European Central Bank Official: If Bitcoin Fails, Central Banks May Suffer

As Bitcoin heads for $10,000, a downward price spiral may affect the real economy and require action from central banks.

Bitcoin is already trading above $10,000 in Korea and may trade over that level soon. But in case of a fallout, the asset, which has a market cap of above $160 billion, may affect the real economy, cause panic and shift the blame to central banks.

At the moment, the reserves of Bitcoin, even if all of the outstanding coins can be exchanged for cash, are just a fraction of the world's gold reserves, which have a total cost of $7.5 billion. But Bitcoin is gaining prominence and lately, it is always in the public's eye.

"The problem with bitcoin is that it could easily blow up and central banks could then be accused of not doing anything," said Ewald Nowotny.

"So we’re trying to understand whether bank activity in relation to cryptocurrency trading needs to be better regulated."

Nowotny, who is the Governor of the Austrian Central Bank and serves on the Governing Council of the European Central Bank, is a well-known Bitcoin critic, stating the cryptocurrency's rise is a bubble akin to the tulip mania.

Strangely, for now the rules and regulations in Europe allow for the easy buying and selling of cryptocurrencies, and the Euro is a small, but steady influx of cash into various digital assets. Europe holds Bitcoin in popularity, but additional altcoins as well, as Litecoin and Dash are also widely available.

The ECB can certainly affect the supply of fiat, but it cannot do anything against Bitcoin, as even European exchanges are highly regulated and follow all compliance procedures.

The Bitcoin trading against the Euro is extremely thin, less than 3% of all volumes, compared to the much more active trading of Bitcoin against the Japanese Yen and the Korean Won. As other analysts have noticed, compared to the size of forex markets, Bitcoin is tiny, and certainly trading against the Euro cannot affect, for now, the positions of the Eurozone's common currency.

Still, trading and sometimes merely owning cryptocurrencies may lead to deep losses, and lawsuits and demands for bailouts are one possible scenario.

For now, several central banks have been hawkish on cryptocurrencies, most prominently China. The most recent outright ban of Bitcoin as a means of payment is from Morocco.