Bitcoin was recently blindsided by a powerful one-two combination: China announced it was shutting down bitcoin exchanges the same week Jamie Dimon, CEO of JPMorgan Chase, dismissed it as a “fraud.” In fact, Dimon compared the digital currency craze to the infamous Dutch tulip bulb bubble of the 1600s, when the value of tulips skyrocketed to unsustainable heights, plummeted and left eager investors penniless.
When financial industry executives like Dimon criticize cryptocurrencies, they are labeled stalwarts of an outdated ecosystem, failing to grasp new currencies and technologies. In fact, tech evangelists seem to believe banks and governments should already embrace cryptocurrencies as mainstream and welcome them as a world currency. Proponents point to the efficiencies bitcoin and other cryptocurrencies create, such as redeeming value in a matter of seconds rather than hours. While these benefits are genuine, they do not outweigh the risks.
The tulip bulb bubble is, in fact, an apt comparison for bitcoin and other cryptocurrencies: Right now, there are more than 1,000 cryptocurrencies in circulation and they are surrounded by a massive amount of hype. Like the tulips in Amsterdam, their value could easily crumble as the hype gives way to plunging prices and panic. Obviously, there is risk and volatility in the dollar, the euro, the sterling, and other currencies; however, the volatility in cryptocurrencies far outweighs the volatility of any traditional currencies.
So before writing off Dimon and other cryptocurrency critics as dinosaurs, bitcoin advocates must acknowledge financial industry leaders understand opportunities, risk and how currency and related derivative instruments work. These financial services experts have good reason to doubt the technology.
Let us consider some basic facts about cryptocurrencies. In all, there is about $150 billion worth of digital currencies in circulation. This is an impressive number until it is compared to global currency transactions where it only represents less than .01% (yes — 1/100 of 1%). This percentage underscores how far cryptocurrencies must go to gain mainstream acceptance.
Next, consider the volatility that surrounds the pricing of digital currencies. Since the start of the year, the price of bitcoin soared from $969 to more than $5,700. Ethereum, a rival cryptocurrency, traded as high as $400 in 2017 — soaring from its value of $8 in 2016. There is not one single currently-traded currency that remotely approaches that sort of volatility. Any transaction that can go from $8 to $400 in a matter of months can just as easily drop to $200 or less; the same is true of bitcoin prices. Financial industry executives recognize this risk and it creates apprehension.
Lastly, if industry leaders treated cryptocurrencies as mainstream, they would also have to turn a blind eye to the darker affiliations that haunt digital currencies. Indeed, bitcoin and other cryptocurrencies are managed on a decentralized network of computers rather than a centralized ledger that is under the watchful eye of a central bank or government. While removing third-party organizations is part of cryptocurrencies’ appeal, the model also opens risk. Frankly, cryptocurrencies enable — and encourage — illegal transfers and transactions. The people behind recent malware and ransomware strands certainly prefer — and profit — from the cryptocurrencies’ lack of transparency. When a major driving force behind a currency is the fact that the people who use it do not want their transactions to be traced, the value of the currency suffers.
True, we see monies frequently appreciate or disappear in the business of currency risk management. Countries often delegitimize a currency to replace it with another one. It is not uncommon, for instance, to see India issue a different currency or reevaluate a currency measurement. But, in these instances, the actions are driven by a true economic force. As a result, the new currency is legitimized.
Bottom line: cryptocurrencies will not gain widespread traction with corporations and governments as long as there remain crucial questions about their volatility, risk, volume and shadowy affiliations.