With bitcoin hitting a new record price this week, some financial experts are predicting that this latest surge could prove that cryptocurrency is here for good.
Ramaa Vasudevan is an economics professor at Colorado State University who has been critical of cryptocurrency. She recently spoke with SOURCE about its future and why it might be more bust than boom.
What does this latest bitcoin surge tell us about cryptocurrency’s potential future? Is it on its way to becoming a legitimate form of currency?
Bitcoin was introduced as an alternative to digitally secured currency, but it is in fact a financial asset that is held and traded in pursuit of quick returns. The current surge is just the latest in a series of boom-bust cycles that has plagued its history.
Bitcoin and similar digital currencies gained more traction from the war in Ukraine as unregulated, alternative channels for making payments were sought. Global banks have entered the “cryptoverse,” signaling its mainstreaming. Central banks in many countries are experimenting and piloting central bank digital currency projects as a public alternative to the privately created cryptocurrency.
All of this suggests that whether or not bitcoin survives, the basic elements of the plumbing of the cryptosphere are likely to be embedded and adopted in the conventional financial system — in particular, block chains, smart code and tokenization.
As you mentioned, this isn’t the first bitcoin surge. What’s behind these big fluctuations?
The recent surge in bitcoin is the outcome of the euphoria of investors awash with funds, seeking outlets for quick financial returns. They have flocked to bitcoin despite the recent scandals and turmoil that roiled the cryptosphere.
A big factor is the recent approval by U.S. regulators to spot trades by bitcoin exchange traded funds (essentially a basket of assets that track bitcoin prices and can be bought and sold like shares on an exchange). This has opened the gates for new investors in this market. Geopolitical factors — the Ukraine war, U.S.-China tensions — have burnished the attraction of unregulated crypto transactions, where bitcoin rules the roost.
There is also the impending “halving” of the bitcoin supply. This is part of the coding built into the bitcoin architecture to create an artificial scarcity of the token and is boosting prices as investors ramp up purchases of bitcoin in anticipation of even higher prices.
While it is hard to predict exactly when the bubble will burst, it is certain that it will. Bitcoin is a speculative financial asset, and like the previous rallies this rally will also crash against reality, as investor sentiment turns. History also tells us that the bursting of the bubble will not presage the end of cryptocurrency but its metamorphoses and metastasis.
You’ve been critical of cryptocurrency. What are your biggest concerns regarding it?
My concerns about cryptocurrency are rooted in a diagnosis of the pathology of capitalist finance — a susceptibility to instability and crisis and a propensity to promote inequality and concentration of wealth.
The magic of code and algorithms cannot immunize cryptocurrency from this pathology. The lack of regulation makes this sphere more vulnerable to fraud and Ponzi schemes, but even more pernicious is the near complete decoupling of cryptofinance from the financing of production and consumption. It epitomizes finance for its own sake, a further expansion of the frontiers of financial speculation.
In your book, “Things Fall Apart: From the Crash of 2008 to the Great Slump,” you explore the global financial crisis of 2008. Is there anything we can look to from that time that speaks to what we’re seeing or could see with cryptocurrency?
The global financial crisis of 2008 turned the spotlight on the leveraged world of shadow banking and the speculative excesses of big banks. The U.S. Fed had undertaken extraordinary interventions to rescue the financial system and bail out the banks. My book explores the structural roots of the crisis and the response. Ironically, bitcoin was launched in the wake of this crisis and championed on the promise of supplanting the tyranny of central banks and predations of big finance with the neutral, decentralized, arbitration of digital technology. Its unique selling point bypassed the need for a central authority.
This promise has proved to be a pipedream. Cryptofinance is beset by the same tendency toward concentration and fragility.
Securitization — the financial engineering that generated a pipeline of securities for global investors — remains entrenched and continues to be promoted in policy discourse despite its critical role in the financial crash of 2008. Cryptofinance in an analogous manner will remain in some form part of the evolving financial architecture despite these boom-bust cycles. There is an urgent need to revamp the regulatory machinery to contain the tendency to instability and inequality more effectively. We have not yet absorbed the lessons of the past crisis.
