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Posted on 28/09/2017

Is Bitcoin’s bubble about to burst?

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For a number of years, Bitcoin has been an enigma to mainstream financial markets. Created in 2009, it is the original cryptocurrency – and still the most well-known. Although the genre remains less transparent than established financial instruments, global organisations from the European Central Bank (ECB) to JP Morgan and PwC are examining cryptocurrencies in depth. They’re looking at their impact on the market, their potential for regulation and their future trajectory. With so much publicity, particularly around bitcoin, it begs the question – what exactly is a cryptocurrency?

Understanding cryptocurrencies

As the name suggests, cryptocurrencies are an encoded currency or form of digital money. The benefit is that they let users make payments and store money in a secure and anonymous way, without the need for a bank (and therefore without incurring fees).

Cryptocurrencies are free from government control and operate through a decentralised technology on a distributed public ledger called blockchain. This is held by currency owners, and it verifies and records all transactions – which cannot be faked or reversed. Because the currency is decentralised, it is available to everyone.

Cryptocurrencies are, however, mired in controversy because of their association with illegal activity and money laundering. Originally conceived as a peer-to-peer version of electronic cash, bitcoin exchanges are required to adhere to anti-money laundering rules in some countries, but there is an overall lack of regulation. For example, numerous high-profile hacking attacks on organisations – from the NHS to MySpace and Talk Talk – have demanded ransom payments in bitcoin.

The value of bitcoin

Bitcoin dominates the cryptocurrency scene, with around $66 billion of bitcoins in current circulation across the virtual world. It is, however, notoriously volatile. At the start of 2017, one bitcoin was worth $1,000. In mid-August, it reached $5,000 before crashing to $3,000 a month later, then returning to $4,000 at the end of September. Despite this rollercoaster ride, of all the cryptocurrencies it is the fastest appreciating against major conventional currencies in 2017.

To understand how rapidly it has increased in value, if you had invested £740 in the entirely virtual currency seven years ago, that would now be worth £40.7 million today.

The outlook for bitcoin

It’s clear that bitcoin has performed remarkably since its invention, but what everyone wants to know is – will it last? Jamie Dimon, the chief executive of JP Morgan, aka Wall Street’s biggest bank, says no. Calling bitcoin “a fraud”, he drew parallels with the tulip bubble in 17th Century Holland, stating: “It is worse than tulip bulbs… It could be at $20,000 before this happens, but it will eventually blow up. I am just shocked that anyone can’t see it for what it is.”

One of his key arguments centres around concern at the lack of central authority in bitcoin, and governments’ growing intentions to crack down on cryptocurrencies due to their use in illegal activity. However, a number of economic commentators were critical of Dimon’s stance. Some pointed out that bitcoin had bounced back from the recent dip in value caused by the Chinese government’s crackdown on bitcoin exchanges. The rebound was likely driven by the belief that traders in China will find alternative exchanges through which to operate.

Whether this optimism will endure for the long term remains to be seen. Or perhaps bitcoin’s creators will strike a deal with financial regulators and the currency will move from a peripheral disrupter to a mainstream instrument. All we know for now is that the future, like the currency’s price, will likely be volatile.