Speaking at the Fortune Global Forum on November 5th, JP Morgan’s Jamie Dimon dismissed Bitcoin’s long-term chances of survival, stating that, in his view, there will be no non-controlled currencies in the world, because no governments can, in the long-run, tolerate the existence of methods of payment they cannot control
This is not the first time that Dimon has been sceptical about Bitcoin. In September he threated to fire any of his traders who attempted to deal in it after declaring the cryptocurrency a fraud.
He is not alone. Legendary investor Warren Buffett has warned for years that Bitcoin has no intrinsic underlying value and that the current price bubble will soon burst in spectacular fashion, whilst billionaire Saudi investor Prince Al-Waleed bin Talah has predicted a forthcoming implosion of the digital currency because of the lack of regulatory control.
On the other hand, part of the reason for the recent Bitcoin price surge was due to strong interest from investors on both Wall Street and in the Far East, whilst the news that the CME (Chicago Mercantile Exchange) plans to trade Bitcoin futures would indicate that, at least some elements of the investment community are anticipating a long and bright future for the cryptocurrency.
Who is to be believed?
Is there a Bitcoin Bubble right now?
It would be hard to argue with those that contend that the current Bitcoin price of over US $6,400 a coin – it was above US $7.500 before falling back – appears to have all the characteristics of a bubble, given that it started the year around the US $1,000 level. As such it would appear, on the face of it to resemble some of the famous bubbles in history, such as the Tulipmania of the 17th century, the South Sea bubble a century later, and, most recently, the dot com boom around the turn of the Millennium.
The problem with this is that the classic definition of a bubble is when an asset is traded at a price that strongly exceeds its intrinsic value. However, if Buffet is to be believed and Bitcoin has no intrinsic value, what is a reasonable price for it?
At this point it is also worth pointing out that a regular fiat currency – such as a dollar, euro or sterling – also has no intrinsic value. Since countries abandoned the gold standard – when every unit of currency issued was backed, at least in theory, by the equivalent in gold – the value of a currency is determined more by the backing and support of government and financial regulation than by any physical equivalent.
It is here that Dimon and bin Talah may have a strong point. Conventional currencies have value because there is a government to support it when they come under pressure. This is why financial authorities and regulators step-in when a currency comes under threat or there is a run on a bank to prevent economic disorder and financial hardship. In other words, it is government support and backing for a currency that legitimises it, rather than the inherent value of the currency itself.
With Bitcoin there is no such safety net. The only thing currently driving its price is market sentiment, which is why there is often such dramatic volatility in its value from one day to another. That would make it vulnerable to a sudden and dramatic loss in value if market sentiment were suddenly to turn against it.
Will Bitcoin become regulated?
There are signs that Bitcoin may, at some point in the future, become subject to government regulation. Already trading in the currency has become banned in China and is coming under increasing government regulation in Russia. At the same time, the SEC in the US has issued a warning to investors that trading in digital assets is subject to Federal Securities laws, whilst both the Bank of England and the Financial Conduct Authority in the UK are monitoring current cryptocurrency developments very closely.
Of course, there are purists who argue that regulating a digital currency is the antithesis of the original concept of Bitcoin – as a decentralised and deregulated peer-to-peer payment system. However, it might be a price that Bitcoin and other similar digital currencies have to pay for their long-term survival.
Certainly if major e-commerce retailers like Amazon, eBay and Alibaba begin to accept Bitcoin and other digital currencies as means of payment, it can be expected that consumer protection laws will be expanded to cover it.
To a certain extent then, a regulated Bitcoin would have the supervision and monitoring that the current coinage lacks, although many of the other principles that underpin a traditional currency – such as an underlying banking system and financial infrastructure, supporting checks and balances, and complete market transparency, would still be lacking.
Bitcoin has its supporters
It should also be said that the views of Dimon and Buffet are not the only voices in the debate. There are equally respected investors who believe in the long-term future of Bitcoin, and that the underlying price will continue to rise. Jeremy Lew, for example, one of the first investors in Snapchat predicts Bitcoin will be worth US $500,000 a coin by 2030, whilst Facebook investor and financial guru Chamath Palihapitya urged his 70,000 Twitter followers to invest in the currency as a “defense against value destruction”.
The Blockchain will survive
Even if Bitcoin were to collapse in value altogether, there are elements of the cryptocurrency concept and technology which will go on to survive and prosper, most notably the concept of the blockchain. Even Dimon himself admits this, saying “the technology will be used, it may even be used to transport currency but it will be US dollars”. He has also previously said that his bank has much to learn from the concept of disruptive payment systems like Bitcoin, in terms of real-time systems, better encryption techniques and a reduction of costs.
It is impossible to state with any certainty the probability of Bitcoin surviving. Certainly its many critics would argue that it is merely an asset with no intrinsic value, whose current price is being driven by a wave of market sentiment that is creating a bubble that will shortly burst spectacularly. On the other hand, there are other investors and market analysts who predict that the currency, although subject to short-term volatility, is on a long-term upward curve.
Probably the answer lies somewhere in the middle. Bitcoin will survive, but not in its present form, and the concepts around it will change. It is likely that the crypto-community is going to have to accept some form of government regulation and monitoring of the currency at some point in the future. Whilst this may be anathema for the purists, this might be the price of longevity and mainstream acceptance.
However, whatever else happens, the concept and application of blockchain technology will not only survive but will prosper and finds its way into an increasing range of applications and industries. In the end, then the enabling tool may prove more valuable than the core concept.