- One reason people are selling out of bitcoin is because governments are moving against cryptocurrencies.
- The promise of bitcoin is that it's anonymous and secure and the government can't touch it. That promise is unfulfilled.
- Governments are not going to stand idly by while people replace or abandon fiat currency.
- That's why cryptocurrencies will always be weak credit tokens compared to cash — governments may be annoying but they aren't stupid.
The total market cap of all cryptocurrencies, including bitcoin, stood at $531 billion just before the weekend, down from $830 billion at it's peak. That's a drop of about 36% in less than a month — a collapse that qualifies as a market crash.
People are casting around for an explanation. Why should this wildly popular new form of payment exchange, which feels like the future, suddenly drop in value? There are a large number of good reasons to sell bitcoin. And that's part of the problem — on most days it feels like there are more reasons to sell than to buy.
But the most obvious headwind comes from governments.
Russia, South Korea, China, Algeria, Bolivia, Ecuador, Nepal, and Kyrgyzstan have all outright banned bitcoin or made noises about tightening regulation around crypto that would make owning the currency much less attractive. South Korea is moving toward an outright ban even though 10% of the entire bitcoin market is traded in South Korean won, according to Coin Hills.
Last week, the European Securities & Markets Authority said it might consider banning contracts-for-difference based on cryptos.
Governments are testing one of bitcoin's central promises: That the alt-currency is somehow immune to regulation because it offers uncrackable security with total anonymity. In theory, cryptocurrency enthusiasts will tell you, crypto allows you to hoard staggering wealth and the government can't touch it. (That's why criminals like it so much.)
It's a nice dream but it requires you to believe that governments will stand idly by while people abandon fiat currency. The government is not going to sit on its hands while people figure out how to stop paying taxes on both their income and capital gains because they are accepting payments via crypto. That would be insane. If there is one thing that governments are good at doing, it's making sure the government never goes away.
Of course the government wants to tax your bitcoin earnings. Of course the government isn't going to let you pay taxes in bitcoin (it's going to require real currency).
It's not just about creaming off the tax, or making sure the government can see how you earn money.
It's about the basis of civil society itself.
Money — fiat currency — underpins everything. Literally, everything.
Governments only stay in business because they have the power to control how much cash flows through the economy. They can create new money or reduce the amount in circulation. Their interest-rate-setting powers control the cost of everything, from the price of patching a pothole in the street to the cost of war in the Middle East.
If cryptocurrencies came even remotely close to becoming the preferred form of cash, then governments would be out of business. The idea that The Man is going abdicate that power to software? Dream on.
Bitcoin will lose this battle.
Governments will move more slowly than tech, sure. But eventually, they will wrestle control of crypto. At that point cryptocurrencies become mere credit tokens valued in actual cash. For most people, cash will remain the more useful medium, and the more valuable one.