This week has been a rollercoaster ride for Bitcoin – and could signal an equally unpredictable future.
What happened this week?
The eight-year-old cryptocurrency has pulled in droves of investors in recent months. But this week it hit record-breaking highs, soaring over $10,000 (£7,493) in value. At the start of 2017 a Bitcoin was worth just $1,000.
And yet within 24 hours of hitting the benchmark it had climbed past $11,000 before losing nearly 20% of its value, to just barely $9,000.
This rollercoaster ride, and resulting headlines, prompted the Bank of England to warn “investors should do their homework” on Bitcoin: some say the currency is peaking and based on nothing but a speculative bubble, while others feel it could have further to rise.
“This week is no different,” says David Yermack, professor of finance and business transformation at New York University. “Bitcoin has always been very volatile. Anybody who invests should have a large amount of risk tolerance.”
Remind me, what exactly is it?
Ten years ago, the idea of a futuristic, invisible currency – one that’s not linked to any government and that lives on the internet – might have been dismissed as a possible line from The Matrix or Blade Runner.
But that’s what it is: a digital alternative to notes or coins. It’s still not an official currency as it’s not issued by any government. It can be used as payment online and can be transferred digitally, avoiding the bureaucratic quicksand of banking hours, transaction fees, and waiting periods. The total nominal value of every bitcoin in existence – the first type of digital currency of its kind – is now over $167 billion.
What comes next?
Some say breaching the $10,000 mark signals a new chapter for Bitcoin.
“We’re in the second inning of a nine-inning baseball game,” says Ronnie Moas, founder and director of research at Standpoint Research, who specialises in investment, stock, and cryptocurrency recommendations. “What do you think is going to happen when this goes mainstream?” He thinks it could end up being as lucrative as Amazon or Google stock, and for him it is worth risking a decent sum in Bitcoin, rather getting caught on the sidelines. “In the direction we are headed, there are going to be 200 million people trying to get their hands on a few million Bitcoin.”
When it was at $1,000, it had no credibility – now people are saying ‘this looks interesting’ – Ronnie Moas
Moas believes the $10,000 mark is “basically a stamp of approval,” almost like a celebrity endorsement. “When it was at $1,000, it had no credibility – now people are saying ‘this looks interesting’.”
Not everyone is so bullish. “It’s a bubble that’s going to give a lot of people a lot of exciting times as it rides up and then goes down,” Nobel Prize-winning economist Joseph Stiglitz told Bloomberg.
Bitcoin’s relevance to the average person on the street, however, is still a little intangible. Although there are a handful of exceptions, you can’t use Bitcoin in most shops because its legal status varies by country. In many places, the cryptocurrency’s semi-anonymous nature stokes fears of money laundering or an increased sale of illegal goods.
While some think Bitcoin is the future of money, others think that the party will inevitably screech to an halt once governments get serious about trying to regulate it.
Right now? “It’s a total mess,” says Tadge Dryja, research scientist at MIT’s Digital Currency Initiative, when describing the decentralised nature of Bitcoin – meaning, there is no central body like a government or bank that oversees its distribution or use.
Dryja and his team are working on systems that will make Bitcoin safer and easier for Bitcoin holders to use in the future. But as it stands he describes the digital currency as “dangerous.”
“I guess the best analogy is that of gold: governments can regulate the institutions that deal with it but not the metal itself. They can’t decide if it’s going to weigh less or be purple instead of yellow. They will have to regulate what is regulate-able.”
That’s why some think eventual regulation will burst the bubble.
Kenneth Rogoff is a professor of public policy and economics at Harvard University and former chief economist at the International Monetary Fund. He thinks that there could be a broad international crackdown, and that even in countries like Japan or Australia which have gone to great lengths to legalise bitcoin, it won’t be further legitimised because governments cannot allow people to make big transactions in ways that can’t be traced.
It’s just nonsense to think that we’ll reach a situation where everything is done in cryptocurrency and that no one pays taxes – Kenneth Rogoff
At the moment, he says governments are sitting back and letting Bitcoin foster technological innovation. But while Rogoff predicts that Bitcoin will struggle as more competitors emerge (Bitcoin may be “the MySpace of cryptocurrencies,” he says), the regulation issue is what will prove the ultimate challenge.
“It’s just nonsense to think that we’ll reach a situation where everything is done in cryptocurrency and that no one pays taxes,” Rogoff says. He says in the currency game, “the government makes the rules and they can keep changing them until you can’t win.
“The fundamental thing is that governments will pull the rug out at some point,” he says. “It will take some international coordination. I don’t think [Bitcoin] will be worthless – there may be some rogue states that support it.”
But for now? The past week’s volatility could signal the “beginning of a really wild ride,” for Moas.
Whether it soars or crashes though, one thing’s for certain, Dryja says: “There will be plenty of jobs for lawyers going forward.”