Opinion: Bitcoin may justify its high price, but it won’t affect global finance

Source: The Economist, January 9, English edition

Compiled by Houlang Finance

Original title: Bitcoin is hard to beat: Bitcoin may justify its high price, but it won’t affect global finance

Cryptocurrency millionaires were minted when bitcoin’s price first surged to around $1,000 in 2013 before an overheated market sparked a bubble that left some of its early fans in despair.

A down-and-out Welsh man searches a garbage dump for an early hard drive that contained 7,500 accidentally discarded bitcoins that went from zero to $7.5 million in value. Since then, bitcoin has been on a wild rise, with its price soaring to around $19,000 in December 2017, driven by speculators and market manipulation, only to fall by more than four-fifths in the year since.

Bitcoin's recent run is its best yet, with prices now above $35,000 after tripling in three months. That means more than $2.6 billion worth of computer hardware is lying in a Newport, Wales, junkyard.

The current market enthusiasm for Bitcoin is amazing, because libertarians living in basements are not the only ones who are hyping up Bitcoin, some elites on Wall Street have also joined their ranks.

For example, Larry Fink, the head of the world's largest asset management company Blackstone Group, said in December that Bitcoin could become the new "global market." Large hedge funds such as Renaissance Technologies have been betting on cryptocurrencies, and Morgan Stanley strategist Ruchi Sharma believes that the growing US debt will make cryptocurrencies more attractive.

If the total Canadian dollar is defined narrowly to include banknotes and central bank reserves, the total value of Bitcoin issued exceeds that of the Canadian dollar. However, few people think it has any chance of replacing government-issued currency, and this is just a dream of early believers.

For example, it is too inefficient to be used for payments; Bitcoin can only process less than ten transactions per second. In contrast, the underlying payment companies of consumer finance, such as Alipay and Venmo, can solve these problems. If Bitcoin can solve this problem, governments will quickly ban any technology that threatens their monetary sovereignty. Regulatory resistance forced Facebook's proposed digital currency Libra to be renamed (changed to Diem) and scaled down Libra's original ambitions.

At the same time, as central banks around the world improve payment systems and launch their own digital currencies, competition between national digital currencies and Bitcoin is also heating up.

Instead, the enthusiasm for Bitcoin is rooted in the possibility that it might eventually provide a safe store of value—like gold, but more convenient (because it’s easier to maintain a digital wallet than a physical vault)—that would become a small but permanent part of an investor’s portfolio.

Like Bitcoin, gold does not pay interest or dividends. In contrast, unlike Bitcoin, gold has a fundamental use, and it is the volatile demand for gold from investors, not jewelers and chipmakers, that drives its price.

Therefore, it is conceivable that the high price of Bitcoin can also be self-sustaining through demand. If Bitcoin can be as popular as gold among investors (holding market value), according to JPMorgan Chase Bank, the price of Bitcoin will rise to $146,000. Compared with gold, millennial investors in the current market seem to prefer investing in cryptocurrencies.

There are many reasons to doubt whether Bitcoin can become gold.

Its price is highly volatile and changes with the stock market, making it almost undesirable to use Bitcoin as a safe haven asset, as the market lacks liquidity and cryptocurrency trading remains an unregulated market. Fraud and theft are rampant, and Bitcoin facilitates crimes such as online sales of drugs. Investors in cryptocurrencies must tolerate significant investment and reputational risks. Hedge funds, which thrive on risky strategies, may be flocking in, but some old-line Wall Street financial institutions, such as pension funds, remain indifferent.

Perhaps it’s a mistake to think that Bitcoin’s rise is out of control. Eventually, Bitcoin will settle with regulators, there will be more liquidity and a crackdown on criminal activity (Bitcoin’s anonymity is a bit overrated), and Bitcoin will have wider appeal.

When Bitcoin was first created, it was expected to disrupt the global monetary system. Today, its success depends on whether it can find a more balanced role in the existing financial system.