An investment of $1,000 in bitcoin in 2012 would now be worth about $4.9mn, while the number of transactions continues to increase. Globally, investors have poured more than $2bn into initial coin offerings (ICOs) despite warnings from regulators including the US Securities and Exchange Commission.
There’s now a new area of excitement about an aspect of bitcoin since it broke into the financial world in 2013. Blockchain – the technology used for verifying and recording transactions that’s at the heart of bitcoin – is seen as having the potential to reshape the global financial system and possibly other industries. More than 100 banks including Barclays Bank and JPMorgan Chase & Co have joined the R3 consortium, created to find ways to use blockchain as a decentralised ledger to track money transfers and other transactions. Nasdaq is already using blockchain for trading securities in private companies; it is also being tested by retailers like Wal-Mart Stores for ensuring food safety.
For all the brighter scope, there is an undeniable dark side. Bitcoin rose to prominence with Silk Road, a marketplace for weapons, drugs and other illicit goods, and it’s still used for such sales even after Silk Road was shut down. It’s also the currency of choice for ransomware hackers, who have invaded millions of computers across the world.
Even the North Korean government is accumulating bitcoin as a means to dodge international sanctions.
That’s prompted Jamie Dimon, CEO of JPMorgan Chase & Co, to term bitcoin as a “fraud” that’s destined to unravel gradually.
For sure, global regulatory efforts are growing. Russian President Vladimir Putin is the latest to call for regulation of cryptocurrencies. China last month banned ICOs and ordered all cryptocurrency exchanges to close. At least 13 other countries have imposed new rules or announced plans to tighten regulations, including South Korea, which also banned ICOs.
The European Central Bank is discussing “concrete legal restrictions” on digital coin sales.
By contrast, the UK has exempted bitcoin from value-added taxes, and says it should be considered a foreign currency for corporate tax purposes, while Japan this year began enforcing a law that recognises bitcoin as a legal method of payment. The US Commodities Futures Trading Commission classified bitcoin as a commodity in September 2015 and this year approved the first cryptocurrency options trading, clearing and settlement firm. The Securities and Exchange Commission in July said some coins issued in ICOs would be considered securities and regulated.
Make no mistake; the financial world is divided on bitcoin. Some see it as a revolutionary use of technology with growing number of money managers looking at cryptocurrencies as an asset class for investment. Others like Dimon see bitcoin as a “fraud” that’s destined to come crashing down even as authorities are searching to find a viable way to tame it.
Amid concerns over transparency, the jury is still out on whether bitcoin is a growing bubble, or a sustainable investment bet. “In the long run, the technology will thrive, but the price of bitcoin will collapse,” says Kenneth Rogoff, former chief economist of the International Monetary Fund, who’s now a Harvard University professor.
