On the 2nd and 5th of February, major financial institutions announced that they will actively prohibit the purchase of cryptocurrencies including the industry leading Bitcoin, using their bank issued credit cards. J.P. Morgan Chase, Bank of America and Citigroup from the US as well as the UK’s Lloyds Banking Group and Virgin Money have all joined a new crypto-clampdown following an attack on Cryptocurrencies by George Soros at the recent World Economic Forum in Davos.
These announcements have followed a large scale downward spiral on the Dow Jones which began Friday the 2nd and continued with an even deeper plunge on Monday the 5th. At one point on the 5th, the Dow fell 1,579 points – the largest single day points loss in the Dow Jones’ history. By the end of the day’s trading, the Dow had closed with a final plummet of 1,175, making Monday the largest point-for-point drop in history, although in terms of percentage drops, the crash of 2008 was still higher.
That's how the biggest point drop in history looks like. Dow plunges 1175.21 points! pic.twitter.com/XUcHUNXH0n
— Holger Zschaepitz (@Schuldensuehner) February 5, 2018
While late 2017 saw record highs for both the Dow and the value of the cryptocurrency Bitcoin, recent days have seen Bitcoin plunge from a peak of over $20,000 in December of 2017 to $6,000 on the 6th of February. Over the course of 24 hours, Bitcoin lost 24% of its value. What is clear is that in spite of many conservative financial planners writing off cryptocurrencies as a ‘fad’ or ‘gimmick’ that are unrelated to the rest of the globalised economy, in reality, the rate of Bitcoin has proved to been synchronous with the US stock market plunge, as well as a declining US Dollar and a British Pound Sterling that is experiencing waves of volatility against the US Dollar and sustained losses against the Euro.
This reality has proved that far from being a sheltered asset vis-a-vis the stock markets or traditional currency markets, Bitcoin is subject to the same downward trends associated with stocks and major state fiat currencies. This also leads one to question whether increased regulation and in some cases open hostility by major governments and financial institutions towards cryptocurrencies has had an effect on the Down Jones.
A move by South Korea to tax cryptocurrency exchanges as well as even more drastic moves by India to de-facto ban the use of cryptocurrencies, have considerably hit the value of Bitcoin. Similar though not surprising moves by China have likewise taken the value of Bitcoin further down. This again proves that governments are able to manipulate the value of cryptocurrencies with almost as much ease as they can manipulate the value of currencies under the control of their own central banking systems.
But beyond this, with Bitcoin losing value due to increased private and public sector regulation, could it be that the crypto sell-off resulting from investors losing their confidence in the long term viability of cryptos has had a knock on effect in respect of the Dow? The answer is likely yes.
This further quashes the rumour that investors in cryptocurrencies are somehow pooled from a different socio-economic demographic vis-a-vis holders of shares in public companies listed on the Dow Jones. While cryptocurrencies certainly had a ‘counter economic-cultural’ origin, today, they are increasingly seen by investors as just another speculative investment which can co-exist in a portfolio with stocks and shares in major companies as well as gold, oil, and traditional currencies.
There is however a wider message for crypto traders from the events of the last days and weeks. Just like the rest of the global economy, trends in cryptocurrency booms and busts are becoming increasingly regionalised. While crackdowns on cryptocurrencies from India, the US, South and UK have done their share of damage to Bitcoin’s value, the forthcoming launch of two new state sanctioned cryptocurrencies should change the game considerably.
This month sees the official pre-sale of El Petro, Venezuela’s cryptocurrency whose value is pegged to the South American nation’s vast oil reserves. Likewise, Russian leaders are finalising their plans to launch a Crypto-Rouble later this year.
These state sanctioned cryptocurrencies will ostensibly regularise blockchain technology, in so far as it will utilise the pioneering system that makes Bitcoin transactions possible, in the exchange of state sanctioned currencies. This will not only add a measure of investor certainty about the viability of such state sanctioned cryptos, but it will also mean that such currencies will receive the same protections that traditional currencies like the Russian Rouble and Venezuelan Venezuelan Bolívar currently enjoy.
If western banking institutions clamp down on people in countries like the US from trading Crypto-Roubles and El Petros, this can and should be seen as a direct attack on the trading assets of the respective nations from which the cryptos derive. In other words, a prohibition on buying Crypto-Roubles or El Petros by Bank of America or Lloyds should be condemned by Caracas and Moscow in the same way that they would express concerns over a ban on purchases of their traditional state currencies.
While aggressive US sanctions against both Russia and Venezuela may make things difficult for some potential investors who express an interest in the state-cryptos of these countries, because the purchase of cryptocurrencies is still de-facto legal in the US, Venezuela and Russia could ostensibly work with entrepreneurs throughout the world, to create new digital wallet systems allowing easy access to the Crypto-Rouble and El Petro for investors in countries whose regimes and major banks are hostile to Moscow and Caracas.
The big wildcard in this equation is China. China’s moves against cryptocurrencies are greatly misunderstood by many observers. China’s market-socialist economy has always closely monitored the sums of money taken out of the country. Unlike western countries, China seeks to keep its domestic assets secure, so that profits from Chinese labour cannot be outsourced to overseas tax shelters. Thus, China is looking at cryptocurrencies in the same way it looks at its Yuan. That being said, China has expressed interest in Russian originated plans to create a BRICS wide cryptocurrency. China is not looking to move aggressively against innovation but like Russia and Venezuela, is looking to attract healthy investment in such a way that does not damage the existing market-socialist model. China will be closely observing the experiences of its Russian and Venezuelan allies in respect of their state sanctioned cryptos. If Russia and Venezuela are able to turn their experiment in state approved blockchain transactions into a win-win model, China may well look to join the club by creating a cryptocurrency with Chinese characteristics.
Thus, we see the beginning of a crypto Cold War between nations who are already engaged in an undeclared economic tug of war. Just as western cryptocurrencies are now both susceptible to and a contributing factor to general economic trends in the west, so-too will cryptocurrencies from the other side of the multipolar world (the wider global east and south) represent the innovation and detachment from Wall Street and the Federal Reserve that continue to define modern mutipolar economies in the 21st century.