation after news of the Omicron variant of the coronavirus first broke, before stabilizing around its current level last week.
Lieutenant Governor Sir Jon Cunliffe said the Bank had to be prepared for risks related to the rise of the crypto asset following its rapid growth in popularity. "Its price can vary considerably and [bitcoins] theoretically or practically it could drop to zero, "he told the BBC.
The market capitalization of crypto assets has increased tenfold since the beginning of 2020 to approximately $ 2.6 trillion, representing approximately 1% of global financial assets. About 0.1% of UK household wealth is in bitcoin and similar crypto assets, such as ethereum and Binance coin. Up to 2.3 million people own crypto assets, at an average amount of around £ 300 each.
The Bank's financial policy committee, created in the wake of the 2008 financial crisis to monitor risks, said on Monday there was little direct threat to the stability of the UK financial system from crypto assets. However, he cautioned that, with the current rapid pace of growth, those assets could be more interconnected with traditional financial services and are likely to present a number of risks.
Publishing its regular health check on the financial system, the Bank said that major institutions should take a cautious approach to adopting crypto assets and that they would pay close attention to developments in the market.
"Improved regulatory and enforcement frameworks are needed, both domestically and globally, to influence developments in these fast-growing markets in order to manage risk, foster sustainable innovation, and maintain greater trust and integrity. in the financial system, "he said. .
In a separate blog post posted on its website on Tuesday, a Bank staff member said that Bitcoin did not meet many of the required characteristics of a currency and that it ran the risk of being inherently volatile.
Thomas Belsham, who works in the Bank's Stakeholder and Media Engagement Division, wrote: “The problem is that, unlike traditional forms of money, Bitcoin He is not used to putting a price on things other than himself. As Bitcoiners themselves like to say, 'one Bitcoin = one Bitcoin'. But a tautology doesn't make a coin. "
He said the shortage of the crypto asset, which is limited to 21 million bitcoins, is one of the key reasons for its attractiveness to investors, but this feature embedded in its design "may even ultimately make Bitcoin worthless. any".
Approximately 19 million bitcoins are currently in circulation, with new coins added as "miners" validate changes to the blockchain ledger that underpins the cryptocurrency. While the maximum number of bitcoins in circulation is not expected to be reached until February 2140, it would be more difficult to maintain this system over time, Belsham said.
“Simple game theory tells us that a backward induction process should really, at some point, induce smart money out. And if that happens, investors should be prepared to lose it all. Finally."
