Cutting off their heads doesn’t work: cockroaches can live up to a week without it. Giving them a few hits doesn’t guarantee anything either: they have flexible exoskeletons capable of supporting up to 900 times their body weight. It is also not a solution to flush them down the toilet: some species hold their breath for more than half an hour. For most, cockroaches are an unpleasant pest. Their presence is all the more annoying because they are indestructible.
A nasty plague: that’s how many bankers and regulators would describe the cryptocurrency sector. Criminals use cryptocurrencies to launder money. Terrorists use them to make payments. Hackers demand ransoms in bitcoins. Many cryptocurrencies are only created so that their creators can make money.
The sector also seems indestructible. Cryptocurrency prices crushed by rising interest rates in 2022. The sector has its head cut off: Changpeng Zhao and Sam Bankman-Fried, the founders of the world’s largest and second largest cryptocurrency exchange, hope sentence for financial crimes (for violating anti-money laundering laws and for fraud, respectively). Regulators crack down. However, cryptocurrencies not only survive, but are skyrocketing again: on December 11, bitcoin reached its maximum in two years, almost $45,000, compared to $16,600 at the beginning of the year.
What’s going on? For starters, indestructibility is built into the technology itself. Bitcoin, ether and other currencies are not companies: they cannot go bankrupt or be shut down. They use blockchains, which maintain a database of transactions. Their lists are verified by a decentralized network of computers whose maintenance is incentivized by the promise of new tokens. The architecture only collapses if the tokens fall to zero. And there are still many reasons to believe that some cryptocurrencies are worth more than nothing.
The first is that owning cryptocurrencies means betting on a future in which the use of technology becomes widespread. Those who live in countries with a despotic regime already use bitcoins and stablecoins (stable cryptocurrencies, linked to a strong currency, such as the dollar) to accumulate savings and, sometimes, to make payments. Its use could become generalized. Artists and museums continue to create or collect non-fungible tokens (TNF). As those who want to sell an image do. Donald Trump is selling his mugshot for $99 a pop. He plans to cut up the suit he was booked in, turn it into cards, and give them away to those who buy at least 47 TNF in a single transaction.
In the boom times, the crypto sector raised a lot of money and hired a lot of smart developers. Those that remain are now working on new uses, such as social media applications or money-making games. These innovations may never be widely implemented, but even the small chance that they work is worth something.
The second reason is that, with each boom and bust cycle, it becomes clearer that crypto is not a bubble like the tulip mania in the 1630s or the Beanie Babies teddy bear craze in the 1990s. Although the Bitcoin is a volatile asset, its price history looks more like a mountain range than a single peak, and it appears closely correlated with tech stocks. Instead, it only has a moderate correlation with the overall market. An asset that swings up and down, rather than in parallel with other assets commonly included in portfolios, can be a useful diversifier.
The fact that bitcoin has established itself as a serious asset seems to be at the root of the latest rise. In August, a US court ruled that the Securities and Exchange Commission (SEC), the main regulator of US markets, had been “arbitrary and capricious” in rejecting an attempt by the investment company Grayscale to convert a $17 billion fund invested entirely in bitcoins in an exchange-traded fund (ETF). Such a measure would make it easier for the average customer to invest in bitcoins.
In October, the court confirmed the ruling and ordered the SEC to rectify it. Larger fund managers, such as BlackRock and Fidelity, have also applied to launch ETFs. Given the returns that bitcoin has offered in the past and its correlations with other assets, the result could be a flood of money into bitcoins, as even sensible investors consider diversifying by placing a small portion of their funds in crypto. pensions or their portfolios.
Many feel instinctive repulsion when they see a cockroach. However, despite their defects, these animals are useful: they convert decaying matter into nutrients and eat other pests, such as mosquitoes. Cryptocurrencies also have their uses, such as diversifying portfolios and keeping money safe under despotic regimes. And, as has been proven, they are almost impossible to kill.
© 2023 The Economist Newspaper Limited. All rights reserved
Translation: Juan Gabriel López Guix
