Bitcoin: Stick or Switch?

Bitcoin: Stick or Switch?

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Jamie Dimon, JP Morgan’s outspoken CEO, sent shockwaves through the cryptocurrency community earlier this month when he denounced bitcoin as “stupid’ and a “fraud” after the currency lost 25% of its value this month.

The comments were made at an investor conference in New York, where the 61-year-old proceeded to question bitcoin’s longevity and likened the digital currency to the Dutch ‘tulip mania’ of the Seventeenth Century. Tulip mania refers to one of the first recorded speculative bubble crashes in modern history. Before the plant’s crash, it is believed that a single tulip was trading for acres of land.

In spite of the bitcoin’s dip last month, its value has still risen by over $3000 per coin this year. It is therefore important to ask how justified Dimon is in his comments versus how much it is a case of an old dog refusing to learn new tricks?

At the time of this article’s writing, bitcoin’s current price is $3950 (£2947) per coin, which may seem high, but just five weeks ago the digital currency reached $4950. This heavy fall in price has raised alarm bells for investors who all too familiar with the bursting bubble scenario.

September has been a challenging month for cryptocurrency investors. Before Dimon’s scathing indictment of bitcoin, the Chinese government banned all digital currency launches on September 4 and all cryptocurrency exchanges in the country were shut down.

Venture capitalist and known bitcoin investor Roger Ver has argued that these nationwide bans will have a limited effect on the bitcoin market: “it’s the same as when you press down on one part of a balloon. Another part will expand’. Effectively, there will be a new market to replace the Chinese one.

Bitcoin proponent, Roger Ver

Ver’s assessment for bitcoin’s future was supported by John McAfee, ex-CEO of McAfee Anti-Virus Software, who added: “People seem to lose sight of the fact that bitcoin’s value has still risen by 250% this year”. Just two years ago, bitcoin’s value was a mere $231 per coin and its rise has been astronomical.

So why have bitcoin and other cryptocurrencies such as ethereum (the second most used digital currency), ripple, and litecoin become so popular amongst the uber-rich and the ordinary masses? There are two primary reasons: privacy and protection.

Cryptocurrencies all use blockchain technology, which is a decentralised database that stores a registry of assets and transactions across a peer-to-peer network. In layman’s terms, the key result of this technology is that a bitcoin user can directly transfer their currency to another user without any third-party interference.

This lack of third-party interference is particularly problematic for governments because they cannot regulate it; users have total anonymity, which  makes it near-impossible for governments to check transactions, and in the worst case, prevent criminal activity. Inevitably, anonymous transacting creates a hotbed for such activity.

But there is a deeper-lying issue for governments: tax. Currently, no government in the world taxes cryptocurrencies, and this will prove to be a problem if more and more users join the cryptocurrency market. As more users join, the circulation of traditional fiat currencies such as the dollar or pound will dwindle and less tax will be paid to the government.

So far however, the future of bitcoin does not appear to be under threat from government regulation. Recent statements, or lack thereof, from regulatory bodies on either side of the Atlantic have highlighted a relative indifference on the subject.

In the U.K., the Financial Conduct Authority announced two weeks ago that the body had no intention of regulating cryptocurrency. In the U.S., cryptocurrency reform has received very little airplay in Washington due to the ongoing foreign relations crisis with North Korea, a federal investigation into President Trump’s links with Russia, and a South-East coast ravaged by hurricanes.

A final point to note is that bitcoin has experienced slides in its value before and stayed resilient; in November 2013, bitcoin’s value reached an all-time high of $980 per coin before losing 35% of its value to $638 per coin three weeks later. There was no subsequent crash after this drop and its price soon stabilised.

Last month’s volatility in the cryptocurrency market has been the subject of intense media and public interest. Bubble or otherwise, the cryptocurrency market is still in its nascence, so there will invariably be fluctuations in its price until the industry matures. Now more than ever, investors need something akin to a crystal ball to predict the future of digital currency.

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