In 2010, one Bitcoin was worth less than one hundredth of an Australian cent. Each Bitcoin is now supposedly worth more than $20,000. But why?
The market capitalisation of Bitcoin is now well over $160 billion, which is larger than the GDP of many small countries. And all of this unrealised wealth is built on promises.
A promise that one day it will be a recognised fiat currency – that is, one that can be taxed by governments and used for official transactions, and to buy the full range of goods and services.
But there remains the stench of Ponzi scheme about it, or at least a bit of Wolf of Wall Street pump and dump.
“In my view, digital currencies are nothing but an unfounded fad (or perhaps even a pyramid scheme), based on a willingness to ascribe value to something that has little or none beyond what people will pay for it,” Oaktree Capital’s co-chairman, Howard Marks, wrote in an investor letter, according to CNBC. Marks is no lightweight. Oaktree Capital had US$99 billion of assets under management as of June 2017, according to CNBC.
The value is built on the fact that there will only ever be 21 million Bitcoins ‘minted’ and there are currently 16 million of them. This makes them a store of value, similar to gold, but it also means that the people who got in early when the minting was easy will make a fortune if Bitcoins are legitimised at the cost of those who come in late.
It’s little wonder then that the number of cryptocurrencies available over the internet as of 6 November 2017 was more than 1,172 and growing. China, for one, has recognised this as an issue and banned initial coin offerings, or ICOs, because of the likelihood of unrestrained theft by unscrupulous individuals.
As well, Bitcoins are totally untraceable, which makes them very attractive to someone with a criminal bent. In fact, someone digitally broke into Mt Gox, the oldest Bitcoin exchange, and stole half a billion dollars’ worth. And, no surprises, no one has been caught.
The extent of the problem with cryptocurrencies and crime is shown by recent Google research, which found that 95% of ransomware cash-outs occurred through the Russian based BTC-e exchange, which is also suspected of being connected with the Mt Gox theft.
However, in the biggest recognition of cryptocurrencies to date, the Chicago Mercantile Exchange (CME), which has been doing legitimate business since 1898, will offer Bitcoin futures contracts, adding to those that already exist elsewhere for Ethereum and Monero.
The contracts will be settled in cash, based on the CME CF Bitcoin Reference Rate, which is set daily against the US dollar price. The futures contracts, or agreements to buy/sell Bitcoins at a set rate and date, remove the volatility and make cryptocurrencies a more attractive asset.
But until cryptocurrencies gain widespread official recognition, they will remain in the playthings of gamblers and crooks.
“Do you think governments are going to be okay with a US$150 billion financial network that can be used by anyone outside of any oversight? … [only] if the governments of the world all lose their collective minds,” Dow Jones columnist Brett Arends pointed out recently.