The Love-Hate Relationship Between Bitcoins And Governments

Image from Quillette

According to Merriam-webster, Bitcoin is “a digital currency created for use in peer-to-peer online transactions.” This basically means that direct transactions can take place without the interference of a central authority, electronically through what is called a ‘blockchain’. The creator of bitcoins is known by the pseudonym ‘Satoshi Nakamoto’ but the gender, age, etc. of the creator is unknown. Nobody even knows if Satoshi is a single person or a group!

Bitcoins are obtained through a process called ‘mining’ with the help of supercomputers that solve increasingly complex puzzles. The reward for solving these puzzles, of course, is one bitcoin. The mining consumes a massive amount of fossil fuel. As a result, the supercomputers used for the same are usually set up in China due to the low carbon tax. Of course, bitcoins can’t be mined for all eternity; about 18.5 million bitcoins have been mined so far, out of a total of 21 million possible bitcoins. This means that the moment we reach the upper limit for bitcoins, we’re out. There’s no way for us to obtain more.

Bitcoins are extremely hard to counterfeit too, making money laundering harder. It is even considered ‘pseudonymous’ since no one can link you to the pseudonym you used for your bitcoin transaction unless it is accidentally revealed in some way. All of this is well and good. However, Bitcoin is more volatile than an Indian parent after you accidentally let slip that Sharma ji’s son got more marks than you.

In April 2021, one bitcoin was worth about 60 thousand USD. And now? It’s barely even worth 33 thousand. Let’s compare it to gold, which was earlier the standard for a lot of currencies. The value of gold seen an increase of almost 50% in the past half decade whereas bitcoin…well, it’s another ball game altogether. An increase of 4000% percent from 2016 to 2021. This is, to put it simply, insane. There’s a good reason why many people consider investing in cryptocurrencies like bitcoin more akin to gambling than sensible investing. Especially since Elon Musk’s tweets seem to control the flow of cryptocurrencies.

As a result, many governments are trying to stop bitcoin in its tracks for multiple reasons, including the amount of energy it uses (5% of ALL the energy in China is used by bitcoin mining computers).

 1) China recently (in May 2021) banned cryptocurrency trades. People holding cryptocurrency wouldn’t be penalized but “The institutions must not provide saving, trust or pledging services of cryptocurrency, nor issue financial product related to cryptocurrency”. Even in 2017, they shut down local cryptocurrency exchanges in attempt to torpedo the ever growing, unstoppable behemoth.  

2) The Indian Government banned banks from dealing in cryptocurrencies in 2018. Though this order was overturned by the Supreme Court in 2020, the government is still pushing for regulation of cryptocurrencies.

3) The use of 12 virtual currencies (including bitcoins) for official transactions is illegal in Bolivia.

And yet, countries like El Salvador, headed by the ‘good dictator’ Nayib Bukele plan to use bitcoins alongside the dollar as official currencies…

 Similarly, in Venezuela, many are adopting crypto money as spiralling hyperinflation has harmed the Bolivar, the official currency.

With all these changes taking place, it is hard to understand what exactly prompts governments to take the decisions they do. The primary reason, no matter what they say, is the fact that a widespread use of cryptocurrencies would make central banks and their monetary policies obsolete. I personally believe that having central banks lose a bit, or even a fair amount, of their power would hurt no one. After all, it’s the banks that often mess up and cause further inflation, unemployment, etc. The financial crisis of 2008 and the mistakes of the central banks and their heads in helping solve the problem continue to hurt the common man today as well. Did you know that in 2009, Hank Paulson cost taxpayers an additional, saveable 40 billion USD?  The US government decided to bail out the 9 largest banks in the country by providing them with capital infusions, rather than by purchasing their bad debts. Paulson used 125 billion USD of taxpayers’ money in exchange for shares in the banks. However, three weeks prior, Warren Buffet had done something similar with Goldman Sachs and had secured more generous terms. If Paulson had done the same as Buffet, the US taxpayers could’ve made almost 40 billion USD. This is just one example of banks exacerbating already existing problems.

And still, it is hard to argue against banks. Why? Simply because they provide security. If the world was to (for some reason) adopt cryptocurrencies as fiat (official) currencies tomorrow, it would be well and good- transactions would take place seamlessly, anonymously and easily. However, who would you approach if banks ceased to exist, and you needed help since you got scammed? Who will you approach if your transaction gets stuck in the electronic equivalent of limbo, and now you have no money or assets? Who will give you interest on money that you deposit with them?

And even more importantly, how much worse would the financial crisis have been if the government/central banks didn’t intervene?

So, it is clear that while banks have their drawbacks, it is impossible to imagine a world without banks that can function without devolving into a dystopian society.

Having established the importance of banks, as well as the problems with bitcoins, I would like to talk more about the bitcoin scenario in India, as mentioned in the second example given earlier.

There are talks of a new bill being passed in the parliament, regarding cryptocurrency. This bill would prohibit all private cryptocurrencies and also begin the process for the launching of a central digital currency. The RBI has stated that it is working on creating a new central bank digital currency (CBDC) that would eliminate the need for cryptocurrencies. RBI has also expressed worries over the fact that cryptocurrencies can easily be used for illegal activities since it is borderline impossible to track it successfully. Moreover, bitcoins, if stolen, cannot be compensated for by anyone either. If you lose your private key (sort of like your personal bitcoin wallet), you lose your bitcoins forever and ever. Mt. Gox, among the largest virtual currency exchanges, declared bankruptcy and shut down after having bitcoins worth 350 million USD stolen from it. Bitfinex, a major bitcoin exchange, was also hacked and lost 60 million USD in bitcoins.

Even if the government decides to step in and offer protection for virtual currencies like these, there’s no guarantee that your money will remain safe and sound. I’m sure all of us have heard of the Colonial Pipeline being hacked and 2020 United States Federal Government Breach. Then again, this does go for practically any virtual currency.

To sum up, the GoI and numerous other governments are pushing for regulation of cryptocurrencies, while also trying to finalise their own CBDC and release it to the public. The Bahamas have already taken a step in this direction, releasing their virtual currency known as the ‘sand dollar’ as a digital fiat currency alongside the standard pen and paper currency in October 2020.

I believe that while banning cryptocurrencies entirely would not be a smart move, (as bans and censorship often serve as a pathway to proliferation of the banned thing) there is some need for regulation. Moreover, awareness needs to be spread about virtual currencies and people educated about trading and the stock market. How many times have all of us seen advertisements scream “GET RICH QUICK BY BUYING [insert any cryptocurrency]!!!!” on any website related to finance and the economy? I know that I have seen dozens of these advertisements and I can personally attest to the fact that my mental health has suffered as a result of this constant barrage of ads. Of course, I don’t actually fall for such ads. But imagine how many people do fall for these, and for more scams. Such people need to be taught, at the very least, about the basics of trading. We all must understand that if something’s too good to be true, it probably isn’t.

Though I digress, all it comes down to is this- you’re probably better off not investing in cryptocurrencies, especially since many governments are going to be working against it.

9 Comments

  1. Enjoyed reading the well -researched article …I would like to know your take on Bitcoins as a safe option if I invest a small amount in the long run -in a diversified portfolio .

    Like

  2. Great read. Thanks! Your thoughts echo Nassim Taleb’s tweet today in which he mentioned that gold will be around 6000 years from now ‘physically’, without degrading. Not sure about bitcoin….”
    I am a firm believer that blockchain technology is transformational. It’s just that crypto’s ( a good use case) have been punted aggressively lately. I guess the effect is waning.

    Liked by 1 person

  3. Am eye opener to both the positive as well as negative aspects of investing in Bitcoin and other similar crypto currency’s. It depends on the risk taking ability of the investor.

    Liked by 1 person

    1. Definitely ! If you’re someone who has a lot to spare, crypto is a great way to diversify your portfolio. I personally never would invest in cryptos because it’s simply too risky for me.

      Like

  4. A very well written, thought provoking article. Blockchain technology is the future for all
    forms of contracts including currencies. Governments are afraid that smart contracts will
    replace the Govt contracts. The popularity of blockchain (e.g bitcoin) forces govts to
    invest in the same. Thus the love and hate relationship. Its high time India should start investing
    in blockchain technology. Keep writing such good articles. Looking forward for your next post.

    Liked by 1 person

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