Beijing Business Daily: Wall Street supports Bitcoin and confronts Washington

Source: Beijing Business Daily

Reporter: Tao Feng and Tang Yitian

Entering a new week, Bitcoin still sits firmly in the center of the global financial circle, and is becoming more and more "attractive" in the eyes of Wall Street: Citigroup released a 100-page report to pave the way for it, Fidelity bluntly stated that it still has room for growth, and Goldman Sachs even restarted its cryptocurrency trading counter... However, even though investment institutions are already ready to move, regulators do not seem to be willing to relax their stance on the risky trading model of cryptocurrency. At least the US Treasury Secretary has long expressed his disapproval.

Wall Street's Favor

Just after experiencing a 20% plunge in a week, Bitcoin has ushered in new good news. This time, Wall Street bigwigs have come out to support it.

On March 1, local time, analysts at the US investment bank Citigroup said that Bitcoin, the world's largest cryptocurrency, is at a historic moment and is now at a "critical point", where it will either become the currency of choice for international transactions or face a "speculative implosion."

In the more than 100-page report, Citi said that the recent large-scale acquisitions of Bitcoin by companies such as Tesla and Mastercard, as well as central banks' exploration of issuing their own digital currencies, have stimulated the huge potential of Bitcoin. As a result, analysts believe that Bitcoin may become mainstream: "There are many risks and obstacles on the road to Bitcoin's development. However, after weighing these potential obstacles and opportunities, we conclude that Bitcoin is at a critical point."

Even more than Citigroup, in the view of Jurrien Timmer, head of Fidelity's global macro business, Bitcoin can serve as "digital gold." Timmer explained that the current Bitcoin asset value is only $900 billion, and given the $11 trillion asset value of gold and the total global financial assets of $160 trillion, the cryptocurrency still has a lot of room for growth.

Not only Citigroup and Fidelity are optimistic, but Goldman Sachs is also interested. On March 2, Bloomberg quoted people familiar with the matter as saying that Goldman Sachs has restarted its cryptocurrency trading desk and will provide clients with Bitcoin futures and non-deliverable forward (NDF) trading services starting in mid-March, while also studying the possibility of a Bitcoin ETF.

It is worth mentioning that a year ago, Goldman Sachs was still a staunch pessimist of Bitcoin. In 2018, Goldman Sachs first established a cryptocurrency trading department, but at that time, as the price of Bitcoin was falling from the high point of the second bull market, it weakened investors' interest in digital currencies, and Goldman Sachs' first attempt ended in failure.

Last May, at a conference, Goldman Sachs analysts bluntly stated that Bitcoin (or any cryptocurrency) is not a viable investment tool in the current economic environment. In the eyes of Goldman Sachs at the time, Bitcoin was not much different from the tulip bubble in the Netherlands in the 17th century.

Regarding Goldman Sachs' return, Bloomberg quoted sources as saying that the real reason for Goldman Sachs' return was the sharp volatility of Bitcoin, which is a huge risk for ordinary investors but extremely valuable for proprietary traders.

With the support of the giants, Bitcoin regained its momentum, with strong trading volume on Monday. According to data from the Bitstamp exchange, the price of Bitcoin rose by 9.7%, the largest increase in three weeks. In early trading on Tuesday Beijing time, Bitcoin broke through $50,000 for the first time in six days, gradually recovering from last week's 21% sell-off.

Regulators’ caution

Even though Bitcoin is a hot commodity in the capital market, it is still surrounded by risks in the eyes of US regulators. On the same day, while Wall Street was unanimously supporting it, New York Attorney General Letitia James immediately poured cold water on it.

"Investing in virtual or cryptocurrencies is extremely risky and we must take action to protect investors' wallets... I remind investors that investing in this unstable market is imprudent and could result in devastating losses," said Letitia James.

This statement seems familiar. A week ago, Bitcoin experienced an unprecedented "night of terror", with a drop of more than 17% in 24 hours. The "culprit" was the helmsman of fiscal policy - US Treasury Secretary Janet Yellen.

At that time, Yellen pointed out that trading with Bitcoin is an "extremely inefficient way" and that the energy consumed to process these transactions is staggering. Bitcoin is often used for illegal financing and is inefficient. Bitcoin still has major problems in terms of legitimacy and stability. Therefore, Yellen does not think that Bitcoin can be widely used as a trading mechanism.

"Bitcoin is still a highly speculative asset. Digital currency may bring faster and cheaper payment experience, but there are many issues that need to be studied, including consumer protection and anti-money laundering." Yellen's statement was full of pessimism.

It is not just the fiscal helmsman who is not optimistic. As one of the US financial regulators, the Federal Reserve has also long expressed its pessimistic stance. Federal Reserve Chairman Jerome Powell once described Bitcoin as a "speculative value store like gold" and pointed out that "almost no one will use Bitcoin for payments." Boston Fed President Eric Rosengren was surprised by the skyrocketing price of Bitcoin, saying that as central banks gradually launch digital currencies, people have no reason to buy Bitcoin anymore.

Even if we look at the world, Bitcoin is not very popular. For example, the German Banking Association called on the German government to impose stricter supervision on digital currencies. The Bank for International Settlements also warned that Bitcoin is not a real currency, but a speculative asset with the risk of collapse. Christine Lagarde, former president of the International Monetary Fund and president of the European Central Bank, also said that Bitcoin is a highly speculative asset, and people use Bitcoin to conduct many "ridiculous" transactions and even "illegal money laundering activities."

From speculation to trading

Judging from the official statements of various countries, the reasons for the pessimism are nothing more than illegal risks and speculative attributes. But it is obvious that this has not affected Wall Street's rush to invest.

Regarding Wall Street's attitude, Lou Feipeng, a researcher at China Postal Savings Bank, pointed out that after the outbreak, the United States implemented large-scale quantitative easing, which released abundant liquidity, and funds needed to find investment targets. In reality, Bitcoin transactions are relatively convenient and fast. Previously, regulators did not strictly control it, such as the United States, which regulated it as ordinary commodities. These factors combined have made more and more investment institutions optimistic about Bitcoin.

However, there are also cautious investment institutions. Investment institution BCA Research pointed out that the energy consumed by mining Bitcoin is staggering, and governments will impose stricter supervision, which will cause Bitcoin to lose most of its value over time.

In fact, some investors mentioned deeper problems. American investor Michael Burry warned that regulators in various countries may "suppress" Bitcoin and even gold to protect their own currencies. In his view, as the economy begins to recover from the epidemic, the US government will introduce more stimulus measures, over-issue currency, and exacerbate inflation. "In the inflation crisis, governments will take action to crack down on competitors in the currency field (Bitcoin, gold)."

"I don't hate Bitcoin. But in my opinion, in a world with centralized governments, the long-term development and future of decentralized encryption technology is very fragile. The monopoly of currency is a vital interest for the government, so Bitcoin will inevitably be suppressed by regulators." Bury emphasized.

However, regarding whether Bitcoin will affect the status of sovereign currencies, Sun Jie, a researcher at the Institute of World Economics and Politics of the Chinese Academy of Social Sciences, said that the impact is not significant at present. Bitcoin is mainly an investment and speculative product, and it is still difficult to enter into transactions, so it is unlikely to truly replace currencies. Powell's statement is still based on the perspective of protecting investors.

Sun Jie further stated that the digital currencies of various central banks are actually fundamentally different from Bitcoin. The former strengthens the centralized position of the central bank and also differs in terms of supervision and tracking.

In addition, Sun Jie also mentioned the investment risks of Bitcoin. As an investment product, Bitcoin makes sense, but if the bubble collapses, what kind of impact will it cause? For example, if some companies or investors use it as collateral, it is hard to say what the impact will be on the financial system.