Federal Reserve Chair Jerome Powell: “Cryptocurrencies are highly volatile and therefore not really useful stores of value and they’re not backed by anything”
Yesterday, the entire crypto market was rattled after bitcoin experienced a wild swing from over $42,000 to a little over $30,000 and back in just 24 hours. The price of bitcoin appears to have stabilized. The world’s most popular cryptocurrency is now trading at $40,555 as of the time of writing.
However, the stabilization does not mean the problems with cryptocurrency are going away. When bitcoin was first created in 2009, it was created to solve the “Trust” problem. Satoshi Nakamoto, the creator of bitcoin, envisioned a worldwide digital currency that could be trusted and not be coerced by any government. The original premise of bitcoin was based on the idea that it is a digital currency on a decentralized peer-to-peer payment system that is independent of any institution. Early adopters of bitcoin also see it the same way and thus a medium of exchange.
Over the years, however, many bitcoin investors now see it as a store of value. Unfortunately, one thing we could all agree on is that bitcoin is a volatile currency. In addition, just like when President Nixon stepped in in 1971 to end dollar convertibility to gold, the government will not sit idle and let bitcoin replace the debased U.S. dollars.
Back in March, U.S. Federal Reserve Chairman Jerome Powell said that cryptocurrencies remain an unstable store of value and the central bank is in no hurry to introduce a competitor.
“They’re highly volatile and therefore not really useful stores of value and they’re not backed by anything,” Powell said during a virtual panel discussion on digital banking hosted by the Bank for International Settlements. “It’s more a speculative asset that’s essentially a substitute for gold rather than for the dollar.”
What’s interesting about Powell’s comment is that he made the statement when bitcoin was still trading near $57,000 apiece and little volatility like what we witnessed in the last 24 hours. Yesterday’s provides a cover for the Fed to step in and introduce regulations to protect Americans from cryptocurrency risks. However, most crypto investors want the crypto market to be left alone.
Meanwhile, just about two hours ago, the Federal Reserve Chair Jerome Powell flagged the risks of cryptocurrencies in an unusual video message on Thursday that also laid out a clearer timetable for the Fed to consider adopting a digital currency of its own.
So, what does all this mean for an average investor and where does that take us? The answer can be found in what the Fed is planning to do. Powell gave it away when he said:
As that technology advances, “so must our attention to the appropriate regulatory and oversight framework. This includes paying attention to private-sector payments innovators who are currently not within the traditional regulatory arrangements applied to banks, investment firms, and other financial intermediaries.”
Just like when China banned financial institutions and payment companies from providing services through cryptocurrency transactions, all the Fed has to do is to put in place some regulations either through SEC, banks, or credit card companies and bitcoin will cease to exist in its current form.