Bitcoin and other cryptocurrencies have been on quite a run over the last year and it has brought out all of the skeptics in full force. Much like the early to mid-90s when you could put a dot com after anything and investors poured money in. It seems that today the equivalent is putting a “coin” out and the “investors” flock to it. With the Chinese government’s recent crackdown on Initial Coin Offerings (ICOs) in the last week the skeptics for crypto currency have been given another arrow to shoot at the “price bubble”.
I am not surprised to see the Chinese government step in and ban ICOs and I would expect the SEC to step up its regulations that it began discussing in July 2017. I would like to take a moment to remind people that ICOs and Bitcoin and other cryptocurrencies are not the same thing. An ICO is a capital raise by a company much like an IPO but significantly more risky. In exchange for your capital, the company gives you tokens which can be traded. I believe that the ICO market needs to be more regulate d or even outlawed because it is too easy for investors to be defrauded or scammed but that doesn’t mean that cryptocurrencies shouldn’t exist.
Critics have been calling for more regulation since almost the beginning and have said that as far back as early 2014. JP Morgan CEO Jamie Dimon is the latest critic of Bitcoin saying its a fraud. He said it was no different than the tulip bulb bubble in the 1600s. While the price movement and crowd mentality may have similarities to the tulip mania I believe that was a glib off hand comment that has little basis in reality. The only possible real similarity is the lack of intrinsic value and the unhinging of the price to the value of a Bitcoin just like the price of a tulip bulb became unhinged from its intrinsic value. It is also disingenuous on Dimon’s part since JP Morgan holds several patents and has several investments in private blockchain companies that do not use Bitcoin but other alt-coins. He also had similar comments in 2015 so it is fair to say that Mr. Dimon is not a fan of cryptocurrencies in general.
Regulation may be the thing that ultimately does Bitcoin and cryptocurrencies in but Bitcoin has been pronounced dead so many times over the last 4 to 5 years that it is almost impossible to count.
“The very reasons why Bitcoin has taken off today will be major reasons why its value is likely to collapse tomorrow. . . . [dramatic price instability] will cause the ultimate failure of the Bitcoin experiment. . . . Bitcoin will fail because a small number of hoarders control most of the supply.”
This was a quote from a Motley Fool Article on April 5, 2013. They may be right that price instability is something that does Bitcoin in. On the date, this article was written Bitcoin was trading for $180.59. By the end of 2013, it had risen to over $700 in value. We have seen a tremendous rise in the price of Bitcoin in 2017 rising to $5,013 on September 1, 2017. It began 2017 at $970.17 and over the next two weeks, Bitcoin saw the price fall to $ 3100 on September 14th. Still a tremendous increase for 2017 but also significant price instability. We have seen significant price moves in Bitcoin before in Jan. 2015 we saw a 36% decrease in value over a couple of weeks. This volatility is not anything new and is not uncommon in new ideas and technology.
In 2014 Bitcoin saw its largest exchange Mt. Gox get hacked and cause Bitcoin holders that had their coins stolen and ultimately Mt. Gox declared bankruptcy ultimately leading to $460 million worth of Bitcoins disappearing from its client’s accounts. The headlines at the time were things like Mt Gox Meltdown Spells Doom for Bitcoin (Bloomberg 2/24/2014) and Mt Gox Hack could be the end of Bitcoin (Vice Feb. 2014). Obviously, security is vital for any asset. If it can be stolen from you in just a few keystrokes then it is not something that the everyday people can gain confidence in. But people should remember that your money and identity can be stolen at any time. We have seen a major rise in cyber crimes and it is understandable that Bitcoin and cryptocurrencies would be a target for the criminals. Regardless it is important to take the necessary steps to protect your identity and assets. Interestingly just recently the authorities have arrested the man they believe is responsible for the Mt Gox hack, so it may be possible for those who had their Bitcoin stolen to get it back but that will take a significant amount of time to investigate.
In 2015 people thought that the increased competition from other cryptocurrencies like Litecoin, Ripple, Ethereum, and others was going to be the thing that did Bitcoin in. So far they have been wrong. If anything it has made the idea of cryptocurrencies and blockchain technology more widely accepted and mainstream. The total cryptocurrency market cap on Jan. 1 2014 was almost $10B and on September 14, 2017 it is almost $115B.
Will Bitcoin die or does it deserve to die?
I think Bitcoin will always play a role in the world of blockchain and cryptocurrency. The question is whether the community will be able to adapt to the new realities it faces. The 51% advantage is starting to become a real concern as miners are collectively steering the project now thanks to the amount of money they’ve put into equipment. (The 51% advantage is a situation where a wealthy individual or nation state could use tremendous mining capabilities to control 51% of the coins available thus controlling what transactions get completed). While they have made Bitcoin more viable – that schism in power isn’t a good thing. It would be wise for the Bitcoin community to even consider switching to a proof of stake Blockchain model in the future. However, the more likely scenario is projects like tezos will address these challenges head on being newcomers to the space. Only time will tell what is the ultimate outcome for Bitcoin and unlike Jamie Dimon, I believe it has a place and will be around in the future of cryptocurrency and blockchain.
The opinions expressed in this commentary are those of the author and may not necessarily reflect those held by Kestra Investment Services, LLC or Kestra Advisory Services, LLC.
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