Bitcoin, which accounts for more than one-third of the $280bn cryptocurrencies market, is in trouble.
Since reaching a record high of $19,511 on December 18 shortly after the introduction of regulated futures contracts in the US, bitcoin has wiped out more than half its value amid waves of negative news. Setbacks included escalating regulatory threats from authorities around the world including India, South Korea, China and the US; a record $500mn heist at a Japanese exchange, fears of price manipulation and Facebook’s ban on cryptocurrency ads.
To be sure, the financial world is growing warier of the highly volatile digital currencies amid growing bubble warnings.
Banks in Britain and the US have banned the use of credit cards to buy bitcoin and other cryptos fearing a plunge in their value will leave customers unable to repay their debts.
Some banks are now stepping up scrutiny over its employees dealings with cryptocurrencies, including trading. Many banks have also stayed away from offering cryptocurrency trades for their clients.
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 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.
There’s, however, a new area of excitement about 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.
For all the brighter scope, there is a conspicuous dark side. Bitcoin rose to prominence with Silk Road, a marketplace for weapons, drugs and other illicit goods, and some cryptos are still being 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.
Bitcoin is the “biggest bubble in human history,” said “Dr Doom” Nouriel Roubini. There are more than 1,300 cryptocurrencies and “most of them are even worse” than the largest digital token, he said.
Jamie Dimon, CEO of JPMorgan Chase & Co, has termed 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 asset. But the crypto’s boom-and-bust wild ride offers yet another historical lesson to a discerning investor: Any windfall return that defies fundamental market wisdom is bound to end up in a crash.
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