One wonders where the money is coming from? Bitcoin’s genesis, at least in part, driven by the great financial crisis (GFC) and the failed old world financial system, its hyper inflation may be fuelled by a decade of quantitative easing, low interest rates and investment return, current market confidence (the banks are recapitalised and the doom and gloom of the GFC is behind us forever right??) and the relentless quest to find yield somewhere, anywhere, even here. A cryptocurrency favoured by the darker sides of the human race but having unique potential to deliver returns bigger than fantastical payday lending returns. And anyone in the World can participate. In their millions they clearly are, fuelling a demand over supply juggernaut.
One hopes this isn’t another crisis brewing since surely the big money institutions, pension funds, insurers etc aren’t heavily invested in Bitcoin? The tea leaves are difficult to read. Bitcoin futures trading on the Chicago exchanges is imminent and with it, the potential for systemic risks flowing through to those very same institutions that were crippled by the GFC. The big Wallstreet banks aren’t happy and are thankfully vocal in their angst. The margin that backstops the contract is placed in a clearing house – i.e. those big banks. What this means is the translation of a virtual ‘paper money’ risk to cryptocurrency speculators who can presumably afford to lose it all, into a real world risk. Bitcoin’s price has collapsed by 80% more than once in its history. With a market cap today that is bigger than Bank of America, the largest banking stock listed on the Dow, such a fall would surely hurt any financial institutions caught in the crossfire.
But doomed Bitcoin almost certainly is. Unlike fiat currency, Bitcoin is inherently finite. Being hard-wire limited to 21 million Bitcoins is one reason for its inevitable failure. Bitcoins never to be replaced and simply irreplaceable. Over a long enough time horizon, so the logic goes, all of the pennies will be lost at the back of the sofa.
Another issue inherent in the Bitcoin architecture and far from lost on Interpol is the ability to track the history of Bitcoins. The ledger is transparent for all to see and data mine, including the Authorities. Consider a situation where a regulated entity is receiving Bitcoins which later turn out to have been, at some point in the past, used for terrorist, drug or human trafficking activities. Might they be seized as linked to criminal activity? Might these too be lost or impounded? And what of the immediate pre-seizure transaction?
Bitcoin’s lack of intrinsic benefit is also its achilles heal. To mine Bitcoin requires intense computing power, consuming huge amounts of energy globally.
Frankly Bitcoin has an image problem. Filthy speculated wealth is hardly likely to enhance it in the eyes of many, prejudicing its adoption and ultimately halting interest in the currency itself. If interest fails, in light of its lack of underlying value, it’s ‘value’ is sure to fall and potentially crash as positive sentiment of those chasing a quick buck wanes.
Eulogy made by John Danahy