The Bank of England has issued a warning saying bitcoin could become “worthless”, and people investing in the cryptocurrency could lose everything.
Bank of England's deputy governor, Sir Jon Cunliffe, said the banking industry needed to be ready for the risks of the currency as it becomes more popular. “Their price can vary quite considerably and [bitcoins] could theoretically or practically drop to zero,” he told the BBC.
The Bank detailed the risks for investors as bitcoin leapfrogged to almost $70,000 in early November, but suffered a sell-off after news first broke of the Omicron variant of coronavirus, before stabilising around its current level in the past week.
In its regular health check on the financial system, the Bank said major institutions should take a cautious approach to adopting crypto assets.
“Enhanced regulatory and law enforcement frameworks, both domestically and at a global level, are needed to influence developments in these fast-growing markets in order to manage risks, encourage sustainable innovation and maintain broader trust and integrity in the financial system,” it said.
In a separate blog post published on its website on Tuesday, one of the Bank’s staff wrote that bitcoin failed to fulfil many of the features required of a currency and that it risked being inherently volatile.
“The problem is that, unlike traditional forms of money, bitcoin isn’t used to price things other than itself,” Thomas Belsham, who works in the bank’s stakeholder and media engagement division, wrote.
“As bitcoiners themselves are fond of saying, ‘one bitcoin = one bitcoin’. But a tautology does not a currency make.” He added, the scarcity of bitcoin – which has been capped at 21 million – was one of the main attractors for investors.
However, Mr Belsham added this feature “may even, ultimately, render bitcoin worthless”. There are about 19 million bitcoins currently in circulation.
“Simple game theory tells us that a process of backward induction should, really, at some point, induce the smart money to get out. And were that to happen, investors really should be prepared to lose everything. Eventually,” Mr Belsham said.
