the times | Thursday February 3 2022 39

CommentBusiness

Hopes of bitcoin becoming credible

have slumped along with its price

Lionel Messi helped to

bolster the huge interest

in cryptocurrencies

W

hen Margaret

Thatcher was

confronted with her

first energy crisis,

she blinked. In

February 1981, she backed down on

proposals to close coalmines in the

face of union resistance. As Bernard

Ingham, her press secretary, wrote,

“no government ever gets from A to

B in a straight line”. A few years

later, better prepared with greater

reserves of both spare coal and spare

political capital, she took on the

National Union of Mineworkers and

forced it to back down.

The lesson for energy policy today

is that the present crisis must not

blind you to preparing for the bigger

battles to come. As ex-government

advisers, we know the real challenge

will be keeping political attention on

this issue when the immediate crisis

averts. Energy policy is long term

and requires long-term thinking.

Those talking heads pointing to

simple, short-term solutions are in

cloud cuckoo land.

Take the argument that fracking

for British shale gas would have

avoided the current price shock. The

idea that a fivefold increase in

European gas prices driven in part by

the geopolitics of China, Russia and

Ukraine could be turned around

quickly by a couple of wells in

Lancashire is fanciful.

There are three key areas that

government will need to prioritise as

it seeks to learn lessons from the

present crisis. First, let markets, not

government, decide which new

power stations and generators are

built. The future electricity system

will be radically different from the

one built over the past century, but

the precise make-up of that system is

incredibly uncertain. Modelling for

Energy Systems Catapult suggests a

£10 billion-a-year range in costs

between the most and least cost-

effective net zero power systems.

Low-cost wind is likely to be the

workhorse of the future UK

electricity system, but the wind does

not always blow. We cannot rely on

only a single clean technology and

instead must create market

structures that reveal the best

combination of nuclear, long-

duration storage and back-up power

stations that might run for only a few

hours a year.

Making this possible will require a

new approach to incentivising low-

carbon electricity projects. We must

unlock the power of markets to

reveal the best combination of

different technologies or projects,

rather than government choosing its

favoured ones. As Policy Exchange

has argued, this will require new,

more local markets that align with

the physics of the new power system,

where more demand comes from our

homes and vehicles.

Beyond rethinking how we

generate our electricity, we need to

revamp how its sold. The future

energy system is likely to require

more sophisticated energy suppliers.

They will hold the hands of

consumers as they switch to electric

vehicles and new ways of heating

their homes. And they will compete

to provide new net zero products and

services, such as smart tariffs and

controls, that enable consumers to

charge their cars when electricity is

cheap, driving down the cost of the

system. But this new world means

suppliers will have to take on new

risks and, as with any other market

where services are improved, they

should be rewarded fairly when they

provide things that consumers like.

Finally, there is a limit to how

much of the cost of the transition

government can load on to energy

consumers. Looking to raise revenue

through energy bills is regressive.

Even if existing green levies are not

the cause of today’s price crisis, their

presence emboldens those who

would prefer us to give up our

environmental leadership.

Government must look again at

the question of how we unlock the

billions needed in clean capital, at

ways in which it can create a level

playing field for UK businesses, such

as through carbon taxes or

standards, including at the border,

and protecting the most vulnerable

through more targeted support.

Yet the fact that significant

changes to the energy system are

painstaking underlines the urgency

of reform. If the government wants

to avoid spending the next ten years

in a cycle of energy crises, it needs to

start now designing an energy

system fit for the future.

Simon Nixon

Ensuring our long-term

energy future demands

big decisions right now

Guy Newey, Josh Buckland

and laundering money, and the

government of El Salvador may have

quixotically adopted bitcoin as legal

tender, but a currency that can lose

half its value in weeks is no use for

the overwhelming majority of

financial transactions.

A second risk relates to regulation.

The extraordinary amounts of money

now engaged in speculation in crypto

currencies has attracted the concern

of financial regulators, who fear risks

to financial stability and consumer

protection. Indeed, the International

Monetary Fund last week expressed

alarm that sell-offs in crypto and

equity markets may be feeding into

each other, as over-indebted investors

dump assets to cover losses. At the

same time, many central banks,

including the Bank of England, are

exploring creating their own digital

currencies as a way to maintain their

own control over the financial system.

China went to great lengths last year

to shut down bitcoin miners.

Nor does the risk come solely from

financial regulators. Because of the

way that bitcoin transactions are

verified by miners, networks of

powerful computers that compete to

be paid in the currency, it is

extraordinarily energy-intensive.

Bitcoin miners are estimated to

consume as much power as the

Netherlands. A Swedish official has

warned that the country’s entire

planned new renewable energy

capacity risks being consumed by

bitcoin miners, undermining its

efforts to reach net zero carbon

emissions. That has prompted calls

for a ban on the most energy-

intensive form of bitcoin mining

within the European Union.

Finally, there is the risk that the

technology does not live up to the

hopes of its advocates in terms of

speed and security, or at least does

not deliver these benefits in the

timescale that the market anticipates.

That is often the way with bubbles.

The tulip bubble burst, but the

Netherlands still has a large cut

flower industry centuries later. The

dotcom bubble burst, but the digital

revolution continues to transform the

global economy to this day. Crypto

may prove to be a transformative

technology. But anyone

contemplating

going back into the

market should be

prepared to lose

their shirt.

One of the boldest

claims advanced to

justify the

remarkable rise in

the value of bitcoin

towards the end of last year was that

the digital currency was set to rival

gold as a long-term store of value.

Indeed, Goldman Sachs even cited

these supposed inflation-proof

qualities as justification for its eye-

catching prediction at the end of last

year that bitcoin could hit $100,000

over the next five years. The

investment bank noted that the

cryptocurrency already accounted for

20 per cent of what it called the “store

of value” market, comprising gold and

bitcoin, and suggested that this could

rise above 50 per cent.

That prediction has not survived its

first contact with economic reality. As

the world’s big economies grapple

with the highest inflation in decades,

the price of bitcoin has tumbled. It

stands at $37,563, more than 40 per

cent below its November peak.

Meanwhile, the price of gold is

broadly unchanged since the start of

the year, suggesting that bitcoin’s

share of the “store of value” market is

down to about 10 per cent. It turns

out that far from trading like gold,

bitcoin has more in common with

technology stocks, which similarly

soared when central banks flooded

markets with cheap money but have

sunk at the first hint of a rate rise.

Indeed, the crypto boom has

carried all the hallmarks of a bubble.

The number of digital currencies has

exploded in recent years, rising from

6,000 to more than 11,000 last year.

At its peak, the combined market

capitalisation of the crypto

universe was an estimated

$2.6 trillion. More than

100 million people own

some form of crypto

asset, including

2.3 million in Britain. It is

said that the signal to

sell shares ahead of the

1929 stock market

crash was when

shoeshine boys

started offering tips.

The 21st-century

equivalent may be

schoolchildren wanting to buy

crypto with their pocket money

after encountering ads on TikTok or

learning that Paris Saint-Germain

star Lionel Messi accepted a bonus in

fan-tokens.

Even so, it’s a brave soul who calls

the end of the crypto boom. As

bitcoin enthusiasts point out, its price

has halved at least four times in the

past three years before bouncing back.

They are betting that crypto

currencies are not simply going to

displace gold as a store of value but

will revolutionise the world of money,

liberating finance from the control of

centralised institutions such as

governments and banks. They argue

that “distributed finance” using

technologies such as blockchain,

which enable transactions to be

verified by networks of computers,

promises to usher in a world of ultra-

cheap, ultra-fast, ultra-secure

financial services that could be worth

trillions of dollars to the global

economy.

The bull case for the latest sell-off

being just another temporary setback

rests in part on the degree to which

mainstream financial institutions have

been piling into what has become a

vast ecosystem. Investment banks

such as Goldman Sachs have set up

trading desks, while asset managers

such as Morgan Stanley have

launched crypto funds. Although

there is not yet an exchange-traded

fund that invests in underlying crypto

currencies, there is now an ETF that

invests in bitcoin futures that trade on

the Chicago Mercantile Exchange.

Gradually, crypto assets are being

brought within the reach of the

regulated financial markets, making

them more accessible and acceptable

to a broader range of investors.

Set against this, there are several

reasons to believe that the air may

continue to come out of the

bubble, or as investment bank

UBS puts it, the market could be

heading for a “crypto winter”. The

first is that cryptocurrencies are

still not capable of fulfilling any

of the three functions of real

money. If the recent sell-off

showed that they are not

yet a reliable store of value,

the endless volatility also

makes them useless as a

means of exchange or a

unit of account. Bitcoin

might have found some

use on the dark web as

an untraceable way of

executing drug deals

‘‘

’’

Guy Newey is director of strategy at

Energy System Catapult. Josh Buckland

is a partner at Flint Global and a

senior fellow at Policy Exchange.

Both are former advisers to

government energy ministers