Korean regulators urged to ban trading of digital coins
By Kim Jae-kyoung
People should rethink their investment in Bitcoin as it is a new form of a fraudulent investing scam, Andy Xie, a noted global economist and financial market expert, said Friday.
He said the digital currency market is in a bubble and the bubble could pop in the coming years once the U.S. Federal Reserve fully normalizes its monetary policy.
The warning came as Bitcoin has surged past $11,000. The leading digital currency gained more than 60 percent over the past month alone, an annualized return of about 720 percent. Other cryptocurrencies are also on the upswing.
"This is a Ponzi scheme," Xie said in an interview. The former Morgan Stanley economist is well-known for having forecast the 1997-98 Asian currency crisis.
"The difference from the past ones is that it is global due to the internet and, hence, all the people in the world can join," he said. "This is why it can go way beyond other schemes."
A Ponzi scheme refers to a fraudulent investment operation that generates returns for older investors by acquiring new investors rather than legitimate business activities or profit of financial trading.
In general, operators of this scheme, which is named after Charles Ponzi who became notorious for using the technique in the 1920s, attract new investors by offering abnormally high short-term returns.
The independent economist warns the Bitcoin craze will eventually be a losing game for everyone except for some operators of exchanges.
He criticized financial regulators for not taking actions against such feverish speculation, urging them to totally ban trading of virtual currencies to protect investors. The Financial Supervisory Service, Korea's financial watchdog, said it has no plans to regulate trading of digital coins.
Losing game for everyone
"If the government wants to protect its people, it should limit their access to the market. Most people will lose money, and only a few smart operators will take all the money," he said.
"How could a government allow its people to lose money on such a large scale?"
According to Xie's analysis, the digital coin craze has been happening in the macro environment of loose monetary policy for 10 years, creating the biggest bubble in history. The bubble is close to $100 trillion, in his estimation.
"The Bitcoin bubble is a small part of this whole thing," he said. "As long as monetary policy is so loose, if not Bitcoin, there will be something else."
Xie expects the bubble will pop within five years once the Fed ends its quantitative easing (QE) to curb inflation.
He said it may take a long time to pop, as the U.S. interest rate is 1 percent, and nominal GDP is growing at 5 percent.
"The normal interest rate should be over 4 percent. Until the interest rate goes there, the bubble may continue," he said.
"The bubble will burst when inflation finally takes hold and rises. That may happen within five years."
The veteran economist warned that once the bubble bursts, it could have disastrous consequences for the global economy and financial markets, possibly the worst financial crisis in history.
"It will be worse than 2008," he said.
This bubble in his view will last longer than any before, because QE means government money everywhere is supporting it.
"It is unlikely the central banks will pull back QE when markets tumble. Hence, QE assets will stay. Any reduction will be marginal," he said.
By Kim Jae-kyoung
 |
| Andy Xie |
He said the digital currency market is in a bubble and the bubble could pop in the coming years once the U.S. Federal Reserve fully normalizes its monetary policy.
The warning came as Bitcoin has surged past $11,000. The leading digital currency gained more than 60 percent over the past month alone, an annualized return of about 720 percent. Other cryptocurrencies are also on the upswing.
"This is a Ponzi scheme," Xie said in an interview. The former Morgan Stanley economist is well-known for having forecast the 1997-98 Asian currency crisis.
"The difference from the past ones is that it is global due to the internet and, hence, all the people in the world can join," he said. "This is why it can go way beyond other schemes."
A Ponzi scheme refers to a fraudulent investment operation that generates returns for older investors by acquiring new investors rather than legitimate business activities or profit of financial trading.
In general, operators of this scheme, which is named after Charles Ponzi who became notorious for using the technique in the 1920s, attract new investors by offering abnormally high short-term returns.
The independent economist warns the Bitcoin craze will eventually be a losing game for everyone except for some operators of exchanges.
He criticized financial regulators for not taking actions against such feverish speculation, urging them to totally ban trading of virtual currencies to protect investors. The Financial Supervisory Service, Korea's financial watchdog, said it has no plans to regulate trading of digital coins.
Losing game for everyone
"If the government wants to protect its people, it should limit their access to the market. Most people will lose money, and only a few smart operators will take all the money," he said.
"How could a government allow its people to lose money on such a large scale?"
According to Xie's analysis, the digital coin craze has been happening in the macro environment of loose monetary policy for 10 years, creating the biggest bubble in history. The bubble is close to $100 trillion, in his estimation.
"The Bitcoin bubble is a small part of this whole thing," he said. "As long as monetary policy is so loose, if not Bitcoin, there will be something else."
Xie expects the bubble will pop within five years once the Fed ends its quantitative easing (QE) to curb inflation.
He said it may take a long time to pop, as the U.S. interest rate is 1 percent, and nominal GDP is growing at 5 percent.
"The normal interest rate should be over 4 percent. Until the interest rate goes there, the bubble may continue," he said.
"The bubble will burst when inflation finally takes hold and rises. That may happen within five years."
The veteran economist warned that once the bubble bursts, it could have disastrous consequences for the global economy and financial markets, possibly the worst financial crisis in history.
"It will be worse than 2008," he said.
This bubble in his view will last longer than any before, because QE means government money everywhere is supporting it.
"It is unlikely the central banks will pull back QE when markets tumble. Hence, QE assets will stay. Any reduction will be marginal," he said.
