Be wary before investing in bitcoins

Bitcoins—considered a fraud by some and a revolution by others—burst to an unprecedented $15,000-mark Thursday.

Published: 08th December 2017 04:00 AM  |   Last Updated: 08th December 2017 01:47 AM   |  A+A-

Bitcoins—considered a fraud by some and a revolution by others—burst to an unprecedented $15,000-mark Thursday. The blockchain-backed digital tradable currency saw a blowout growth of 1,400 per cent this year, sending its value to nose-bleeding new highs from barely a penny in 2010 and $1,000 at the start of 2017. The $97-billion question (cumulative value of all existing bitcoins) is, if bitcoins are here to stay and if it’s a bubble waiting to burst.

Advocates believe bitcoins are the greatest money-making opportunity—a $100 bet in July 2010 is now worth $16 million!—while others view it as the greatest bubble in history. Nobel laureate Joseph Stiglitz says bitcoins “ought to be outlawed”, while JP Morgan’s chief, Jamie Dimon, termed them “a fraud”. Governments too are planning a crackdown amid growing concerns that they aid money laundering and tax evasion.

Bitcoins, that trade 24x7, were designed as peer-to-peer, anonymous electronic transactions. In other words, they are what conventional currencies are not: you can’t see or hold them, neither are they issued or regulated by governments. Yet, their widespread adoption, from drug peddlers to arms dealers, is aiding the rally. They won’t displace sovereign currencies, but are viewed as a legitimate asset class for investors, despite warnings of a massive, speculative bubble.

While central banks, including the RBI, are raising red flags, they too have proposed crypto or digital currencies. The RBI is considering issuing a blockchain-based official currency, hoping it will eliminate price volatility and reshape the financial systems. Retail use of bitcoins doesn’t exist anywhere, but is being widely discussed with some like the Bank of Canada and Bank of England completing proof of concept based on the blockchain technology. But first, all central banks have to consider balancing potential benefits against potential risks to avoid bank runs. They have to factor in risks to the financial system, the economy, and the monetary policy, which are currently hard to assess.

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