Innovate

The Bitcoin Bust That Wasn’t (and isn’t)

Several high-profile figures bashed Bitcoin recently, but what’s really going on?

As Bitcoin plummeted from its $20,000 all-time high to a more modest price at about $8,000, the critics, almost immediately, started piling on.

“At this point in time, the money has been made in bitcoin already,” said Jordan Belfort, the so-called “Wolf of Wall Street” who is now a motivational speaker. Belfort, in an interview with “The Street,” took aim at Bitcoin and other cryptocurrencies, describing proponents of the fiat fund as “scamsters.”

Belfort’s not the only one. Jamie Dimon, chief executive officer of J.P. Morgan Chase, also has called Bitcoin a “fraud” – he later softened his remarks, but not his stance on the then-soaring cryptocurrency. Even Bill Gates weighed in on Reddit, a web forum popular with millennials, describing crypto’s anonymity as a tool for criminals to sell drugs and hide illicit profits. Indeed, Gates went so far as to say Bitcoin and its underlying blockchain technology “has caused death in a very direct way.” Google also banned ads for cryptocurrencies earlier this month (Facebook has banned them since January) after the company said many such advertisements use deceptive language.

Is Bitcoin dead? Bitcoin buyers who jumped in when it skyrocketed past $15,000 or so might think so, but it’s more likely the cryptocurrency simply is leveling off into something more sustainable. And Belfort’s prediction that Bitcoin will “drop to zero very quickly,” remains as unlikely a scenario as the cryptocurrency skyrocketing back to $20,000 without warning.

So, what’s really going on?

Byzantine Blockchains

blockchain500x400Those unfamiliar with Bitcoin – and other cryptocurrencies – might need an explanation of blockchain.

Blockchain is a digital ledger secured with cryptography that can be used to verify online ownership and transactions. Without blockchain, Bitcoin and other digital currencies would struggle with policing double-spending, or there would need to be a third party involved in transactions. A third party, however, would defeat the purpose of Bitcoin, and so the blockchain becomes an essential component of any digital currency.

“This is the Internet creating its own value transfer system,” said Charles Hayter, chief executive officer and founder of CryptoCompare, a U.K. service that compares cryptocurrency prices across various exchange platforms.

In academic circles, the blockchain is described as holding more promise than Bitcoin or other existing digital currencies. Several academic papers have noted that the blockchain technology could be used by traditional banks to develop more secure transactions and that Bitcoin’s unstable purchasing power makes it unlikely that the blockchain is being used to its full potential. Without a stable purchasing value, the only point to holding Bitcoin idle is speculation or illicit transactions. Blockchain technology, however, is being actively pursued by several traditional banks.

Currently, IBM’s Hyperledger Fabric project intends to create a blockchain system tying together major banks. The Hyperledger has attracted interest from some of the world’s largest banks such as Deutsche Bank, HSBC, KBC, Natixis, Rabobank, Societe Generale and Unicredit. Other projects have seen institutions like Credit Suisse, UBS, and State Street sign on.

Technology and cryptocurrency media have watched the banking industry’s developments with both a sense of optimism and trepidation – a January article in CoinDesk, a cryptocurrency information service, took aim at the banks for doubting the usefulness of the technology in the first place, but noted that increased investment from the sector could produce interesting, and effective technologies. It may be some time, however, before the technology is ready for primetime as many banks remain in the prototyping and testing stage with their respective products.

Alternative Alternatives

Bitcoin isn’t dead, not yet at least. But its recent correction does signal that investors might be bringing a more rational attitude to cryptocurrencies.

“It was a mania to a degree … We’ve seen this multiple times in history before,” said CryptoCompare’s Hayter. “It should’ve happened.”

Bitcoin’s drop from approximately $20,000 to somewhere in the range of $8,000 is “in line with historical pullbacks,” he added.

Hayter drew on several historical examples—notably the Dutch tulip mania in the mid-17th century in which some tulip bulbs, just before the bubble burst, sold for 10 times the average worker’s annual earnings – to put the Bitcoin correction into perspective. Bitcoin prices were driven higher and higher by the “faith and attachment” of investors, and the speculation eventually had to result in a rapid decline.

Stocks, however, also were driven by speculation when rudimentary markets first appeared. Just as stocks evolved into regulated, more-or-less transparent entities, cryptocurrencies also will progress into less speculative products. When that will happen is anyone’s guess, but cryptocurrency proponents are bullish that day is coming.

Alternative cryptocurrencies to Bitcoin also have proliferated in recent years. The most well-known of these, Ethereum has emerged as a realistic competitor to Bitcoin, although its value ($550 at the time of this writing) still trails far behind. Other cryptocurrencies are region-specific, such as Cambodia’s proposed Entapay, which the government announced earlier this month it was pursuing (while, oddly enough, banning banks from implementing cryptocurrency transactions). Venezuela also recently launched Petro, its own national cryptocurrency.

The competition has already been felt by at least one Bitcoin “wallet” provider. Coinprism, based in Ireland, announced that Etherium had made the firm’s offerings “obsolete” and that it was closing its exchange. Investors were given a deadline to find another wallet provider, and after that Coinprism will shutdown for good, according to a company news release.

Belfort told “The Street” that the new digital currencies are simply a tool for “scamsters” to wring money out of unwitting investors disappointed at having missed the chance to cash in on Bitcoin. Belfort knows a thing or two about scamsters. His firm, Stratton Oakmont, made millions during a “pump and dump” scam that landed Belfort in prison. Bitcoin, he said, is a similar scam, and he pointed to the proliferation of new cryptocurrencies

“They create the illusion of prosperity – this is what I did at Stratton – you keep the old ones up high enough so people still believe in the overall system and launch the next one, and that’s where they make their money.”

Unlike penny stocks or pyramid schemes, however, the people behind various cryptocurrencies are different, not necessarily working together, and often creating products for niche markets, like the regional cryptos noted above. While Belfort maintained that the money in Bitcoin “has already been made,” the goal, according to crypto-boosters, is to build a fiat digital money that can cross national borders, not a speculative investment product.

For Hayter, Belfort, along with J.P. Morgan’s Dimon, represent the “old guard” that failed to see the value in cryptocurrency and is now playing catch-up with the industry. While investors should proceed with caution before buying a cryptocurrency – which are unregulated by national governments – the digital money can produce solid returns and make for a good investment, provided decisions are made using logic, not emotion.

“Certainly don’t listen to the people who are trying to grab headlines,” Hayter said, when asked to comment on Belfort’s interview with “The Street.” “But [also] don’t believe in something just because you want to.”

 

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