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The Future of Bitcoin: Illusion and Reality
As a financial writer, I was first asked about Bitcoin, the controversial electronic currency, in 2015 by a bartender. My first question was: “What is a Bitcoin?” He was prescient, as bartenders often are. Not long after, I got a call from a public relations executive who wanted me to meet someone running one of the world’s first Bitcoin exchange-traded funds.
The handsome French algorithmic trader-turned-Bitcoin enthusiast told me that Bitcoin would soon climb to US$20,000, which it did but only in December 2018, although it would nosedive to US$3,604 as of January 10, an example of the astonishing swings in value the cryptocurrency has undergone since it was invented in 2008 by a mysterious figure who may or may not be named Satoshi Nakamoto.
The diversity of opinion on Bitcoin is well-known. Critics include almost all the top economists including Nobel laureate Joseph Stiglitz (“Bitcoin will be regulated into oblivion”), Princeton economist Ken Rogoff (Bitcoin will fall to US$100 in 10 years), Nobel Laureate and NYT columnist Paul Krugman (“Bitcoin has no tether to reality”) and Nouriel Roubini, (Bitcoin and other cryptocurrencies are “shit coins” and blockchain, its underlying technology, is “nothing more than a glorified spreadsheet”).
These could merely be old-fashioned economists venting frustration at a paradigm-busting digital innovation trying to upend the financial and economic system that they had spent their careers studying and analysing, or high priests of religion lambasting rogue cults of their faith. American billionaire Warrant Buffet once said the Bitcoin boom is a bubble that will “end up very badly.” His partner Charlie Munger has said that the Bitcoin is “worthless” and is “an artificial gold.” Their concerns are valid for Bitcoin is not backed by assets or anything else, and it is indeed, for critics like Munger, nothing but fool’s gold.
The sharp criticism has unsurprisingly fallen on deaf ears of the disciples who continue to believe in the idea of a global digital currency. For them, it is a solution to all that ails the global monetary system and whose time has finally come as a next evolution of the Internet. For them, it was predicted by as early as 1999 by Nobel Prize-winning economist Milton Friedman (according to an interview with him on YouTube) as a form of e-money – a currency that could be electronically transmitted from one person to another (peer-to-peer) without the intervention of the prying eyes of the international banking system.
Helped along by speculators, the believers have helped push Bitcoin from a relatively maverick idea discussed in nerdy tech circles and as a tool to carry out illicit financing on shady websites, to front-page news and a potential hazard to the global financial system (if not for the relatively small size of the market). Over the past two years, it has morphed into a cause of concern for financial regulators and central bankers and has been on the top of the agendas at the G20 to IMF and World Bank summits.
Despite the faith in the currency by the hard-core believers and ideologues, the market, existing as it does in the real world, is still determined by the dynamics of supply and demand and hence, like it or not, is often subject to the whims of the speculators. Most experts believe that much of the rally in the Bitcoin (and the cryptocurrency industry in general, for that matter) is driven by demand from Chinese citizens who use cryptocurrencies as a tool to move money away and also as a form of speculation (especially by those who believed that the renminbi is overvalued).
However, a strong response by the Chinese regulators against cryptocurrency transactions, including the banning of digital tokens and a clampdown on Bitcoin exchanges, more or less put paid to the great Bitcoin rally of 2017.
Much of that activity (including the exchanges, themselves) moved to overseas jurisdictions such as Hong Kong, Singapore, Japan and South Korea (as well as to offshore islands such as Malta and Gibraltar.) Clearly, some regulators were more favorable in their policies towards Bitcoin than others and much depended on the circumstances and risk-appetite of the individual jurisdictions.
If there was one trend, it was that the global regulators (especially at large developing nations like China and India, which do not have freely convertible currencies) remain opposed, and for a good reason. Other reactions, however, seem somewhat mixed and less black-and-white among jurisdictions such as Hong Kong and Singapore, or even South Korea, the United Arab Emirates or Thailand and the Philippines, which have chosen to adopt a more modulated and flexible approach.
Cryptocurrencies, for one, are seen as making bank transactions cheaper and more efficient, a big deal for countries with large migrant populations such as the Philippines, Thailand, Indonesia. This has forced many banks to try out blockchain especially in the fields of cross-border remittances.
However, giving the anti-money laundering and terrorist financing risks (primarily due to the anonymous nature of transactions), few want to be as bold as to whole-heartedly embrace Bitcoin. Many point to the backslash that Japan suffered after Tokyo made a somewhat bold move to legalize Bitcoin as a form of payment.
Having said that, global central banks are clearly in awe of the underlying technology as several projects have been launched by the lenders of last resort to create digital currencies for both retail and wholesale use. Such digital currencies, running on permissioned and regulated blockchain, are aimed at having your cake and eating it by creating state-sanctioned equivalents to Bitcoin.
Without going into the debate about whether Bitcoin is a money or not, it is worth noting what would happen to the dream to become a global currency if and when these experiments by the global central banks prove to be successful. At this stage most of the work is still experimental and early-stage, and many central banks probably do not yet have the legal authority to issue such digital currencies.
According to a January survey of 63 central banks conducted by the Bank of International Settlements (BIS), only two central banks from the emerging economies said they are considering issuing a digital currency for retail use in the short term. But the BIS survey pointed out that “beyond the short term, an increased proportion of central banks consider the issuance of both types of central bank digital currencies (CBDC) to be possible.”
Large-scale efforts involving hundreds of developers to create sovereign cryptocurrencies on the one hand, and the strong regulatory response to the Bitcoin industry on the other have together had a deleterious effect. These coordinated policy initiatives at the global level provide useful hints in helping foresee, if not predict, the possible future of Bitcoin as a currency, regardless of the strong faith by hard-core believers.
So, we know why it is not surprising why the price of Bitcoin is languishing and why Bitcoin will continue to remain on the margins in the years to come. While trying to predict the price of such speculative assets is clearly a fool’s errand (the chance of it shooting up dramatically is as high as it going down to zero), the dream of Bitcoin going mainstream as a form of digital money will probably never come true.
Tsering Namgyal is the Chief Editor of Blockchain Asset Review. He does not hold any cryptocurrencies, including Bitcoin. He is a regular contributor to Asia Sentinel.