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Tuesday, 2 March 2021

Big banks flock to crypto despite warnings

Major banks and firms are raising their holdings in cryptocurrencies despite market volatility, leaving US authorities concerned about the creation of a crypto bubble, Bloomberg reports. With Bitcoin and other cryptos having currently achieved a USD 1.47 tn market cap, prominent financial institutions are looking to both invest in, and enable their platforms to support, crypto exchanges.

These include heavy hitters like Goldman Sachs, who will restart trading in Bitcoin in mid-March, unnamed insiders told Bloomberg, while business intelligence and software company MicroStrategy Inc has purchased an additional USD 15 mn worth of Bitcoin, raising its holdings to USD 4 bn, Bloomberg reports. Investment banking group BNY Mellon has also said it will begin facilitating the transfer and issuance of digital currencies, while Mastercard said last month that it will allow users to make payments in crypto “stablecoins” — those pegged to the USD. Visa has also said that if a digital currency “becomes a recognized form of exchange” they will add it to the network, while the world’s first Bitcoin ETF began trading in Canada last month.

And central banks are also looking to get in on the trade: The Bahamas issued the world’s first Central Bank Digital Currency (CBDC) late last year, while China is working on the second trial of its digital yuan in Shenzhen after rolling out an initial test batch of the currency. Sweden is also working on a feasibility study to be complete in 2022 after testing its e-krona last year.

Egypt’s central bank said back in 2018 that the CBE would be studying issuing a digital currency as part of Egypt’s drive towards a cashless society, though did not specify whether the currency would be reserved for inter-bank transactions or could be used by the public. Read our explainer on why central banks are turning to digital currencies.

But bitcoin’s volatility has raised warnings: Trading in digital currencies opens up more avenues for market manipulation, New York’s Attorney General Letitia James said yesterday, calling cryptos “high-risk, unstable investments that could result in devastating losses just as quickly as they can provide gains,” Bloomberg reports. The underlying value of cryptos unpegged to a currency or commodity is subjective, warned James, and could prove difficult to cash out, while exposing investors to heightened risks of fraud.

Major investors are paying attention to these warnings: Hedge fund billionaire Dan Loeb recently shared his two cents on Bitcoin, saying he had been doing a “deep dive” into crypto and was keeping an open mind, but stopping short of issuing a verdict or announcing an investment. But Bill Gates is less open, and has warned against Bitcoin volatility’s effect on smaller investors, as well as the environmental impact of energy-intensive bitcoin mining.

Volatility did accelerate in 2021: Tesla’s USD 1.5 bn investment in Bitcoin last month sent the currency to record highs. It then slumped 20% last week amid a general slide in stocks — its largest drop since a covid-19 induced sell-off in March — but bounced back to levels exceeding its pre-slump highs.

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