Bitcoin declined 26% in the five days through Monday in a major test for the nascent digital currency industry. The cryptocurrency, however, rallied past $15,000 yesterday after a roller coaster five-day slump.
Bitcoin’s record high was reached on December 18 hours after CME Group debuted futures contracts. But the movements have been very volatile with traders knocking about $160bn in market value off the biggest cryptocurrencies in about three days.
Wall Street banks are now trying to balance clients’ interest in speculating on the cryptocurrency with executives’ scepticism about its future.
Eight years since the birth of bitcoin, central banks around the world are increasingly compelled to address the potential upsides and downsides of digital currencies. However, their approaches to the undeniable popularity of cryptocurrencies have been extremely contrasting.
The Federal Reserve hasn’t been overtly enthusiastic about the idea of a central-bank issued answer to bitcoin; the European Central Bank has repeatedly warned about the dangers of investing in digital currencies, while China has cracked down on private digital issuers, banning exchange trading of bitcoin and others.
The Bank of Japan looks to deepen knowledge about them; the Bundesbank has been particularly wary of the emergence of bitcoin and other virtual currencies; Bank of England Governor Mark Carney has cited cryptocurrencies as part of a potential “revolution” in finance, while India’s central bank is opposed to cryptocurrencies given that they can be a channel for money laundering and terrorist financing.
There’s, however, a new area of excitement about an aspect of bitcoin. 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.
Some enthusiasts also argue the movements in the market for cryptocurrencies don’t reflect the outcome of rigorous economic or technical analysis, or even a basic theory of why the blockchain technology underlying these currencies even matters.
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.
Amid concerns over transparency, the jury is still out on whether bitcoin is a growing bubble, or a sustainable investment bet.