By Samuel Indyk
Investing.com – The European Central Bank has compared the recent rise in cryptocurrency prices to previous financial market bubbles from history, saying the rise in Bitcoin prices has eclipsed previous financial bubbles like “tulip mania” and the South Sea Bubble.
In its latest Financial Stability Report, the ECB said that although interest is high, the risk to financial stability is slim.
“Signs of exuberance have […] been observed in the renewed interest in crypto-assets, although financial stability risks appear limited,” the ECB said.
Crypto volatility
Speaking after the publication of the report, ECB Vice President De Guindos said that when you have difficulty to find out what the real fundamentals of an investment are, then what you are doing is not a “real investment”.
“This is an asset with very weak fundamentals and that is going to be subject to a lot of volatility,” de Guindos said in an interview with Bloomberg TV.
Environmental concerns
The ECB highlighted some common concerns with cryptocurrencies in their Financial Stability Report, such as the environmental damage and use for illicit transactions.
“Its price volatility makes Bitcoin risky and speculative, while its exorbitant carbon footprint and potential use for illicit purposes are grounds for concern,” the ECB said.
The environmental impact of cryptocurrencies has garnered attention in the last week after Tesla (NASDAQ:TSLA) CEO Elon Musk said that the electric vehicle maker would stop accepting Bitcoin due to the energy used to mine and transact on the network.
The U-turn from Musk was the catalyst for the sell-off in cryptocurrencies which has seen Bitcoin fall by over 44% from its high print seen last week. Other major cryptocurrencies were not faring much better with Ethereum down 42% and Dogecoin down 53% from year-to-date highs.
Bitcoin’s use for illicit transactions has never been as much at the forefront as it is now, either. Last week, a hacker group called DarkSide shutdown a key oil pipeline in the US in a ransomware attack, demanding payment in Bitcoin to resume operations. Colonial, the company that operates the pipeline, reportedly paid the hacker group a $5mln ransom in cryptocurrency. Some analysts have speculated that this could be very public use of Bitcoin for nefarious means could accelerate potential regulation in the crypto sphere.