Although regulators have outlawed virtual currency business, "underground" virtual currency businesses continue to be banned.
Guangzhou Development and Reform Commission carried out the first on-site remediation of virtual currency "mining" in Guangzhou in March this year. More than 190 virtual currency "mining" professional mining machines, worth more than 5 million yuan, were seized in a virtual currency mine in an electric vehicle charging station. The city of Jieyang has seized 916 "mining machines" in a crackdown on virtual currency mining. As the virtual currency business continues to be banned, the central bank's work meeting in March also set the goal of "maintaining a high pressure crackdown on the speculation of virtual currency trading".
Bitcoin in a major crisis
Virtual currencies are hard to eliminate for one big reason: they are still regarded by their investors as a safe-haven asset, providing a hedge against sharp market corrections as part of a portfolio. Take Bitcoin, which occupies half of the "coin circle", for example. Bitcoin is called "digital gold" by its investors, who believe that due to its scarcity, encryption and limited supply nature, Bitcoin is a better hedge asset than gold, which can hedge losses in the event of economic recession and major crisis. Goldman sachs group inc. in 2021 of virtual currency surged to restart the transaction encryption currency account, and in 2022 annual research report said that the currency will be more to assume the role of gold in the future, from gold market share, and will become investors in the heart has a "store of value function of precious metals" new choice, its price is expected to continue rising.
Can virtual currency help investors avoid risk after all? For further analysis, take bitcoin, the most valuable virtual currency.
Bitcoin has not demonstrated safe-haven functionality since its high in early November 2021, underperforming when the market faces significant downside risk. Since the emergence of the Novel Coronavirus variant Omicron in South Africa in November 2021, the price of bitcoin has plunged along with global stock markets, falling 8.9% on November 26. The conflict between Russia and Ukraine rattled global financial markets earlier this year. Pessimistic expectations sent global equity markets sharply lower on February 24, but traditional safe-haven assets such as gold and commodities such as crude oil took on a safe-haven effect. The price of bitcoin has plunged, dropping $2,688, or more than 7%, on Feb. 24. In both major crises, bitcoin failed to function as a safe haven asset.
Bitcoin's volatility and legitimacy
Bitcoin is not designed as a hedge against market volatility and uncertainty.
First, bitcoin does not have stable purchasing power. Since ancient times, gold has always played a role in the economic life of mankind. Because of its rarity and physical stability, gold was not only used for decoration and religious objects, but also became a universal equivalent and even spawned the gold standard monetary system. By contrast, bitcoin, as a digital product, lacks endogenous value. In popular terms, bitcoin is like a kind of digital medal, with a limited stock. It exists in a series of blockchains, where miners violently solve by computer and get the correct hash value to obtain the right account for one bitcoin, namely, one bitcoin. Bitcoin lacks real value support, sovereign credit and commercial credit, and is fundamentally different from other financial products. Whether the digital assets outside the economic system have actual intrinsic value is highly controversial.
Second, bitcoin is too volatile to maintain price stability in the face of market turbulence. The price of bitcoin is highly susceptible to market sentiment, rising and falling, and showing far more volatility than ordinary financial assets. The price of bitcoin will be greatly affected by what the "bigwigs" say and do. Elon Musk is one of the most prominent proponents of bitcoin, and his tweets can have a major impact on the price of the virtual currency. In June 2021, Following Musk's announcement on Twitter that Tesla would again accept bitcoin as payment, bitcoin rose 12% to its highest level in three weeks. In May of that year, Musk also tweeted that Tesla would no longer accept Bitcoin as a payment method, causing the price of bitcoin to fall by about 15%, even though not many people actually use bitcoin to pay Tesla. However, the bitcoin market is highly volatile and subject to manipulation of market sentiment, making it unstable as a store of value and risk hedging tool.
Finally, bitcoin's policy is risky and lacks official international recognition. In addition to speculative risks, the regulatory risks of virtual currencies also prevent them from being a safe haven asset. Virtual currencies bypass the traditional "bank-central bank" system and leave no verifiable records of payments or transfers because they are anonymous, unregulated and freely traded. Therefore, virtual currency is favored by the illegal market, and is largely used for illegal transactions by the dark web and black market. In October 2013, before bitcoin was widely used, the FBI shut down silk Road, a dark web that used bitcoins to buy and sell weapons and drugs. In 2017, it shut down Alpha Bay and Hanseatic, an online black market that was trading in tens of millions of dollars a month. At present, China has clearly defined virtual currency-related business activities as illegal financial activities, and regulatory authorities in other countries tend to be conservative in their attitude towards bitcoin. Bitcoin will not achieve the same level of recognition and legitimacy as gold around the world for a long time to come.
In fact, foreign regulators are wary of bitcoin as a safe haven. During an online event at the Bank for International Settlements (BIS) Innovation Summit in March 2021, Federal Reserve Chairman Jerome Powell said bitcoin is a "speculative asset" that lacks endogenous value and is highly volatile, making it unsuitable as a store of value. In September 2021, the Notice on Further Prevention and Disposal of Speculation Risks in Virtual Currency Transactions jointly issued by the People's Bank of China and other 10 government departments pointed out that bitcoin and other virtual currencies are not legally compensable and should not and cannot be circulated in the market as currency. Virtual currency-related business activities are illegal financial activities. The work meeting of the central bank in March this year also set "maintaining a high-pressure crackdown on the speculation of virtual currency trading" as one of the goals for 2022.
To sum up, virtual currency, as a new digital product, has high price volatility and is easy to be used for underground transactions. Therefore, it is difficult to recognize its legitimacy on a global scale and does not have the role of hedging systemic risks.