Bitcoin could become WORTHLESS and punters should be prepared to lose everything, Bank of England says
THE Bank of England has issued a stark warning saying Bitcoin could become “worthless” and investors in the cryptocurrency could lose everything.
While the digital currency is currently valued at £43,100 a piece, the central bank has questioned if there is any inherent worth in the high-profile cryptocurrency.
Bitcoin hit a high of more than $67,000 (£50,700) in early November but suffered a decline in its fortunes after news broke about the Omicron Covid variant.
The Bank of England's deputy governor, Sir Jon Cunliffe, said it had to be ready for risks associated to the rise of the cryptocurrency after its rapid rise.
He told the BBC: “Their price can vary quite considerably and they [bitcoins] could theoretically or practically drop to zero.”
Since early 2020, the value of crypto assets including coins such as Ethereum and Binance, has grown tenfold to around £2tn, equating to around one per cent of global financial assets.
Around 0.1 per cent of UK households’ wealth is in cryptocurrencies with up to 2.3m people holding crypto assets, worth on average about £300 each, reports .
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The Bank’s financial policy committee, which was established after the 2008 financial crisis to monitor risks, warned on Monday that with the current rapid pace of growth of cryptocurrencies, these assets could become more interconnected with traditional financial services and were likely to pose a number of risks.
However, it added there was little direct threat to the stability of the UK financial system from cryptocurrencies.
In its health check on the country’s financial system it warned major institutions should take a cautious approach to adopting crypto assets and added it would pay close attention to further developments.
“Enhanced regulatory and law enforcement frameworks, both domestically and at a global level, are needed to influence developments in these fast-growing markets in order to manage risks, encourage sustainable innovation and maintain broader trust and integrity in the financial system,” the Bank added.
A member of the Bank’s staff said in a separate on Tuesday that Bitcoin had failed to fulfil many of the features required of a currency and it risked being inherently volatile.
5 risks of crypto investments
THE Financial Conduct Authority (FCA) has warned people about the risks of investing in cryptocurrencies.
- Consumer protection: Some investments advertising high returns based on cryptoassets may not be subject to regulation beyond anti-money laundering requirements.
- Price volatility: Significant price volatility in cryptoassets, combined with the inherent difficulties of valuing cryptoassets reliably, places consumers at a high risk of losses.
- Product complexity: The complexity of some products and services relating to cryptoassets can make it hard for consumers to understand the risks. There is no guarantee that cryptoassets can be converted back into cash. Converting a cryptoasset back to cash depends on demand and supply existing in the market.
- Charges and fees: Consumers should consider the impact of fees and charges on their investment which may be more than those for regulated investment products.
- Marketing materials: Firms may overstate the returns of products or understate the risks involved.
Thomas Belsham, who works in the Bank’s stakeholder and media engagement division, wrote: “The problem is that, unlike traditional forms of money, Bitcoin isn’t used to price things other than itself. As Bitcoiners themselves are fond of saying, ‘one Bitcoin = one Bitcoin’. But a tautology does not a currency make.”
He added that scarcity of Bitcoin – which is limited to 21m coins – is among the key reasons for its attraction to investors but warned the feature embedded into its design “may even, ultimately, render Bitcoin worthless”.
Currently, some 19m Bitcoins are in circulation, with the amount increasing with new coins when “miners” validate changes to the blockchain ledger which underpins the currency.
Belsham said that while the ultimate number of Bitcoins in circulation is not expected to be reached until February 2140 it would become increasingly harder to sustain the system over time.
“Simple game theory tells us that a process of backward induction should, really, at some point, induce the smart money to get out. And were that to happen, investors really should be prepared to lose everything. Eventually.”
