Crypto currency bitcoin has rarely been out of the headlines.
First the price highs, then the dramatic decline, and now ongoing volatility caused by concerns over greater regulation.
Bitcoin remains the most popular crypto currency by some margin with a market share of around 35 per cent, despite the introduction of around 1,500 others. Although interest in them persists, we do not think cryptocurrencies will rival traditional money any time soon.
In the early years, interest in bitcoin was muted, but this has changed in recent years. The price of bitcoin skyrocketed, reaching a high of nearly USD19,500 in December 2017. Since then, crypto currency prices in general have tumbled by around 65 per cent, supporting claims that they had been the centre of possibly the largest speculative bubble since the global financial crisis, although prices have stabilized more recently.
Regulators around the world are taking different approaches to managing the crypto currency hype: while China has banned crypto currency exchanges and the Reserve Bank of India has recently stopped the transfer of money into bitcoin wallets, a bitcoin futures index has been launched in the US and Japan has accepted bitcoin coin as legal tender.
“A major problem is the anonymity bitcoin provides, which has encouraged its use for illegal activities”
A Digital Token
The advantages of owning crypto currencies like bitcoin are generally held to be threefold: firstly, bitcoin has lower transaction times and costs through its peer-to-peer function; secondly, it provides a level of anonymity; and finally, as bitcoin is supposed to have a fixed lifetime supply, it is also seen as a hedge against the sort of hyperinflation that can result from central banks printing too much money.
Despite these advantages, however, we expect bitcoin to remain a digital token, at best, with little potential to rival traditional money or even a commodity like gold. To be accepted as money, bitcoin would have to fulfill certain important functions.
According to recent research by the University of Sydney (Foley et. al.), almost half of all bitcoin transactions are associated with illegal activity, such as drugs or terrorist financing.
The decentralized nature of crypto currencies implies that there are few, if any, safety nets for users in the event of a collapse in prices or panic selling, making crypto currencies inherently unstable. Traditional currencies, by contrast, have central banks standing ready to stabilize and defend their value, acting as lender-of-last-resort during times of systemic crisis.
Another source of concern for bitcoin is that mining or producing it requires exponentially increasing computing power. According to the head of the IMF, Christine Lagarde, mining bitcoin in 2018 could utilize the same amount of energy as the annual energy consumption of Argentina.
This is clearly not sustainable and will pose severe constraints on the usability of bitcoin and other crypto currencies.
About Madhur Jha
Madhur Jha is the current head of Thematic Research for Standard Chartered. She is responsible for providing a comprehensive and thematic overview of key macroeconomic developments globally. Prior to joining Standard Chartered, Madhur worked at HSBC in London, primarily as a global economist, but also covering European economics, particularly Spain. Jha has also gained experience in emerging-market economics research from her stints as a CEEMEA economist at a leading research consultancy in London and as a foreign exchange economist at ICICI Bank in India, where she also worked in foreign exchange derivative sales. She holds a Masters in Economics from Delhi School of Economics, India.