Can the Fed still put the brakes on cryptocurrencies?

Chart of the week

How much longer will central banks and regulators watch the rapid growth of cryptocurrencies? Measured against the U.S. money supply, they are already astonishingly large.

You hate them or you love them. Few investors are indifferent to cryptocurrencies. Not even the richest in the world. Bill Gates, for example, advises you to keep your hands off them unless you are as rich as Elon Musk, who recently revealed himself as a crypto fan.[1] There are certainly as many reasons for as against the new "currencies". There seems to be agreement, at least, on one thing that the underlying technology – blockchain – has a great future ahead of it. However, opinions already differ on the question of whether the "currencies" need to prove themselves as an everyday means of payment if they are to serve as a store of value.

Those who cannot remain indifferent to the issue are the central banks and regulators. For them, sovereignty over the money supply and the security of alternative means of payment are of great importance. The latter was underscored again just this week by Gary Gensler, the new U.S. administration’s nominee as head of the Security and Exchange Commission's (SEC's) regulatory agency. He described it as a challenge for the SEC to keep the crypto market free of fraud and manipulation.[2] The week before, Janet Yellen, the Treasury Secretary, had already indicated that she was less than enthusiastic about most cryptocurrencies and expected the U.S. Federal Reserve (Fed) to create its own digital currency.[3]

But the plug has not yet been pulled on cryptocurrencies by any of the major central banks. Which begs the question of whether this would even be feasible without provoking major turmoil in the financial markets. To grasp the size of this new sector, just looking at the market capitalization of all outstanding cryptocurrencies is not enough. It is currently equivalent to about 1.6 trillion U.S. dollars, which is roughly equal to the amount of all outstanding dollar bills and coins.[4] In addition, one must also take into account all the financial products and companies that have sprung up around cryptocurrencies.

Our Chart of the Week could be a gauge of central-bank nervousness. The chart shows the market value of all cryptocurrencies as a percentage of the United States's fairly broad M2 money supply, as well as the astonishing growth of M2 itself. That value will soon reach 10%, and the sharp increase in recent months is particularly eye-catching. When the pain threshold might be reached, we do not know. But given the size of the crypto market as described above, we think it is more likely that intervention will amount to a controlled letting out of air rather than an abrupt end. 


* The market value of all cryptocurrencies was approximated by the price history of Bitcoin and the assumption that Bitcoin holds a constant 60% market share of all cryptocurrencies.

Sources Bloomberg L.P., DWS Investment GmbH as of 3/3/21




4. as of 3/3/21


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