Many still struggle to understand the full implications of the introduction of digital currencies. Others seem to be very convinced about the success of this financial innovation. They are plunging head-on in this new fad by investing in buying Bitcoins that have appreciated exponentially in the last year.
So is Bitcoin a dangerous illusion or the next best thing to happen to the world?
Defining a cryptocurrency is not straightforward. It certainly is not easily understood by most ordinary people who are used to seeing, feeling and understanding what standard currency is.
And yet nearly everyone is talking about Bitcoin.
The most cynical and concise description of Bitcoin I have encountered is that of Gary Silverman and other authors writing in the Financial Times, who wrote that, “Bitcoin is a digital currency created by geeks that very few people understand.”
Robert Ophele, chairman of the Autorite des Marches Financiers, the French financial markets regulator, recently said that Bitcoin is a ‘dangerous illusion’ and a tool for criminals. He is more categorical in his dislike of digital currencies saying: “It’s a way to purchase illicit goods, it’s a way to launder illicit income. It’s a way to develop and pay for cybercrimes, and it’s a pure empty currency. If it were a currency, it would be a very bad one.”
The top brass of some investment banks may have serious reservations about the sustainability of digital currencies.
But they are not prepared to miss on a possible bonanza of income that could result from the growing interest of investors in cryptocurrencies. Jamie Dimon, head of JPMorgan Chase, once called Bitcoin a “fraud”. Now he is considering helping his clients trade bitcoin futures according to a report in the Financial Times.
It’s not for me, but there’s a lot of things that weren’t for me in the past that worked out very well
Goldman Sachs seems to be thinking along the same lines as a way to exploit the current craze. Lloyd Blankfein, Goldman’s CEO said: “It’s not for me, but there’s a lot of things that weren’t for me in the past that worked out very well. Based on everything I know, I’m not guessing that it will work out. But I can’t say… it’s a fraud, it can’t work out, because it might.”
The informed opinion of most financial analysts is that the secrecy afforded to Bitcoin and its cryptocurrencies imitators provides a refuge for actors in the darker corners of the global economy. Larry Fink, CEO of BlackRock, the world’s largest money manager, reflects what many unbiased observers with their feet steady on the ground. He said: “Bitcoin just shows how much demand for money laundering there is in the world.”
I find the opinion of Joseph Stiglitz, the Nobel Prize-winning US economist even more revealing. He argues that Bitcoin should be outlawed adding that: “It is successful only because of its potential for circumvention, lack of oversight. It doesn’t serve any socially useful function.”
Financial regulators are understandably less than enthusiastic supporters of digital currencies. Some may say that this is to be expected from a class of business professionals who are known for their conservative views and who were unable to prevent the global economic crisis of 2008. Randal Quarles, the Financial Reserve official who oversees banks warns that digital currencies are a niche product that have to prove themselves in a time of crisis.
I find Yale economist William Goetzmann’s definition of bitcoin very incisive: Bitcoin is an electronic commodity used for payment that has become a vehicle for speculation. BNP Paribas chairman Jean Lemierre says that bitcoin is a commodity rather than a currency. Like every commodity, its value can go up or down according to supply and demand dynamics.
In the current low-interest rate scenario, some investors may want to throw caution to the wind. Those who have loads of money and feel an irresistible urge to gamble are likely to listen to some computer geeks who have pinned all their reputation on blindly supporting the widespread adoption of this invention. Others succumb to peer pressure influenced mainly by the fear of missing out on a once-in-a-lifetime opportunity to become wealthy with little effort.
It is unfortunate that the blockchain database technology is often indistinguishable from the proliferation of digital currencies. Blockchain can indeed be a blessing as it makes the handling of data for particular everyday applications, like medical record keeping, more efficient.
Whether Bitcoin mania will end up like other investment manias remains to be seen.
johncassarwhite@yahoo.com