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Bitcoin, which had been surging all the way , was brutally slaughtered and plummeted 16% after a remark by U.S. Treasury Secretary Janet Yellen. Highly speculative, high risk, active illegal transactions...Yellen hit the nail on the head. This is not surprising. After all, along with the sharp rise comes calm voices. The surge in U.S. bond yields has left risky assets nowhere to hide. Even Tesla CEO Musk, who has always been bullish on Bitcoin, has begun to doubt it. Of course, Yellen not only hit the pain points of Bitcoin, but corporate taxes are also coming.
'Highly speculative asset'
Bitcoin had a terrifying night. On the evening of February 22, the price of Bitcoin, which was approaching $60,000 , suddenly plummeted in the short term. Ten minutes before the opening of the U.S. stock market on Monday, Bitcoin fell by more than $3,000 in 5 minutes, and after falling below the $50,000 mark, it quickly fell to below $48,000, a drop of more than 17% in 24 hours, and fell to a low of $47,668 that night.
On the 23rd, the decline continued. That afternoon, the price of Bitcoin fell below $45,000, and then rebounded. As of 20:00 Beijing time on the 23rd, the price of Bitcoin was $45,900, a drop of more than 16% in 24 hours. In addition, within 24 hours, a total of 29.9 billion yuan of digital currency contracts were liquidated, involving more than 490,000 people.
Yellen may have contributed greatly to this round of Bitcoin crash. On February 22, local time, Yellen participated in an online event organized by the New York Times and mentioned her views on issues such as US debt, Bitcoin and corporate taxes.
Regarding Bitcoin, Yellen said that trading with Bitcoin is an "extremely inefficient way" and the energy consumed in processing 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, and digital currencies may provide faster and cheaper payments, but there are many issues that need to be studied, including consumer protection and anti-money laundering," Yellen said.
Before the flash crash on that day, Bitcoin had reached an unprecedented high after a period of rapid growth. Data showed that the price of Bitcoin had risen by 86.96% this year, and by 446.36% in the past year, reaching a peak of $57,492.9 on February 21.
The sharp rise and fall of Bitcoin prices is not uncommon. In 2017, during Bitcoin’s second bull run, its price once climbed to nearly $20,000, but the following year, its price immediately fell by 80%.
Before Yellen, Musk, who has always been a loyal supporter, also had doubts about the rapid rise of Bitcoin. On the day when the price rose to more than $57,000, Musk tweeted, "Currency is just data that saves us from the inconvenience of barter. This data, like all data, has delays and errors. So, Bitcoin and Ethereum do seem to be high."
With the bigwigs’ statements, it is not surprising that Bitcoin was strangled. After all, the former represents the US regulators, while the latter hints at the current investment attitude of institutions. Nikolaos Panigirtzoglou, a strategist at JPMorgan Chase, also said that Bitcoin has risen about twice in the past three months, but the liquidity of the Bitcoin market has deteriorated.
The possibility of a digital dollar
“It goes without saying that new investors in bitcoin should be prepared for significant volatility, with prices likely to plummet as quickly as they have surged,” said Neil Wilson, chief analyst at Markets.com.
Liu Xiangdong, deputy director of the Economic Research Department of the China Center for International Economic Exchanges, analyzed that if risky assets like Bitcoin lack supervision, some speculative behavior will definitely occur. Now that this form of currency already exists, the problem for the US government is how to incorporate it into a formal regulatory framework.
Liu Xiangdong further stated, "It is impossible for each country to allow the existence of another monetary system besides legal currency, which will reduce the status and credit of legal currency. Yellen’s statement now may also imply that the government will prevent excessive speculation and market manipulation of Bitcoin in the future and lead cryptocurrencies in a more formalized direction."
Indeed, even if the price has been soaring, in the eyes of regulators in various countries, Bitcoin is still like a scourge. Similar to Yellen's attitude, European Central Bank President Christine Lagarde is also pessimistic about Bitcoin.
On February 10, Lagarde stated that she does not think Bitcoin is a real currency and that central banks will not hold it as a reserve currency anytime soon. In January, she also called for more regulation of cryptocurrencies, saying that Bitcoin has been used for some "interesting businesses" including money laundering.
In fact, despite the criticism of Bitcoin, countries have somewhat relaxed their stance on digital currencies. Lagarde once said that she hopes to make the digital euro a reality within five years.
Compared with Europe, Japan has been ready to move. The three major commercial banks and more than 30 companies have jointly established a digital currency research group. The Bank of Japan plans to start empirical experiments on digital currency in the spring of 2021. In South Korea, the Governor of the Central Bank, Lee Ju-yeol, also stated that the central bank's digital currency will build a test system in a virtual environment according to the established plan and carry out related testing work.
During the conversation, Yellen pointed out that the digital dollar issued by the Federal Reserve may help solve the obstacles to inclusive finance for low-income families in the United States. "Too many Americans do not have access to convenient payment systems and bank accounts, and I think the digital dollar will help in this regard. This may bring faster, safer and cheaper payments, which I think is an important goal."
However, just like the concerns about Bitcoin, Yellen also added that there are "many things to consider" before the possible launch of a digital dollar, such as how regulators will "manage money laundering and illicit financing issues" and the impact of a digital dollar on banks and the Federal Reserve.
Gradual corporate tax hikes
In this statement, Bitcoin is the focus, but in addition to Bitcoin, Yellen, as the US Treasury Secretary, also revealed some future fiscal policy directions.
For example, the highly-watched issue of corporate tax. Yellen said that President Biden hopes to raise corporate tax from 21% to 28% to support the long-term economic reconstruction plan and ensure debt sustainability. In addition, Yellen also said that raising capital gains tax is "worth considering" and will carefully study the impact of financial transaction tax on ordinary investors, but will avoid levying taxes on the rich at the same time.
"In fact, the Democratic Party expressed its willingness to raise corporate taxes in its platform last July," said Yang Shuiqing, assistant researcher at the Institute of American Studies of the Chinese Academy of Social Sciences. Previously, the Trump administration reduced corporate taxes from 35% to 21%. At a hearing on January 19 this year, Yellen said that tax increases would not be raised until the economy fully recovered. At that time, the market speculated that taxes might not be raised before 2022. But last week, the wind direction changed. Yellen said that any tax increases sought by the government to help pay for huge expenditures would be implemented gradually or introduced later in 2021.
Yang Shuiqing pointed out that the scope of corporate tax collection is relatively large, except for some special industries that may be exempted. The change in Yellen's attitude is definitely related to the tight US finances. In order to revive the economy, the Biden administration has many projects that need to spend money, and it is unlikely to print money unlimitedly.
In Yang Shuiqing's view, in addition to raising corporate taxes, the US government may also make changes to capital gains taxes. Currently, this tax rate is below 20%, and it is not ruled out that it may be increased to a level that matches corporate taxes in the future.
Indeed, debt is an issue that cannot be ignored for the United States at present, but the $1.9 trillion stimulus plan is also on the verge of being launched. Liu Xiangdong pointed out that the Democratic Party has always advocated government action, but various expenditures require money. However, under the situation of quantitative easing, the current debt scale of the United States is very high, so raising taxes is a very likely option.
However, while advocating tax increases, Yellen has not given up the possibility of continuing to launch economic stimulus plans even if the debt is high. Yellen said that in the current low interest rate environment, the traditional indicator of debt-to-GDP ratio is no longer important. The more important indicator is the ratio of federal debt interest to GDP, which is currently about 2%, no higher than the level in 2007. Yellen said that the debt cost can be partially recovered through stronger economic growth.
Yang Shuiqing analyzed that the current ratio of US debt to GDP is about 120%. There is a view in the market that as long as fiscal revenue can pay the interest generated by the debt, the scale can continue to expand. The current actual interest rate in the United States is negative, so the interest generated is very small, so fiscal revenue can be gradually compensated by increasing taxes in the future. Of course, whether to increase taxes still depends on economic recovery. Compared with the growth rate of economic recovery, from Yellen’s speech, it depends more on employment indicators. If the level before the epidemic is achieved, it may promote tax increases. |
