- Bitcoin has been the subject of competing pulls between the government and the people, one of the world’s most revered economists believes.
- Mohamed El-Erian also pointed out that the reason China is cracking down on Bitcoin is that it fears the crypto will erode its monetary policies and control.
Bitcoin has become the object of competing pull between and within the private and public sectors, one of the world’s leading economists believes. Mohamed El-Erian, the chief economic advisor at German giant Allianz, further affirmed that Bitcoin’s volatility will persist for the rest of the year and that its continued rise is worrying governments like China’s and the U.K.
El-Erian is one of the most revered minds in the financial world globally. Aside from his role at Allianz, he’s also the president of Queen’s College, Cambridge and was previously the chair of President Obama’s Global Development Council.
The Bitcoin tug-of-war
In a recent op-ed for Bloomberg, the Egyptian-American thought leader delved into the relationship between Bitcoin and traditional assets and what its future holds. On volatility, he pointed out:
The likely persistence of volatility is due to a tug-of-war that will become more tense and multidimensional. One notable aspect of cryptos this year, and especially of Bitcoin, has been the competing pull between and within the private and public sectors.
This year, the private sector has been in the driver’s seat. It has accelerated the broader adoption of Bitcoin as a form of payment and store of value, he noted.
The most visible impetus came in February when Elon Musk announced that Tesla had invested some of its cash in Bitcoin and would also accept it as payment for cars,” he added. This action led to many other companies following suit. However, as quickly as it had started, it stopped after Elon Musk turned around on Bitcoin.
For most governments, Bitcoin poses a great risk, he noted. It threatens their monetary policies and their control of the financial system. In addition, it could also reduce the adoption of CBDCs. He believes these governments will continue to “put regulatory pressure on the attractiveness and viability of decentralized variants such as Bitcoin. Indeed, this could well be a motivation behind China’s recent anti-Bitcoin actions.”
Will crypto volatility affect traditional assets?
For years, crypto has stood out as an alternative asset class. Crypto investors have claimed that Bitcoin will take over from gold, with institutions like JPMorgan backing up this claim. El-Erian concurs, stating that cryptos ” tend to live in their own ecosystems, at least for now.”
Based on their fundamental attributes, cryptos are neither physical nor financial substitutes for stocks, bonds and commodities.
However, contagion channels between crypto and traditional assets are growing. With assets such as government bonds and stocks becoming unattractive to some, cryptos have offered a way for these investors to diversify their assets.
Contagion risk increases as cross-holdings expand in more investor portfolios, especially when trades are levered, as quite a few are now, and the operational infrastructure supporting crypto trading comes under pressure, as it did last week.